Technical Inbox - 6 July Pick of the Week
06 July 2016
Posted by: Author: SAIT Technical
1. Is it acceptable
to write off bad debt and claim Input Vat if the debtor is under business
Output Vat was declared earlier. Section 22 of the VAT Act states that the
input tax can be claimed when it is irrecoverable. What is the criteria that
the amount is irrecoverable and can be written off as bad debt?
A: Section 22(1)
requires the supplier (vendor) to have "written off so much of the said
consideration as has become irrecoverable”. We agree with you that the
metre fact that the recipient is in business rescue is not indication that the
amount is irrecoverable.
SARS regards a debt as irrecoverable
if the vendor has complied with both the following requirements (see VATNEWS 8
and Guide for Vendors (VAT 404) para 15.2):
'• the vendor must have done all the necessary entries in his
accounting system to record that the amount has been written off, and
• must have ceased any recovery action taken by himself and have
decided to either not take any further action or have handed the debt over to
an attorney or debt collector.'
Inland Revenue, New Zealand, has
stated that whether a debt has become bad is an objective test. The question is
whether a reasonably prudent business person would conclude that there is no
reasonable likelihood that the debt will be paid.
Factors which are likely to
be relevant in this regard are the length of time a debt is outstanding, the
efforts that the vendor has taken to collect the debt, information relating to
the debtor's financial position and payment of other debts, which information
is often gained through recovery action taken. They have also stated that it is
not a requirement that recovery action be taken before a decision is made that
a debt is bad. Further, a debt may be bad even though the vendor is taking
action to recover the debt, as recovery action may be taken for a number of
reasons, even when it is believed that there is no reasonable likelihood that
the debt will be recovered (see Tax Information Bulletin Vol 12 No 5).
can assessed losses be offset against future income?
Q: When a CC was trading as a supermarket and
built up an accumulated loss and sold the supermarket. The taxpayer bought a
filing station. Will the assessed loss be allowed to be used against future profits
of the filing station?
A: It is section 20 of the Income Tax Act that allows for the
set-off of assessed losses. In this instance it may well be that there is
also a ‘balance of an assessed loss’. Our guidance that follows accepts
that the taxpayer will be able to prove that the sole or main purpose was not
to utilise the assessed loss or balance of assessed loss – refer to section
103(2) of the Income Tax Act.
Because the taxpayer is a company (as
defined in section 1(1) of the Act) an assessed loss and balance of assessed
loss can only be set off against income derived from carrying on any
The current practice generally prevailing is "that section 20 contains
a trade requirement and an income from trade requirement. Both these
requirements must be satisfied before an assessed loss may be carried
Remember also that the company "must
have carried on a trade during the current year of assessment. If it
fails to do so, it will forfeit the right to carry forward its balance of
assessed loss under section 20(1)(a).”
Disclaimer: Nothing in these queries and answers 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 answers, SAIT do not accept any responsibility for consequences of decisions taken based on these queries and answers. It remains your own responsibility to consult the relevant primary resources when taking a decision.