This article first appeared in Accountancy South Africa July 2025 edition

Fathima Dawood CA(SA) | Senior Corporate Tax Consultant, PKF Durban

SARS’ procedural defect in its Rule 31 statement and Section 24J takes centre stage in Flower’s R320 million win over pre-trade finance deductions. While the case also dealt with the issue of ringfencing, this article will focus solely on Rule 31 of the Court rules.

FLOWER V CSARS, IT 25209

In a resounding win for taxpayers, the Tax Court’s February 2025 judgment in Flower v CSARS delivered a sharp rebuke to the South African Revenue Service (SARS) for procedural overreach and unfairness relating to SARS’ Rule 31 statement. At the core of the case was a R320 million deduction claimed by the taxpayer for pre-trade development fees, costs that were closely linked to financing the establishment of a solar facility. What began as a technical dispute over the interpretation of “related finance charges” under section 24J of the Income Tax Act (ITA) quickly turned into a case about fairness, due process, and SARS’ duty to stick to its case. The Court’s findings not only vindicated Flower’s position but also sent a clear message: tax litigation is not a moving target, and procedural integrity matters.

The Court found SARS acted unlawfully and unfairly by shifting its case late in the process, which amounted to a novation on SARS’ part. The case will hold interest for anyone working with section24J, as even though the judgement itself did not extend to section 24J, SARS made a complete reversal on its original assessment that the expenses did not qualify in terms of section 24J as “related finance charges”, category 2 expenses.

Flower, a solar energy producer, appealed an additional tax assessment by SARS, which had disallowed R320 million in pre-trade development fees claimed as deductions under sections 11A and 24J of the ITA.

SARS’ INITIAL POSITION: SECTION 24J, “RELATED FINANCE CHARGES”, CATEGORY 2 EXPENSES

Prior to Flower commencing its trading activities, Flower incurred significant expenditure in the construction, erection and establishment of a solar facility. This included raising loans and financial credit facilities necessary to fund the initial capital outlay required to reach the position from which Flower could begin its trading activities amongst other costs. The development fees represented the cost of expenditure incurred by Flower in connection with the raising of funds and credit facilities required to fund the establishment of the solar facility. The development fees were not directly included in the various credit agreements concluded by Flower with its creditors that made the funding available.

Flower alleged that the development fees fell within the meaning of “related finance charges” and the definition of “interest” contained in section 24J of the ITA. On this basis, Flower believed that it was entitled to claim the development fees as deductions from income in the 2014 tax year, this in terms of section 11A(1)(b) of the ITA Flower relied on the close connection to the obtaining of the loans and the furtherance of the project as a whole relying on the outcome of the SARS v South African Custodial Services (Pty) Ltd (SACS) and ITC 1870 cases for its position.

Section 24J provides for two categories of expenditure, an interest charge that is directly related to the amount of credit and the period for which the credit is extended, and secondly, “related finance charges”, as in category 2 costs. Category 2 costs refer to legal fees, guarantee costs, the cost of raising a loan and financing, brokers and lawyers’ fees, all fees not included directly in the finance agreements themselves.

SARS disallowed Flower’s deduction of R320 million in development fees, claiming the fees did not qualify under section 24J. It argued that the SACS case and ITC 1870 applied only to section 11(bA) and not to section 24J. SARS in its finalisation letter argued that it was never the intention of the Supreme Court of Appeal (SCA), in SACS, to recognise fees such as legal fees and related finance charges as these fees do not arise directly from and are not included in the finance agreements.

SARS’ LATER (RULE 31) POSITION – A COMPLETE U-TURN

In its Rule 31 statement, SARS conceded that the broad definition of “interest” in section 24J does include “related finance charges” (ie, category 2 costs). The SACS and ITC 1870 cases do therefore apply to section 24J and the current matter.

However, SARS then changed its objection: it now challenged the factual sufficiency of Flower’s evidence, alleging a lack of detail in how the development fees qualified as related finance charges. This factual challenge had not been raised previously and contradicted SARS’ earlier acceptance of the breakdown provided by Flower.

JUDEGMENT

The Court found SARS’ conduct to be a complete novation of both the legal and factual basis of the assessment. SARS had effectively abandoned its original legal interpretation and introduced a new case at the appeal stage, which is not allowed under Rule 31(3).

Judgement summary

• Procedural defect in SARS’ Rule 31 statement:
  • SARS introduced new factual and legal grounds in its Rule 31 statement that were not part of the original assessment.
  • This amounted to a novation (replacement) of the assessment's basis, which is prohibited under Rule 31(3).
  • SARS’ position in the Rule 31 statement was a complete reversal of its previous legal argument and acceptance of Flower’s facts.
• Unfair prejudice to taxpayer
  • Flower was unfairly required to revisit and prove financial details from over a decade ago.
  • SARS previously acknowledged Flower’s explanation and breakdown of the expenses but later challenged it without prior notice.

Court order

• The additional assessment is altered.
• The R320 million development fees are allowed as a deduction.
• All related penalties and interest are reversed.
• SARS is ordered to pay costs, including the costs of two counsel.

The judgment is a clear reminder that a tax dispute isn’t a game of hide-and-seek. SARS cannot change the rules mid-match and expect the taxpayer to play along. Procedural fairness is the taxpayer’s right conferred by the legislature, and when SARS changed its own legal stance and tried to shift the goalposts, the Court was quick to pull out the red card. For taxpayers navigating the murky waters of section 24J, this case goes someway to offer both clarity and assurance.