Most South African businesses are at some point in time exposed to credit risk in the form of bad debts. Although taxpayers would undoubtedly prefer to recover the debts, the Income Tax Act1 provides for some relief in cases where debts have become bad, or doubtful.
Not only does section 11(a) provide for the deduction of losses actually incurred in the production of income, section 11(i) and 11(j) are specifically aimed at a deduction or allowance for bad and doubtful debts respectively. These two provisions are, however, contentious mainly for two reasons. Firstly, there is no guideline in the Act, or clear test that has been established in case law, for when a debt is only considered to be bad, or “doubtful”, or has, in fact, become “bad”. This is an important consideration since it determines whether taxpayers can claim a permanent full deduction of the amount in terms of section 11(i), or merely an allowance in respect of section 11(j), that must be included in taxable income again in the subsequent year.
Secondly, the value of the allowance that taxpayers can claim in respect of “doubtful” debts has been a topic of dissent between taxpayers and SARS. Traditionally, taxpayers have claimed a 25% allowance in respect of such debts but some taxpayers, especially in the retail and unsecured debts market, have been challenged by SARS on the reasonability of the allowance. Recently, however, there has been an effort from the legislature to provide some certainty around the bad debts regime, at least in respect of the second value of allowances for “doubtful” debts.
Since 1 January 2018, banks can claim 25% of an impairment loss calculated in terms of the International Financial Reporting Standards (IFRS). In the Draft Taxation Laws Amendment Bill 2018, the legislature looks to extend this rate of allowance to other taxpayers as well, and specifically as follows:
Companies reporting in terms of IFRS: 25% of the loss allowance relating to impairment as calculated in IFRS 9 (excluding lease receivables); and
Companies that do not report in terms of IFRS: 25% of the face value of doubtful debts that are 90 days past due date.
Although the proposal to provide certainty is welcomed, some tax practitioners have made representations to National Treasury on the different treatment of taxpayers that report in terms of IFRS, and those who do not.
Whereas IFRS 9 makes provision for either a general or a simplified approach (or a combination thereof) that may be applied across a group of financial assets (debts) and that can also consider historical information, taxpayers that do not report in terms of IFRS 9 will be required to make an individual assessment of each debt to determine if such a debt is 90 days or more in arrears. This could cause practical difficulties where debtors have different terms or when payments are due (e.g. 30 days after invoice date or 30 days after statement date), especially where taxpayers have a significant number of low-value debtors.
It is suggested that there should not be any distinction between taxpayers that report in terms of IFRS 9 and taxpayers that do not, but rather that the guidance of IFRS 9 can be used to determine any impairment, even for taxpayers that do not report in terms of IFRS 9. This will also remove any inconsistent treatment of taxpayers, depending on the financial reporting framework that they are subject to. The suggestion is, therefore, that any taxpayer not reporting in IFRS may elect to apply IFRS 9 in determining its section 11(j) allowance. Submissions are currently being considered by National Treasury.
58 of 1962 (‘the Act’)
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