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

Section 23(o) of the Income Tax Act has existed since 1 January 2006, and it does one specific job: it blocks a deduction for expenditure connected to corrupt activities, or to a fine or penalty resulting from unlawful conduct, even where that expenditure would otherwise satisfy the general deduction requirements of section 11(a). SARS first interpreted the section in 2010, reissued that guidance as Issue 2 in January 2017, and has now published Issue 3, dated 1 September 2026, a document that has been sitting in draft form, open for comment, since January 2025, before finally being finalised.

The section's corruption limb doesn't operate in isolation. It borrows its definition of a corrupt activity directly from Chapter 2 of the Prevention and Combating of Corrupt Activities Act, 2004 — meaning the tax question of whether an expense is deductible turns on a criminal-law definition, specifically the concept of "gratification," which the PCCA Act defines broadly enough to include not just cash bribes but gifts, employment contracts, services rendered, and even the avoidance of punishment or loss. Getting the deduction question right, in other words, requires engaging with anti-corruption criminal law, not just tax law — and the Interpretation Note's own annexure sets out the specific categories of PCCA Act offences relevant to the section.

The fines-and-penalties limb is broader than it might first appear: it applies to a fine or penalty resulting from unlawful activity carried out anywhere, not only in South Africa — provided that conduct would also have been unlawful had it occurred here. A South African company fined abroad for conduct that would equally be illegal at home gets no deduction for that fine, regardless of where the penalty was imposed.

Issue 3's most consequential technical addition concerns fruitless and wasteful expenditure that is later recovered. The draft text addresses a scenario SARS had not previously and explicitly resolved: where expenditure was properly treated as fruitless and wasteful, and a deduction was denied under section 23(o)(iii) on that basis, what happens for tax purposes if that money is subsequently recovered — say, from an employee found responsible, or through a successful claim? This is a genuinely practical question for public entities and companies with internal loss-recovery processes, and Issue 3 is the first time SARS has directly addressed it in this Interpretation Note.

This is a narrower, more technical note, but one with real money attached to it for any company restructuring through an amalgamation. Section 44 of the Income Tax Act provides "roll-over" relief for qualifying amalgamation transactions — allowing one company to absorb another without triggering an immediate tax charge on the assets transferred, on the basis that certain tax attributes carry over rather than resetting. Section 12C separately allows an accelerated wear-and-tear allowance for manufacturing assets — under the relevant proviso, 40% of cost in the year an asset is brought into use, then 20% in each of the following three years.

The question IN 146 answers is what happens to that allowance schedule when a section 44 amalgamation happens mid-stream. Section 44 deems the amalgamating company and the receiving company to be "one and the same person" for certain purposes — and the Interpretation Note's job is pinning down exactly what that phrase means in practice for the wear-and-tear allowance specifically: does the receiving company simply continue the existing 40%/20%/20%/20% schedule from where the transferring company left off, with no apportionment gap or reset, or does something else happen?

SARS's own worked example in the note makes the mechanism concrete: Company C buys manufacturing machinery for R500,000 on 1 January 2023, begins claiming the accelerated section 12C allowance, and then amalgamates into Company D on 1 July 2024, transferring the machinery as part of that transaction. Both companies share a 31 December year-end. The note walks through exactly how the allowance continues to be calculated across that transaction — treating the two companies, for this specific purpose, as a single continuous claimant rather than requiring the allowance schedule to restart or apportion around the ownership change.

Why this matters beyond the specific example: corporate groups regularly restructure through amalgamations for entirely non-tax commercial reasons, and an unclear answer on whether capital allowances survive that restructuring intact creates real uncertainty in deal structuring and tax provisioning. IN 146 gives specialists a citable SARS position to plan around, rather than relying solely on a literal reading of "deemed to be one and the same person" and hoping it holds up on audit.

SARS's Alternative Dispute Resolution process sits within the broader dispute resolution rules made under the Tax Administration Act, 2011 — rules that have themselves been amended in recent years, including changes tightening the time periods for interlocutory applications and requiring SARS to issue assessments giving effect to a settlement within 45 days of a signed ADR agreement. Against that backdrop, Issue 2 of the Quick Guide, published 3 September 2026, updates SARS's own plain-language explanation of when and how ADR can actually be used.

The core mechanics remain what they have long been: a taxpayer initiates ADR by indicating that intention in a notice of appeal (via form DA 52, submitted within 30 days of the relevant decision), SARS then decides whether the matter is suitable, and — if it proceeds — a facilitator drawn from a list maintained by a senior SARS official runs the process, which is deliberately less formal and less adversarial than litigation. If the dispute resolves, SARS issues a revised assessment to give effect to the agreement; if it doesn't, the taxpayer retains the right to continue to the Tax Board or Tax Court.

What Issue 2 specifically clarifies, per SAIT's own summary of the update, is the distinction between an invalid objection and a disallowed one, a distinction that matters procedurally, since ADR is available when appealing a full or partial disallowance of an objection, not when an objection itself is invalid on procedural grounds. Getting this distinction wrong at the outset is a common, avoidable way for a taxpayer to lose access to the ADR route entirely. The guide also restates the facilitator's role and the range of possible outcomes from a facilitated process — full settlement, partial settlement with the balance proceeding to the Tax Board or Court, or no agreement at all.

The least glamorous of the four, but a genuinely necessary annual housekeeping publication: SARS's updated Average Exchange Rate tables, published 9 September 2026, are used to translate foreign-currency income, expenditure, and capital gains into rand for tax purposes where an average-rate method is required or elected, rather than the actual spot rate on the transaction date. The publication contains Table A (annual average rates going back to December 2003) and Table B (monthly average rates, used where a taxpayer's year of assessment is shorter or longer than twelve months), along with a worked example showing the calculation method. SARS has indicated the next scheduled update will follow in December 2026.

Who must act, and what specifically changes: None of these four publications creates a new filing obligation or deadline. All four apply to ongoing tax positions and disputes as current SARS practice, effective immediately from their respective publication dates.

Financial and operational exposure: Businesses that have treated any bribe-adjacent payment, fine, or unrecovered fruitless expenditure as deductible should revisit that position against IN 54 (Issue 3) specifically — and organisations that have since recovered money originally written off as fruitless and wasteful should check the note's new treatment of that recovery scenario before assuming the earlier non-deduction is the end of the story. Any company that has gone through, or is planning, a section 44 amalgamation involving manufacturing assets under section 12C should confirm its wear-and-tear allowance schedule against IN 146's worked methodology rather than assuming a reset or apportionment is required. Taxpayers with a live SARS dispute should have their advisor confirm, using the updated ADR Quick Guide, whether their specific objection outcome (disallowed versus invalid) actually qualifies for the ADR route before requesting it.

Realistic timeline: All four documents are in effect now. There is no phase-in period for any of them, since none changes the underlying law — they state SARS's interpretation of provisions already in force.

What remains uncertain or pending: Whether Issue 3 of IN 54 differs from the January 2025 draft version that was open for public comment, and if so how, was not confirmed in available secondary reporting — practitioners relying on the draft text should confirm against the final published version directly. The exact wording SARS uses in IN 146 to describe the boundaries of "deemed to be one and the same person" — for example, whether the same reasoning would extend to other allowance types beyond section 12C — was not addressed in available sourcing and would need direct confirmation from the final text.

Can I deduct a fine my company paid overseas if the conduct wasn't illegal in that country? Section 23(o) looks at whether the conduct would have been unlawful in South Africa, not whether it was unlawful where the fine was actually imposed. A fine for conduct that's lawful abroad but would be illegal here is still non-deductible.

I previously wrote off an amount as fruitless and wasteful expenditure and was denied the deduction — now I've recovered some of that money. What happens? This is the specific scenario Interpretation Note 54 (Issue 3) newly addresses. Practitioners should consult the final published text directly for the precise treatment, since this is one of the note's most concrete additions over the prior issue.

Does a company amalgamation force a manufacturing business to restart its wear-and-tear allowance clock? No, based on SARS's worked example in Interpretation Note 146 — the receiving company continues the allowance schedule the transferring company was already on, treating both as a single continuous claimant for this purpose, rather than resetting or apportioning around the transaction date.

Can I use ADR for any SARS dispute? Only once you've received a decision disallowing your objection, in full or in part, and SARS agrees the matter is suitable for the process. An invalid objection — one that fails on procedural grounds before reaching a decision on the merits — does not qualify for ADR in the same way.

Where do I find the exchange rate I should use for a foreign-currency transaction? SARS's updated Average Exchange Rate tables (published 9 September 2026) provide both an annual table going back to December 2003 and a monthly table for shorter or longer years of assessment, depending on which averaging method applies to your situation.