Corrupt Payments, Merged Companies, and Tax Disputes: SARS's Four September Interpretation Notes Explained

• IN 54 (Issue 3), 1 September 2026: section 23(o) denies deductions for payments that are corrupt activities under Chapter 2 of the PCCA Act, with no conviction required. It also denies fines and penalties for unlawful activity, and fruitless and wasteful expenditure of PFMA entities.

• Foreign fines are non-deductible only if the conduct would also have been unlawful in South Africa. Commercial penalties, compensation and damages fall outside section 23(o).

• Recoveries of fruitless and wasteful expenditure previously denied are exempt under section 10(1)(zL).

• IN 146, 2 September 2026: in a section 44 amalgamation, the transferor claims the full section 12C allowance in the transfer year and the transferee claims none. The transferee resumes the schedule the next year, based on the original cost. Section 11(e) allowances are apportioned by months of use.

• ADR Quick Guide (Issue 2), 3 September 2026: ADR is available when appealing a disallowed objection, not an invalid one.

• Average exchange rate tables, 9 September 2026: the quarterly update of Tables A and B. Their use is optional but must be consistent and documented.

The provision. Section 23(o) of the Income Tax Act does not grant deductions; it takes them away. It applies only where an amount would otherwise qualify, usually under the general deduction formula in section 11(a), and then denies it. The section was introduced with effect from 1 January 2006. A third limb for fruitless and wasteful expenditure was added with effect from 1 April 2019. SARS first interpreted the section in Issue 1 (26 February 2010), updated it in Issue 2 (25 January 2017), released a draft Issue 3 for comment on 20 January 2025, and has now finalised Issue 3, dated 1 September 2026.

Corrupt activities: a criminal-law test inside the tax code

The first limb imports the whole of Chapter 2 of the PCCA Act, which covers sections 3 to 21. It spans the general offence of corruption and specific offences involving public officers, foreign public officials, agents, tenders, contracts, sporting events and gambling. The key concept is gratification, defined to include money, gifts, loans, fees, employment or service contracts, discounts and commissions, and even the avoidance of a loss or punishment.

Three points in the Note carry real weight:

• No conviction needed. SARS will deny the deduction wherever the facts show a Chapter 2 activity, whether or not anyone has been prosecuted.

• Indirect benefits count. In SARS's sponsorship example, a company offers to donate R50,000 of cricket kits to the charity favoured by the official who can award it a R500,000 sponsorship. The kits are gratification and non-deductible. The sponsorship itself remains potentially deductible.

• Hospitality is not automatically caught. Gifts of no significant, lasting or commercial value will normally fall outside the Act. SARS will weigh the taxpayer's intention, the size and regularity of the gift, and the recipient's position.

The recipient side is separate. A bribe the payer cannot deduct is still gross income in the recipient's hands.

Fines and penalties: what is caught, and what is not

Section 23(o)(ii) catches fines and penalties for unlawful activity, whether statutory or at common law. Examples include Competition Tribunal penalties, Consumer Protection Act administrative penalties, traffic fines, by-law contraventions, and court fines for tax offences. Penalties and interest imposed under tax Acts administered by SARS are separately denied under section 23(d).

Foreign fines. A fine imposed abroad is denied only if the conduct would also have been unlawful in South Africa. A foreign fine for conduct that would be lawful here is not caught by section 23(o)(ii). It must still pass section 11(a) read with section 23(g) to be deductible.

Outside the section altogether:

• Commercial penalties, such as a building contractor's contractual penalty for late completion, do not arise from unlawful activity. They are tested only under section 11(a) and section 23(g).

• Compensation and damages for patrimonial or non-patrimonial loss are distinct from fines and penalties and are not denied by section 23(o).

Fruitless and wasteful expenditure, and what happens on recovery

The third limb applies only to national and provincial departments, constitutional institutions and public entities listed in Schedules 2 and 3 of the PFMA. It does not apply to private-sector companies. Fruitless and wasteful expenditure is expenditure made in vain that would have been avoided had reasonable care been exercised. Amounts disclosed as such in audited annual financial statements will generally be accepted as fruitless and wasteful. Undisclosed amounts that meet the definition are also caught.

Recoveries are neutral. When a public entity later recovers an amount whose deduction was denied, for example from a responsible official, section 10(1)(zL) exempts the recovery from normal tax in the year it is received or accrues. Without that exemption, the entity would be taxed on a recovery of an expense it was never allowed to deduct. The Note sets out this outcome in terms.

The question. When a company transfers a depreciable asset in a section 44 amalgamation, section 44(3)(a) gives roll-over relief. Past allowances are not recouped from the amalgamated (transferor) company. The amalgamated and resultant (transferee) companies are also deemed to be one and the same person for determining any allowance or recoupment on that asset. What that deeming means for the allowance in the transfer year was uncertain, particularly for allowances that are not apportioned for part-year use. IN 146, published 2 September 2026 after a draft released on 18 November 2025, answers the question.

What "one and the same person" means. Relying on Supreme Court of Appeal authority on deeming provisions, SARS reads the phrase contextually and only as far as its purpose requires. The resultant company steps into the amalgamated company's shoes. It inherits the asset's original cost and the accumulated allowances already claimed, and it is treated as meeting eligibility conditions it could not satisfy on its own, notably the "new and unused" requirement for section 12C. It then claims future allowances. The same person cannot claim twice for the same year.

The answer depends on the type of allowance.

The section 12C worked example. Company C buys manufacturing machinery for R500,000 on 1 January 2023 and claims the accelerated section 12C allowance: 40% in the first year and 20% in each of the next three years. It transfers the machinery to Company D in a section 44 amalgamation on 1 July 2024. Both have 31 December year-ends.

The R300,000 C claimed is not recouped when it transfers the machinery. It rolls over to D and becomes recoupable by D on an eventual disposal.

The section 11(e) contrast. On the same dates, an R500,000 asset written off over four years under section 11(e) gives C a 2024 allowance of R62,500 (R125,000 × 6/12), and D the same R62,500 for its six months. D then claims R125,000 in 2025, bringing the tax value to nil.

Wider reach. SARS applies the same reasoning to the parallel deeming rules for asset-for-share transactions (section 42), intra-group transactions (section 45) and liquidation distributions (section 47). It indicates the principle may also extend to other non-apportioned allowances, such as building allowances and section 12B energy assets. This is consistent with its existing view in Interpretation Note 107 on section 13quin commercial buildings.

SARS published Issue 2 of its Alternative Dispute Resolution Quick Guide on 3 September 2026. It changes no rules. The process remains governed by the dispute resolution rules under the Tax Administration Act, 2011. The update refreshes SARS's plain-language account of when and how taxpayers can use ADR.

What ADR is. ADR is a facilitated, less formal and less adversarial alternative to litigation, intended to be quicker and cheaper. Either the taxpayer or SARS may propose it, but SARS decides finally whether a matter is suitable. A facilitator bound by a code of conduct must seek a fair, equitable and lawful resolution.

Where it sits in the dispute process:

The key clarification: invalid versus disallowed. According to the South African Institute of Taxation's summary, Issue 2 draws a clear line between two outcomes:

• A disallowed (or partly disallowed) objection has been considered on its merits and rejected. The taxpayer may appeal and elect ADR.

• An invalid objection has failed the procedural requirements, such as the prescribed form, grounds and supporting documents. It has not been decided on the merits, so there is no disallowance to appeal and the ADR route is not yet open. The taxpayer must first cure the defect by resubmitting a valid objection within the permitted time.

This matters because an avoidable procedural error at the objection stage can cost a taxpayer both time and access to the cheaper ADR route.

Possible outcomes. The guide restates three outcomes:

• Full settlement. It is recorded and signed by both parties, approved by a senior SARS official, and given effect by a revised assessment where necessary.

• Partial settlement. The agreed issues are settled and the balance proceeds to the Tax Board or Tax Court.

• No agreement. The appeal continues to the Tax Board or Tax Court.

SARS published its updated Average Exchange Rate tables on 9 September 2026 as part of its regular quarterly update cycle. The next update is expected in December 2026.

Why they matter. Several provisions of the Income Tax Act require foreign-currency amounts to be translated into rand at an average exchange rate rather than a spot rate. The term is defined in section 1(1) as the average determined using closing spot rates at the end of daily or monthly intervals during a year of assessment, applied consistently within that year. Provisions that rely on it include:

• section 6quat(4) (rebate for foreign taxes);

• section 9D(6) (net income of controlled foreign companies);

• section 9G;

• section 25D(3) (translation of foreign-currency amounts); and

• the Eighth Schedule (capital gains tax).

What SARS publishes:

Two practical points. First, using SARS's rates is not compulsory. A taxpayer that uses different averages, such as bank-derived rates, must keep full records of its calculations for audit. Second, the published figures are averages only; they are not spot rates and cannot replace a spot rate where the Act requires one.

None of the four publications creates a new filing obligation or deadline. Each states SARS's current practice on law already in force and applies from its publication date. They matter because SARS will apply them on audit.

Corporate taxpayers: fines and payments. Separate genuine commercial penalties and damages, which can be deductible, from regulatory fines, which are not. For foreign fines, record why the conduct would or would not have been unlawful in South Africa. Review commissions, success fees, sponsorships and hospitality involving public officials or tender processes against Chapter 2 of the PCCA Act. No conviction is needed for SARS to deny the deduction.

PFMA entities. Align the tax computation with fruitless and wasteful expenditure disclosed in audited financial statements. Track recoveries so that section 10(1)(zL) is applied and recovered amounts are not taxed.

Restructurings. In the year of a section 44 amalgamation, the amalgamated company claims the full section 12C allowance and the resultant company claims none. Section 11(e) allowances are split by months of use. Build this into deal models, tax provisions and both parties' returns, and make sure the resultant company's fixed-asset register carries the original cost and accumulated allowances for future recoupment.

Disputes. Before lodging an objection, check it against the requirements for validity: the prescribed form, specific grounds and supporting documents. If SARS declares it invalid, cure it promptly. If SARS disallows it, weigh ADR against litigation within the 30-business-day appeal window.

Foreign-currency reporting. Decide whether to use SARS's Table A or Table B averages or an alternative. Apply the choice consistently within the year of assessment and keep the workings.

Can my company deduct a fine paid abroad? Only if the conduct would have been lawful in South Africa. Section 23(o)(ii) denies a deduction for a foreign fine where the activity would also have been unlawful here. A foreign fine for conduct that would be lawful in South Africa is not caught by section 23(o), but it must still meet section 11(a) and section 23(g) to be deductible.

Does SARS need a criminal conviction to deny a deduction for a bribe? No. Section 23(o)(i) applies wherever the payment, or an agreement or offer to make it, is an activity under Chapter 2 of the PCCA Act, whether or not anyone is prosecuted.

Are contractual penalties, such as late-completion penalties, deductible? They are not caught by section 23(o), because they do not arise from unlawful activity. They are deductible if they meet the general requirements of section 11(a) read with section 23(g). The same applies to compensation and damages.

Does the fruitless and wasteful expenditure rule apply to private companies? No. Section 23(o)(iii) applies only to persons subject to the PFMA: departments, constitutional institutions and listed public entities. Recoveries of amounts previously denied are exempt under section 10(1)(zL).

Who claims the section 12C allowance in the year of an amalgamation? The amalgamated company claims the full allowance for the year of transfer, and the resultant company claims nothing that year. From the following year, the resultant company continues the schedule based on the asset's original cost.

Can I use ADR if SARS has declared my objection invalid? Not at that stage. ADR is elected when appealing against a disallowed or partly disallowed objection. An invalid objection must first be corrected and resubmitted.

Must I use SARS's published average exchange rates? No. They are optional, but a taxpayer using other averages must keep records of its calculations for audit.