In 2018, amendments were made to section 11(j) of the Income Tax Act to provide specific criteria for determining doubtful debt allowances. Further amendments have now been introduced which take effect for years of assessment commencing on or after 1 January 2021. This means that the new rules will effectively apply for the first time to taxpayers with the year of assessments ending on 31 December 2021.
The tax position before the latest amendments
The amount of section 11(j) deduction depends on whether the taxpayer applied International Financial Reporting Standard (IFRS) 9 for financial reporting purposes.
Where IFRS 9 is applied
The deduction is the sum of the following three amounts: 40% x IFRS 9 lifetime expected credit loss (ECL) plus
- 40% x IFRS bad debts not allowed under section 11(i) plus
- 25% x IFRS 9 other ECL impairment
Section 11(j) allowance is not claimable on lease receivables, whether they had accrued to the taxpayer or not.
Where IFRS 9 is NOT applied
The deduction is the sum of the following two amounts:
- 40% x debt that is ≥ 120 days plus
- 25% x debt that is ≥ 60 days
A taxpayer can apply to SARS to have the 40% in the above calculations be increased to a higher percentage but not exceeding 85%. SARS will take the following factors into account when deciding on the higher percentage:
- The history of a debt owed to that taxpayer, including the number of repayments not met, and the duration of the debt
- Steps taken to enforce repayment of the debt
- The likelihood of the debt being recovered
- Any security available in respect of that debt
- The criteria applied by the taxpayer in classifying debt as bad, and
- Such other considerations as the Commissioner may deem relevant
The tax position after the latest amendments
- Taxpayers applying IFRS 9 for financial reporting purposes can now claim a section 11(j) allowance in respect of lease receivables that have accrued to them, but not in respect of future lease amounts.
- Taxpayers who do not apply IFRS 9 must base their calculation on the amount of debt after taking into account any security available in respect of that debt.
A logical correction
In my view, the first of the latest amendments listed above is a logical correction. The policy reasoning for the second amendment above, as cited by National Treasury in their Explanatory Memorandum, is due to the lack of parity between taxpayers that apply IFRS 9 and those that do not. The current 25% and 40% allowances for taxpayers not applying IFRS 9 does not take into account security given in respect of the debt.
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