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?
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:
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.
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being proposed in the 2018 Taxation Laws Amendment Bill (with comments due by 16 August 2018), with section 11(j) to be repealed and replaced in its entirety, to read as follows: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.
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
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.