Lay-by arrangements and debtors allowances

A lay-by arrangement can be characterised as one where a prospective purchaser agrees with a prospective seller that a particular item or asset will be set aside or reserved for purchase. The prospective purchaser usually pays a deposit for the reservation (sometimes followed by further payments). Once the prospective purchaser has presented full payment, the sale is concluded and the purchaser takes possession and ownership of the item. (There may be different characterisations depending on the relevant terms of the agreement.)

24 Feb 2022 2 min read 2022 Special Edition Budget Speech Alert Article

Section 24 of the Income Tax Act 58 of 1962 essentially provides for a deemed accrual for a seller of goods or other property in certain circumstances, mainly in the context of credit agreements.

The circumstance in which section 24(1) applies is where transfer to the purchaser is subject to receipt by the seller of the whole or a certain portion of the purchase price.

The accrual of the full purchase price will then be deemed to have occurred during the tax year that the agreement was entered into, and not only when ownership is passed.

This particular provision was the subject of the case of Milnerton Estates Ltd v Commissioner for South African Revenue Service 81 SATC 193, which caused some concern in the property industry in 2018.

Section 24(2) does, however, provide some relief for the seller in the form of a debtors allowance in respect of amounts that have accrued under section 24(1) but which have not yet been received. The allowance applies where at least 25% of the amount is payable only after 12 months of the date of the agreement.

In the 2022 Budget Speech, the National Treasury has indicated that it will review the debtors allowance provisions in the context of lay-by arrangements, as these arrangements are often for a period of less than 12 months, resulting in the seller not qualifying for the allowance.

Our view, however, is that section 24(1) is not necessarily applicable to lay-by arrangements as characterised above. As such, there should be no concern in relation to the debtors allowance.

In any event, whether section 24(1) applies or not, it appears that the National Treasury may make provision for shorter-term arrangements.

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