The reasons for potential non-payment can include disputes over supply, the condition of goods or the appearance of financial stress within a customer’s operations.
It is common practice for businesses to provide for a provision for the doubtful debts, which is an estimate of bad debts that may arise.
Based on current legislation and prior to the proposed amendments below, the Commissioner: South African Revenue Service (SARS) has the authority to grant an allowance of so much of any debt due to the taxpayer it considers doubtful. In practice, SARS allows 25% of doubtful debt provisions as a deduction based on a specific list and determined with reference to a debtors’ listing in terms of section 11(j) of the Income Tax Act. The allowance must be included in income in the following tax year.
To align with the move to a self-assessment income tax system, SARS discretionary powers needs to be removed. Accordingly, to provide certainty regarding the criteria for claiming doubtful debt allowance, the following are proposed to be legislated. The proposed amendments will come into operation on January 1, 2019 and apply in respect of years of assessment commencing on or after that date.
Companies using International Financial Reporting Standards (IFRS) 9 accounting standard for financial reporting purposes - section 11(j)(i): It is proposed that 25% of the loss allowance relating to impairment as contemplated in IFRS 9 excluding lease receivables contemplated in IFRS 9 be allowed as deduction if recognised for financial reporting purposes.
The allowances allowed in a year of assessment must be added back to income in the following year of assessment. The test is therefore not relating to whether a particular debt has gone bad, but one needs to test for the “impairment” of the debt.
Companies not using IFRS 9 accounting standard for financial reporting purposes - section 11(j)(ii): It is proposed that 25% of the face value of doubtful debts that are 90 days past due date be allowed as deduction.
Again, the allowances allowed in a year of assessment must be added back to income in the following year of assessment.
For example, where the debtors as per the debtors age analysis fall within the 90 days and over category, these debtors would be subject to doubtful debt allowance.
These proposed amendments provide clarity to taxpayers depending on which basis their financial statements are prepared. The test for income tax deduction is simplified by the proposed amendments.
* Koovarjee is an Associate Director, Corporate Tax at KPMG Services (Pty) Ltd. He can be contacted at +27 (0) 31 327 6000 or email [email protected]