When do deposits received from tenants qualify as ‘gross income’?
16 July 2015
Posted by: Author: SAIT Technical
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.