Section 23H of the Income Tax Act limits the deduction you can claim for prepaid expenses in the year you pay them. If you pay upfront for goods or services that will only be delivered in a later year of assessment, your current-year deduction is restricted to the portion of the benefit you actually received before year-end. The rest is deferred and claimed when the goods or services arrive.
What Section 23H Does
The rule matches your deduction to the period in which you enjoy the benefit. SARS uses it to stop taxpayers from front-loading deductions by paying several years’ expenses in one tax period. Pay for a three-year maintenance contract in full today, and the law will not let you write off the whole cost this year. You deduct the share relating to services received before year-end, and the remainder sits as a prepayment until the benefit arrives.1South African Revenue Service. Interpretation Note 74 – Deduction and Recoupment of Expenditure Incurred on Repairs
The typical items caught are insurance premiums paid in advance, rent covering future months, service or maintenance contracts, and professional retainers. The trigger question is always the same: did you pay now for something you will only use later?
When You Can Skip the Apportionment
Two exceptions spare you the split entirely. If either applies, you deduct the full amount in the year you pay it.
- The six-month rule. If you will receive all the goods, services, or benefit within six months after the end of the year of assessment in which you incurred the expense, no apportionment is needed. This is what covers an annual insurance policy or service contract straddling your year-end by a few months.1South African Revenue Service. Interpretation Note 74 – Deduction and Recoupment of Expenditure Incurred on Repairs
- The R100,000 threshold. Where total expenditure on a particular item does not exceed R100,000, the limitation does not apply. The threshold looks at the full contract value, not just the portion that spills into the next year.
Miss both, and the apportionment rules apply with no further leeway.
How to Calculate the Deductible Portion
Where neither exception applies, you apportion the expense over the benefit period on a days basis:
Current-year deduction = Total expenditure × (Days of benefit in the current year ÷ Total days in the full benefit period)
The balance is added back to taxable income for the current year and becomes deductible in the following year, when the benefit is actually received.
Worked Example
Your company has a February year-end and pays R240,000 on 1 December for a 12-month equipment maintenance contract running to 30 November the following year. The full benefit period is 365 days. Only 91 days (1 December through 28 February) fall within the current year.
Current-year deduction: R240,000 × 91 ÷ 365 = R59,836. The remaining R180,164 is not deductible this year. You add it back when calculating taxable income, and it becomes deductible in the next year of assessment as the remaining months of service are received.
The days-based method suits continuous services like insurance, rent, or maintenance. Section 23H can also apply to prepayments for physical goods delivered in batches. SARS gives the example of a taxpayer who prepays for replacement parts but only receives half by year-end: the deduction is limited to the cost of what was actually delivered, with the balance following once the rest arrives.1South African Revenue Service. Interpretation Note 74 – Deduction and Recoupment of Expenditure Incurred on Repairs There you apportion by what you received, not calendar days.
Reporting the Add-Back on Your Return
The non-deductible portion has to be added back when you calculate taxable income. Companies filing the ITR14 will find two separate line items: “Prepaid expenditure not limited by s23H” sits under special allowances, and “Prepaid expenditure not allowed under s23H” sits under non-deductible amounts debited to the income statement.2National Treasury. Corporate Income Tax – ITR14 Form Keep the two apart: prepayments that fall within an exception go in one field, prepayments that need apportionment go in the other.
Individuals filing the ITR12 handle the adjustment in the trade income section, in the fields for non-deductible expenses within the adjustments to accounting profit. On eFiling, the entry sits in the adjustments container of the tax computation. Enter the deferred portion to increase taxable income. Skipping the field, or entering the wrong amount, understates your taxable income.
Records You Need to Keep
A prepayment schedule is your first line of defence in a SARS audit. For each expense subject to Section 23H, keep the total amount paid, the contract or invoice showing the benefit period, the start and end dates of the service or delivery, and the calculation showing how you split the deduction between years.
Under the Tax Administration Act, records must be kept for at least five years from the date you submit the return. If the return has not yet been filed, the five-year period does not start, and records must be kept until it is. A SARS audit or investigation extends the retention period until the process concludes, even if five years have already passed.3South African Revenue Service. Record Keeping
Penalties and Interest If You Get It Wrong
Claiming the full deduction where Section 23H requires apportionment understates your taxable income, and SARS treats that as an understatement under the Tax Administration Act. The penalty depends on how the conduct is categorised:4South African Revenue Service. Interpretation Note 129 – Understatement Penalty: Meaning of Maximum Tax Rate Applicable to the Taxpayer
- Substantial understatement (shortfall exceeds R1 million or 5% of the tax properly chargeable, whichever is greater): 10%, rising to 20% for obstructive or repeat behaviour.
- Reasonable care not taken: 25%, rising to 50%.
- No reasonable grounds for the tax position: 50%, rising to 75%.
- Gross negligence: 100%, rising to 125%.
- Intentional tax evasion: 150%, rising to 200%.
These percentages apply to the tax shortfall caused by the understatement, not the whole tax bill. A voluntary disclosure made before SARS notifies you of an audit can reduce or eliminate the penalty, depending on the category.4South African Revenue Service. Interpretation Note 129 – Understatement Penalty: Meaning of Maximum Tax Rate Applicable to the Taxpayer
SARS also charges interest on outstanding tax at 10.25% per year as of 1 March 2026.5South African Revenue Service. Interest Rates – Table 1 Interest runs from the date the tax was due to the date of payment, so delay compounds the cost.