Page 464 - SAIT Compendium 2016 Volume2

IN 48 Income Tax acT: InTeRPReTaTIon noTes IN 48
4.5 Amount of the debtors’ allowance
The amount of the debtors’ allowance is based on the gross pro t percentage applied on qualifying outstanding debtors at the end of the taxpayer’s year of assessment (excluding nance charges and VAT) and reduced by –
• bad debts under section 11(i), and
• any allowance for doubtful debts under section 11(j).
The debtors’ allowance is thus arrived at by multiplying the amount of the adjusted qualifying outstanding debtors at the end of the year of assessment by the gross pro t percentage.
Finance charges and VAT must also be excluded from turnover (sales) and cost of sales in determining the gross pro t percentage which is calculated as follows:
[(sales – cost of sales) / sales] × 100 = gross pro t percentage or
(gross pro t / sales) × 100 = gross pro t percentage
The gross pro t should include other forms of income such as delivery charges, fees for maintenance contracts and
insurance premiums.
4.6 Commissioner’s discretion
The granting of the debtors’ allowance is at the discretion of the Commissioner. In practice the Commissioner’s discretion will be exercised upon assessment or audit of the case. Taxpayers must ensure that they have the necessary information or documentation on hand to support any debtors’ allowance claimed should this be required by SARS.*
Under section 3(4)(b) the Commissioner’s decision under section 24(2) is subject to objection and appeal. Should the debtors’ allowance be denied, the taxpayer is entitled to object and appeal against the Commissioner’s decision in accordance with Chapter 9 of the Tax Administration Act. 28 of 2011. Under section 102 of the Tax Administration Act, the burden of proving, amongst others, that an amount is deductible rests with the taxpayer.
4.7 Calculation of debtors’ allowance on an individual debtor-by-debtor basis
The purpose of the debtors’ allowance is to grant an allowance equal to the gross pro t element of the outstanding debtors at the end of each year of assessment.
The manual determination of the allowance on a debtor-by-debtor basis is simple when there is a single debtor or a few debtors. In other words, the speci c gross pro t percentage applicable to each debtor is applied to that debtor. This method could also be applied when there are numerous instalment debtors and the taxpayer has a sophisticated computer system capable of determining the exact gross pro t percentage applicable to each debtor. Such a method would be the most accurate and would be the ideal method most acceptable to SARS.
The example below illustrates the amortisation of nance charges and determination of the debtors’ allowance for a single debtor.
Example 2 – Calculation of debtors’ allowance for a single debtor
Facts:
X Limited sold and delivered a machine held as trading stock which cost R114 000 (VAT inclusive) to its customer on day 1 of the rst year of assessment under the following conditions:
Selling Price
Interest rate per annum
Payment period
Instalment payments of R74 894 are received annually in arrears.
R171 000 (VAT inclusive) 15%
3 years
Result:
The total of all capital instalments amounts to R224 682 (R74 894 × 3). This amount is dissected as follows: R
Whole amount (capital amount) = 100 / 114 × R171 000 VAT (output tax) = 14% × R150 000
Finance charges = R224 682 – R171 000
Sum total of capital instalments = R74 894 × 3
150 000 21 000 53 682
224 682
Amortisation Table
Date
Beginning yr 1 End year 1 End year 2 End year 3 Total
Instalments Finance charges
VAT (output
tax) RRRRR
74 894 74 894 74 894
224 682
25 650 [b] 18 263 9 769
53 682
6 048 [c] 6 955 7 997
21 000
43 196 [d] 49 676 57 128
150 000
150 000 [a] 106 804 [e] 57 128 Nil
Capital repayments
Capital balance
* Section 29 of the Tax Administration Act.
456 saIT comPendIum oF Tax LegIsLaTIon VoLume 2