The South African Revenue Service recently published a new Interpretation Note relating to the taxation of deposits. In the ordinary course of business, taxpayers may receive money in advance in the form of deposits related to goods or services to be delivered or rendered at a future date. Having regard to the definition of “gross income”, the facts of each transaction must be considered to determine whether a deposit should be included in gross income and, if so, in which year of assessment it is applicable. In the context of deposits received in advance, one of the requirements which have given rise to interpretational difficulties in the past and resulted in the courts being called on to make a determination, is whether the physical receipt of a deposit means it has been received for purposes of the definition of gross income.
Depending on the terms of the contract, the deposit may be refundable, refundable only under specified conditions, or set off against the price of goods when they are delivered or services when they are rendered in the future. A deposit is not a loan. Typical deposits include returnable containers, security deposits, rental deposits, and agreements for sales of goods or services.
In general, deposits received by a taxpayer must be included in the taxpayer’s gross income if received by the taxpayer “on his own behalf for his own benefit”. For a deposit to be excluded from gross income on the basis that it has not been received by the taxpayer, the amount must be held in trust and generally be held in a separate bank account. The use of a separate bank account, however, does not override the true nature of the transaction and intention of the taxpayer. Thus, even if the taxpayer keeps the deposits in a separate bank account but there is no intention of refunding them, they must be included in gross income in the year of assessment in which they are received – this has been confirmed by our courts. Consider, for example, the case of ITC 707, where the taxpayer received advance payments for funerals to be rendered at a later date. The court held that the advance payments constituted gross income since they represented ordinary revenue income of the taxpayer’s business and the taxpayer had at all material times dealt with the advance payments as his own money. The money went into the taxpayer’s ordinary business account; it was not put into a trust fund or any special account and was used by him in the ordinary course of his business to either fund the running of the business or to make investments for his own benefit.
The treatment of an unclaimed deposit depends on its prior treatment for income tax purposes. For example, if a rental deposit, which was not included in the lessor’s gross income under the principles considered in this Note at the time it was received, or prior to prescription, is for some reason never claimed by a previous lessee, then, after the relevant prescription period when the deposit becomes the lessor’s money, it must be included in the lessor’s gross income. In contrast, if a customer pays a deposit for the supply of goods in the future and under the principles considered in this Note, the deposit was received by the supplier for own benefit and included in gross income when received, then if the goods are not supplied and the customer does not claim the deposit, it will not be included in gross income again. If the supplier refunds the deposit, it may constitute a deductible expense for the supplier.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).