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21 September 2018
The draft Taxation Laws Amendment Bill (TLAB) 2018, published for public comment on 17 July 2018, has proposed a number of significant legislative amendments. This article examines the amendments regarding the allowance for doubtful debts set out in Section 11(j) of the Income Tax Act (58/1962).(1)
In 2015 various discretionary powers afforded to the South African Revenue Service (SARS) commissioner in the context of the Income Tax Act's assessment provisions were removed in order to formalise South Africa's move towards income tax self-assessment. This realignment was undertaken against the backdrop of international research performed as part of a study on the transition to income tax self-assessment, which confirmed that the international trend was a move away from administrative income tax assessment towards self-assessment and voluntary compliance.
One of the provisions affected by this shift was Section 11(j) of the act, which provides for a deduction of doubtful debts. The allowance is made only in respect of debts which would have been allowed as a deduction had they become bad. Notably, Section 11(j) affords the SARS commissioner the discretion to decide whether a debt was doubtful. Historically, the commissioner has generally provided for an allowance of 25% of the face value of doubtful debts. This percentage has occasionally been increased depending on the facts and circumstances of the specific case.
Despite this longstanding practice, the key issue has always been how to manage the pressing need for certainty and equality of treatment within this area of the law given the commissioner's discretionary powers. In particular, there has often been debate over the different treatment of taxpayers where different facts or circumstances warrant different doubtful debt allowance percentages. For example, taxpayers that engage in various moneylending activities are in a different position to those that do not.
In line with the removal of the remnants of the administrative assessment system, the commissioner's discretion in respect of the doubtful debt allowance under Section 11(j) of the act was to be deleted with effect from a date to be determined by the minister of finance. The intention behind the deletion and insertion of an amended Section 11(j) was that, in future, the allowance would be claimed according to certain criteria set out in a public notice issued by the commissioner. The draft TLAB now proposes specifically inserting into the act certain criteria for determining the doubtful debt allowance as opposed to publishing the criteria by way of a public notice.
The proposed amendments envisage separating the tax treatment of two defined categories of taxpayer – namely, those which use International Financial Reporting Standards (IFRS) 9 for financial reporting purposes and those that do not. Broadly, this relates to a delineation between listed and unlisted companies, given that most public companies must utilise the IFRS (although many private companies also utilise the IFRS voluntarily in compiling their accounts).
In respect of companies utilising IFRS 9, it is proposed that 25% of the loss allowance relating to impairment as contemplated in IFRS 9 – excluding lease receivables contemplated in IFRS 9 (because a deduction may be allowed for the lessor of leased assets under Section 11(e) of the act) – be allowed as a deduction if recognised for financial reporting purposes.
In respect of all other companies, it is proposed that an age analysis of debt be used in this regard. As a result, it is proposed that 25% of the face value of doubtful debts that are 90 days past their due date be allowed as a deduction. The allowances given in an assessment year must be added to the taxpayer's income in the following assessment year.
The additional proposed amendments to the doubtful debt provisions build on the insertion of a new Section 11(jA) in the act, which concerns doubtful debt allowances for 'covered persons', as defined in Section 24JB of the act (ie, banks). Section 11(jA) provides for a more favourable doubtful debt allowance in the case of banks, ranging from 25% to 85% depending on the level of impairment, in accordance with the IFRS. The proposed amendment provides clarity and certainty on this doubtful area of the law; however, it remains to be seen what the practical impact will be on various taxpayers in light of their different industries and the facts and circumstances.
Despite the proposed amendments, uncertainty remains as to what constitutes a 'bad debt' under Section 11(i) of the act, which is inextricably linked to the doubtful debt allowance set out in Section 11(j). This has recently become a hot topic of discussion and remains one of the most contentious areas of tax law. Notwithstanding some of the case law already handed down on this issue, there appear to be differences in the interpretation of what constitutes a 'bad debt' and clarification and certainty in this regard would be welcomed by many taxpayers.
For further information on this topic please contact Jerome Brink at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email (firstname.lastname@example.org). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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