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Tax consequences of the receipt of a non-refundable deposit

05 February 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Company A sells immovable property to Company B. Company A does not sell properties in the course of its normal business (i.e. it does not trade in properties). The contract stipulates that a non-refundable deposit will be paid. Company B paid the non-refundable deposit. Company B then reneged on/backed out of the agreement and the contract was not concluded. My question is how must Company A account for this non-refundable deposit (which Company A received in cash) in terms of the Income Tax Act as well as the VAT Act.

My view is that the deposit is a receipt of a capital nature and not subject to income tax or capital gains tax. Furthermore, I believe there is no VAT as the deposit is not considered to be "any payment" and also does not constitute a supply of goods or services.

A: VAT will be payable if "consideration” is paid to the seller in respect of or for inducement of the supply as defined in section 1 VAT Act, this would include a deposit. However the provision the definition states that a deposit will only constitute payment and consequently "consideration” once the deposit is applied as consideration against the purchase debt or the deposit is forfeited. Section 8(4)(b) of the VAT Act deems the amount retained by the seller after cancellation of the agreement as the supply of a service. In terms of section 9(1) the time of supply is the earlier of whether a tax invoice is issued for the supply or a "payment of consideration” is made. In respect off the latter, it is our view that on forfeiture of the deposit (i.e. cancellation of the sale) a supply will be deemed to have occurred because at such time a payment of consideration occurs per the section 1 definition of "consideration”. 

In respect of income tax, the transaction is assumed to be on capital account. In our view the contractual right by the seller to claim payment of the forfeited deposit, on happening of the resolutive condition in respect of the sale of the fixed property, constitutes an asset per paragraph 1 of the Eighth Schedule. Once the resolutive condition is met, i.e. the sale is cancelled, the right is "disposed of” per paragraph 11 Eighth Schedule by being extinguished on payment of the forfeited deposit, which payment will constitute "proceeds” per paragraph 35 Eighth Schedule. As the base cost of the right is Rnil, a capital gain equal to the deposit forfeited will be incurred by the seller.For the purchaser, a capital loss will occur (if connected person see paragraph 38 and 39 Eighth Schedule) which is not subject to the exclusion in paragraph 17 applicable to forfeited deposits as paragraph 17(2)(b) excludes fixed property which is not a primary residence, which we assume it is not. As the time of disposal in respect of the property, subject to a resolutive condition, is in terms of paragraph 13 the date of the agreement, you would also have to consider where the sale and cancellation occurs in the same or different tax years. If it is different tax years, please refer to paragraph 24.6 of SARS CGT Guide (issue 4) as to how the forfeiture and cancellation is treated for CGT purposes.

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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