A critical evaluation of the doubtful debt income tax treatment in South Africa

Abstract

The objective of section 11(j) of the Income Tax Act 58 of 1962 (“the Act”) is to afford relief to taxpayers who doubt the recoverability of debt that is due to them. The Taxation Laws Amendment Act 23 of 2018, issued on 17 January 2019, established an amendment to the doubtful debt allowance to promote certainty. This amendment was succeeded by another amendment to section 11(j), included in the Taxation Laws Amendment Act 34 of 2019, to align the South African Revenue Service’s (“SARS”) intention with the current wording of the legislation. The main concern facing SARS is that it has failed to provide certainty to taxpayers through the amendments to section 11(j). Apart from that, there is a possibility that the income tax treatment resulting from the 2019 amendment is not consistent with the fundamental principles of taxation. This inconsistency may be attributable to the distinction made in section 11(j) between taxpayers applying IFRS 9 and taxpayers not applying IFRS 9. Pursuing this matter further, the purpose of this study is to critically evaluate current legislation regarding section 11(j) against the fundamental principles of taxation to determine compliance thereof. The study reveals that the principles of neutrality, certainty and simplicity, and effectiveness and fairness might be in contravention because of variations in the income tax treatment of doubtful debts for the different types of taxpayers identified by current legislation. Ultimately, the study points towards the possibility that section 11(j) is not in conformance with the fundamental principles of taxation.