Effective for years of assessment commencing on/after 1 January 2019, taxpayers will need to amend the manner in which they determine the doubtful debt allowance as per section 11(j) of the Income Tax Act 58 (1962).
The previous provisions
In terms of the previous provisions, a taxpayer was entitled to claim an allowance in respect of so much of any debt due to the taxpayer as SARS considers to be doubtful. It was SARS’ practice to grant an allowance of 25% of doubtful debts.
The amendments as introduced by the 2018 Taxation Laws Amendment Bill published on 25 October 2018, discerns between debts accounted for in terms of the provisions of International Financial Reporting Standards (“IFRS”) 9 Financial Instruments and those debts that are not accounted for in terms of IFRS 9. Covered persons such as banks and insurers will continue to apply the provisions of section 11(jA) of the Income Tax Act.
Taxpayers that apply the provisions of IFRS 9 to account for the relevant debt should determine the allowance for doubtful debts as the sum of:
- 40% of the impairment allowance loss based on lifetime expected credit loss (excluding lease receivables) and accounting bad debts; and
- 25% of the impairment loss allowance (excluding lease receivables).
Taxpayers that do not apply the provisions of IFRS 9 to account for the relevant debt should determine the allowance for doubtful debts as the sum of:
- 40% of debt 120 days or more in arrears; and
- 25% of debt 60 days or more in arrears but less than 120 days.
The amendments further allow a taxpayer to apply to SARS for a directive to increase the percentage of the allowance to a percentage not exceeding 85%. In determining the percentage, SARS will consider the following:
- 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.
Take note: From the effective date, taxpayers will no longer be entitled to apply any directives acquired from SARS in this regard. All taxpayers will be required to apply the amended provisions or apply for a new directive.