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When do deposits received from tenants qualify as ‘gross income’?

16 July 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: We are a group of companies owing commercial properties which are rented out to tenants. We would like to know whether the tenant deposits received and held falls into the definition of gross income (specifically related to the earlier of receipt or accrued). Should these tenant deposits received on a monthly / yearly basis be included in our taxable income?

As the tenant deposit are only held on behalf of the tenant we believe that the tenant deposit should not be taxed until such time that the deposit are actually utilised for rental income or recoveries.

A: We need to remind you that the taxpayer bears the onus of proof - in this instance there was a receipt - that it is not gross income.  The problem is that an amount would be gross income at the earlier of receipt or accrual.  As there is no accrual yet, we accept, the taxpayer will have to show that it was either not for his benefit or capital in nature in order for it not to be gross income. The service offered by SAIT is also limited to guidance only. 

Judge Howie, in the MP Finance case said: "The sole question as between scheme and fiscus is whether the amounts paid to the scheme in the tax years in issue came within the literal meaning of the Act.  Unquestionably they did.  They were accepted by the operators of the scheme with the intention of retaining them for their own benefit.  Nothwithstanding (sic) that in law they were immediately repayable, they constituted receipts within the meaning of the Act.  In other words it does not matter for present purposes that the scheme was not entitled, as against the investors, to retain their money.  What matters is that what they took in was income received and duly taxable…” 

In C v COT 46 SATC 57 it was held that where an unconditional obligation existed to repay, the deposits were not received by the taxpayer, but Judge Howie, in the case referred to above, said that the fact that "the scheme was legally obliged to repay an investor immediately on receipt” didn’t mean that the deposit wasn’t received by it. 

It is generally accepted that if the money is held in trust (see the Brookes Lemos Ltd v CIR 14 SATC 295) it would not be received and therefore not gross income. 

In CSARS v Cape Consumers Judge Davis said with regard to the funds held in reserve that "… in terms of the legal relationships between itself and the buyers, such monies were not for its own benefit but for the benefit of the buyers.”  The decision was then that it was not gross income.  

With regard to your statement that the deposit is "only held on behalf of the tenant” we don’t believe that the landowner is receiving this in a capacity of an agent.  We agree, if the view was taken that it was not gross income, that when the deposit is applied it would turn into gross income. 

If you have an uncertainty regarding the view taken, you may want to support it with an opinion from a tax practitioner.  


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