Barter transactions are commonplace in today’s commercial environment. Parties exchange goods or services without a cash transaction underpinning it. The question is, “What happens when I sell the asset in future? Do I have a tax cost for it?”
Paragraph 20(1)(a) of the Eighth Schedule to the Income Tax Act refers to ‘the expenditure actually incurred in respect of the cost of acquisition or creation of that asset’. The word ‘expenditure’ includes expenditure in cash or in kind. In ITC 1783 the court established the following about the meaning of the word ‘expenditure’:
“Expenditure” in its ordinary dictionary meaning is the spending of money or its equivalent e.g. time or labour and a resultant diminution of the assets of the person incurring such expenditure.”
The court cited the following extract from the authors of Silke:
“It is submitted that the word “expenditure” is not restricted to an outlay of cash but includes outlays of amounts in a form other than cash. For example, if a merchant were required to pay for his goods by tendering land or shares in a company, the value of the land or shares would constitute expenditure in terms of s 11(a) and would be deductible.”
This principle confirms that the expenditure in a barter transaction is the amount by which each party’s assets are diminished. For example, in South Atlantic Jazz Festival (Pty) Ltd v C: SARS the taxpayer staged annual international jazz festivals during the period in question. During its enterprise it concluded sponsorship agreements with various suppliers in which the sponsors paid money towards and provided goods and services for the festivals in return for which the taxpayer provided goods and services to the sponsors in the form of branding and marketing. The transactions under the sponsorship agreements were essentially barter transactions despite their part-cash components. The court found that:
“In consequence, and accepting, as one may, that the transactions were at arms’ length, the value of the goods and services provided by the appellant to the sponsors in each case falls to be taken as the same as that of the counter performance by the relevant sponsor. … ‘In an ordinary arms’ length barter transaction, the value that the parties to it have attributed to the goods or supplies that are exchanged seems to me, in the absence of any contrary indication, to be a reliable indicator of their market value.”
In general, therefore, it can be accepted that when assets or services are exchanged for assets or services under a barter transaction, the market value of the assets or services will, absent any contrary indication, be the market value of the assets or services as agreed between the parties and would be of equal value. In most instances the market value of the assets or services to be exchanged between the parties is reflected in the relevant agreement.
Should you engage in barter transactions on a regular basis, it is advisable to speak to your financial/tax adviser to determine the specific factors relevant to these transactions.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted. (E&OE)