Do share-based payments constitute expenditure, for tax purposes, in order to facilitate a deduction?

Master Thesis


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University of Cape Town

The uncertainty surrounding whether a share-based payment constitutes expenditure, is, to a large extent, unresolved. This issue is significant because a company may only claim a (general) deduction in terms of section 11(a) of the Income Tax Act No. 58 of 1962, as amended (The Income Tax Act) if they have incurred "expenditure". [...] The issue has been brought to the fore with the 2004 introduction, by the International Accounting Standards Board, of a new accounting standard on share-based payments, International Financial Reporting Standard 2 Share-based Payment (IFRS 2). [...] This paper will initially discuss the financial implications of this new accounting standard. Before discussing the tax implications, it will provide a brief background to the requirements of IFRS 2. Whether a share-base payment constitutes "expenditure" for tax purposes will be determined by interpreting any applicable case law, both local and international, and by analysing any relevant legislation. Finally, the international practices of both the UK and Australia will be briefly discussed. (This paper will in no way no consider the valuation, for tax purposes, of such potential deduction).