22 February 2018 by

Tax treatment of doubtful debts to be clarified by way of statutory amendments

In 2015, various discretionary powers afforded to the Commissioner of SARS in the context of assessment provisions contained in the Income Tax Act, No 58 of 1962 (Act) were removed in order to formalise the move towards income tax self-assessment in South Africa. This re-alignment was done against the backdrop of international research performed as part of the study on the transition to income tax self-assessment, which confirmed that the international trend was to move away from administrative income tax assessment towards self-assessment and voluntary compliance.

One of the provisions impacted by this was the doubtful debts allowance contained in s11(j) of the Act. Section 11(j) of the Act provides for a deduction of such amount that represents debts which are doubtful. The allowance is only made in respect of debts which would have been allowed as a deduction had they become bad. Importantly, s11(j) of the Act afforded the Commissioner of SARS a discretion to decide whether the debt was doubtful. In line with the removal of the remnants of the administrative assessment system, the Commissioner of SARS’s discretion in respect of the doubtful debt allowance under s11(j) of the Act was to be deleted with effect from a date to be determined by the Minister. The intention behind the deletion and substitution of an amended s11(j) was that, in future, the allowance would be claimed according to certain criteria set out in a public notice issued by the Commissioner of SARS. 

The one issue with such a proposal was that there was a risk that the public notice may have been limited to the extent that it failed to take into account certain taxpayers’ circumstances and was thus too broad in its defining criteria. Nevertheless, while there has been engagement between SARS and the banking industry on this specific matter given the significant impact it has on that industry, no general criteria have been formulated and published up to this point as was originally intended. In any event the new proposed s11(j) of the Act has not come into effect such that the Commissioner’s discretion is still applicable. SARS has in the past usually allowed the taxpayer a deduction of 25% of its list of doubtful debts or alternatively a deduction based on a formula. 

The Minister announced in the Budget that instead of publishing the criteria by way of a public notice, it is now proposed that the criteria for determining the allowance should instead be included in the Act. The intended certainty and a move towards more objective criteria will be welcomed by taxpayers. However, it will be interesting to analyse and consider the draft legislation once it has been published, bearing in mind that different industries will be impacted by different criteria.  

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