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Section 11(i) permits a deduction from a taxpayer’s income of the amount of any debt due to the taxpayer which has during the year of assessment become bad, provided such amount is included in the current year of assessment or was included in previous years of assessment in the taxpayer’s income.


This deduction will thus only be allowed to the extent to which the debt has become worse during the specific year of assessment. Another essential requirement is that the amount of the debt must have been included in the taxpayer’s income in either the current or a previous year of assessment, and thus the debt must be due to the taxpayer.


As a result, if a taxpayer sells his business, including his debt, during the year of assessment, he will be unable to claim an allowance for bad debt (should that debt become bad), as the debt is not due to that taxpayer anymore. Similarly, when a taxpayer compromises with a debtor during the year and waives his right to claim any portion of the debt owed by him, the portion for which he has waived his recovery right cannot rank as a bad debt. This is because it does not belong to him at the end of the year of assessment. In practice, however, the Commissioner permits a taxpayer to write off any loss sustained in the event of a compromise as a bad debt.


If a bad debt is claimed as a deduction, the taxpayer must keep a record of certain information, including the name of the debtor, the date the debt was incurred, the amount written off, his reasons for writing off the debt, the circumstances in which the debt became due, for example, for goods supplied, services or work performed, money lent or as a result of the purchase of the assets of a business, including the debt due to it.


When considering this deduction, it should be kept in mind that the debt must have become worse during the year of assessment for it to be claimed in that year. Bad debt can, therefore, not be accumulated and written off in a later year.
If a debtor becomes insolvent in a particular year of assessment, the taxpayer (seller) cannot claim a deduction under Section 11(i) for that debt in a later assessment year. If the seller has neglected to claim the deduction in the year in which the debtor became insolvent (or an earlier year if the debt went terrible before insolvency), his only remedy is to seek a revision of the assessment or a refund of tax overpaid for the year in which the debt became terrible.
Another requirement for a bed debt deduction is that the debt written off must have been included in the taxpayer’s income. A bad debt arising out of money lent to an employee, for example, is not deductible since the amount of the debt would never have been included in the lender’s income.


Debt taken over on the purchase of a business and subsequently found to be wrong is thus also not allowable since the amount of the debt would never have been included in the income of the buyer of the business. This loss is one of a capital nature. The same principle applies to an inherited business. The heir is not entitled to deduct bad debt outstanding at the deceased’s death date, as the amount concerned was never included in the heir’s income.
A finance company or a moneylender is not prevented from writing off money lent that proves bad. Such losses are, however, deductible in terms of Section 11(a) as losses incurred in the production of income and not of a capital nature. This will also be the case if it is the custom of a business or profession to make advances to customers or clients as an integral part of the business carried on for the purpose of securing or retaining business.


Section 11(i) does not require the continued existence of the taxpayer’s business out of which the debt arose for the deduction to be available. A taxpayer can deduct bad debt incurred in a previous business from his income from trade in a particular year. This will be allowed if all the other requirements are satisfied. In practice, SARS also permits a taxpayer to deduct the cost of collecting such debt.


The question of whether a debt is bad or not must be decided when the bad debt is claimed and according to the then-existing circumstances of the debtor.


Subsequent events cannot influence the determination made for that year of assessment. In practice, the taxpayer is permitted to make his determination at the time when his financial statements are prepared and are not obliged to do so on the last day of his year of assessment. No deduction will be allowed for bad debts to the extent that the debt is recoverable from someone under a guarantee or suretyship agreement in accordance with Section 23 (c).
If a debt were included in the debtors of a VAT vendor, the debtor amount would include VAT. Since the VAT portion would not have been included in the income of a taxpayer and could also never be a bad debt, as it can be claimed back from SARS by way of an input tax adjustment, VAT should be excluded when calculating a bad debt for the purposes of Section 11(I).

Prepared by CORE TAX
For more information contact 051-448 8188 / tax@coretax.co.za

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