In 2011, the Income Tax Act Chapter 52:01 was amended and among the amendments was the insertion of paragraph (r) at section 41 of the Act. The amendment sought to include training levy as a specific deduction in determining the assessable income of a taxpayer. It is against this background that the Botswana Unified Revenue Service (BURS) Commissioner General revised one of their client’s (the taxpayer) 2010 tax year assessments to disallow training levy as he was of the opinion that they were disallowable under section 50(b) prior to the 2011 amendment. Section 50(b) states that:
“Subject to any express provision in this Part authorizing a specified deduction in ascertaining chargeable income, no deduction shall be allowed in respect of any amount not wholly, exclusively and necessarily laid out or expended for the purpose of producing assessable income”
The taxpayer on the other hand argued that training levy has always been deductible as it qualified for the same under section 39(2) which covers general allowable deductions. The said section which is a mirror image of section 50(b) states that:
“In ascertaining the chargeable income of any person for any tax year there shall, upon due claim and subject to such evidence as the Commissioner may require, be deducted from the assessable income of such person all expenditure wholly, exclusively and necessarily incurred by that person during the tax year in the production of his assessable income.”
After various engagements and a stint at the board of adjudicators the case eventually went before the High Court where both parties had to defend their arguments and prove their cases. BURS’ contention was that prior to the 2011 amendment training levy was not an allowable expense as it failed the test of wholly, exclusively and necessarily in the income tax act.
The argument of whether an expense is wholly, exclusively and necessarily incurred is an old phenomenon that goes beyond our borders. Various tax cases have been deliberated on this subject and it is evident that revenue authorities tend to lean towards the rigid interpretation of the phrase compared to an extensive and fact based approach of the interpretation. It is no surprise that BURS contended that the same approach should be applied in this case. The rigid approach seeks to establish a direct connection between the income produced and the expense incurred, in following this approach BURS argued that though the taxpayer had incurred the expense there is no direct linkage to income produced. BURS further argued that the taxpayer can operate without having to incur the training levy expenditure.
Such a narrow interpretation will indeed mean that various expenses such as parking fees, road levy and other related expenses are disallowable as there is no direct linkage to the income produced. The taxpayer on the other hand argued that training levy is a necessary expense in conducting business as it is a requirement of law that the company should incur training levy. Therefore the objective of incurring the expense matters more than the direct effect of the expense on producing income. The judge agreed with the taxpayer that training levy is sufficiently closely connected to operations of the business as the taxpayer will be trading illegally if they do not comply with the Training Levy Order.
However, subject to provisions of section 87(1), taxpayers that had their training levy expense disallowed for tax years 2011 and prior may not have it allowed for tax purposes. Section 87(1) reads:
“Subject to section 80(1) and (3) and section 81, where in relation to an assessment —
(a) No valid notice of objection has been given under section 88;
(b) Subsequent to the determination of an objection, no valid notice of appeal has been given under section 91; or
(c) An appeal has been determined and there is no right of further appeal, such assessment shall be final and not subject to appeal”.