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South Africa: Doubtful debt allowances, proposal to revoke Commissioner's discretion

South Africa: Doubtful debt allowances

The latest set of proposed changes to section 11(j) of the Income Tax Act seeks to remove South African Revenue Service (SARS) discretion, in part to reduce the SARS administrative burden—but at what cost to the taxpayer?

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Doubtful debt allowances—background

Under current law, the Commissioner has the authority to grant an allowance of an amount of any debt due to the taxpayer that is considered to be doubtful. In practice, SARS allows 25% of doubtful debt provisions as a deduction (based on a specific list and determined with reference to a listing of debtors).

Some taxpayers have been able to negotiate a more favourable allowance through rulings. In particular, a SARS directive to the Banking Association of South Africa (BASA) provided for much more favourable terms to its members. In certain instances, certain taxpayers considering themselves moneylenders, often applied the BASA directive (even though they were not members of BASA and acted without special dispensation provided by the Commissioner). 

The introduction of IFRS 9 rendered the BASA directive and most other specific rulings unusable. The terminology and concepts used in the SARS directive were aligned with IAS 39 and are no longer used in IFRS 9. 

National Treasury introduced section 11(jA), effective from years of assessment commencing on or after 1 January 2018, to govern the treatment of doubtful debt allowances for “covered persons” as defined (i.e., mostly banks). In general, banks are allowed a deduction (as determined in terms of IRFS 9) of:

  • 85% of stage 3 expected credit losses
  • 40% of stage 2 expected credit losses
  • 25% of stage 1 expected credit losses 

There are some intricacies, considering that section 11(jA) does not specifically refer to the three stages. Also, section 11(jA) is only available to banks and not any other moneylenders. 

Proposed changes

The following amendments are being proposed in the 2018 Taxation Laws Amendment Bill (with comments due by 16 August 2018), with section 11(j) to be repealed and replaced in its entirety, to read as follows:

(i) an allowance equal to 25 per cent of the loss allowance relating to impairment, as contemplated in IFRS 9, in respect of debt other than in respect of lease receivables as defined in IFRS 9, if IFRS 9 is applied to that debt by that person for financial reporting purposes; or

(ii) an allowance equal to 25 per cent of so much of any debt, other than a debt contemplated in subparagraph (i), due to the taxpayer, that would have been allowed as a deduction under any other provision of this Part had that debt become bad if that debt is 90 days or more in arrears:

Provided that an allowance under this paragraph must be included in the income of the taxpayer in the following year of assessment.

The proposal, thus, would effectively revoke the Commissioner’s discretion and would provide for an allowance of 25% of so-called “IFRS 9 loss allowances,” or 25% of other debt older than 90 days before considering specific provisos. 

KPMG observation

A question for consideration is whether 25% is acceptable. Most non-moneylender taxpayers stand to benefit from the proposed amendment, owing to the 25% that would be allowed on all IFRS 9 impairments, and would not be limited to specific impairments (as previously limited). On face of it, all taxpayers would be treated equally.

 

Read a July 2018 report [PDF 91 KB] prepared by the KPMG member firm in South Africa

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