Over the past few years, the South African Revenue Service (SARS) appears to have created a new category of doubtful debts allowances which they have termed a “specific” doubtful debts allowance, as distinct from the “ordinary” doubtful debts allowance to which a taxpayer is entitled under section 11(j) of the Income Tax Act, 1962 (the Act) in the ordinary course in respect of its doubtful debts. ENSafrica, Taxand South Africa, explores.
The “specific” doubtful debts allowance category has been created by SARS for the purpose of replacing a taxpayer’s bad debt deduction (claimed under section 11(i) or (a) of the Act) where SARS has taken the view that the pool of debtors in respect of which a taxpayer claimed such a bad debt deduction is not in fact bad, but merely doubtful. Regardless of effort expended by any taxpayer in the collection process prior to the writing-off of a debt as bad and the claiming of a section 11(i) or (a) deduction in respect thereof, if any recovery processes take place post write-off, SARS has expressed the view that as a matter of principle, the entire pool of debtors is tainted and as such merely doubtful.
The percentage of the specific doubtful debts allowance granted by SARS in these circumstances is generally based on the inverse of the bad debt recovery rate. For example, if a taxpayer’s bad debt recovery rate is 25%, then SARS would grant a specific doubtful debts allowance of 75% in lieu of the bad debt deduction.
Discover more: The “specific” doubtful debts allowance
Co-authored by Taryn Solomon
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It is notable that no mention is made of the section 11(i) or 11(a) requirements which feed into the determination of which debts are “bad” and which are “doubtful”. It is also worthwhile mentioning the considerable gap that has arisen between the debts assessed as “doubtful” for accounting and financial reporting, as opposed to those allowed as doubtful under section 11(j). It remains to be seen as to whether, and if so, how the “specific” doubtful debts allowance will feature and/or be catered for in terms of the amended legislative regime.
