Browsing by Subject "debt allowance"

Now showing 1 - 1 of 1
  • No Thumbnail Available
    Item
    Open Access
    A critical analysis of the design and operation of the amended section 11(j) doubtful debt allowance in light of its purpose and scope
    (2026) Masango, Steve; Johnson, Tracy
    Section 11(j) of the Income Tax Act 58 of 1962 (‘the Act') entitles a taxpayer to claim an allowance in respect of doubtful debts. This allowance may only be claimed in respect of a debt that constitutes an amount that has been included in the taxpayer's income, or an amount that is not capital in nature, provided that such amount was incurred for the purposes of trade and the earning of income. Section 11(j) establishes three bases for determining the value of the allowance. For purposes of this paper, these bases have been identified and referred to as IFRS 9, Ageing Analysis, and the Commissioner's discretionary basis. The objective of this study was to determine whether the identified bases for determining the value of the allowance are aligned with the purpose and scope of section 11(j). To achieve this objective, it was necessary to first establish and describe the purpose and scope of section 11(j). Thereafter, a set of criteria was developed to evaluate each of the identified bases. The purpose of section 11(j) is twofold. Where the debt in question constitutes an amount that has already been included in the taxpayer's income, section 11(j) seeks to temporarily exclude such a debt from taxation if the debt is considered potentially irrecoverable. Where the debt does not constitute an amount that has been included in the taxpayer's income but nevertheless falls within the ambit of section 11(j), the provision seeks to allow a temporary deduction equal to the value of the potentially irrecoverable debt. It is submitted that section 11(j)'s objectives are achieved by granting taxpayers an allowance that reasonably reflects the likelihood of non-recovery of debts due to the taxpayer. The allowance granted under the IFRS 9 basis does not appear to align with this purpose. It was established that this is a consequence of applying accounting principles, such as the time value of money, which results in taxpayers claiming an allowance on amounts that are neither due nor doubtful, as envisaged in section 11(j). Furthermore, the language used to describe the provisions applicable to the IFRS 9 basis does not appear to align with the purpose of section 11(j), as it excludes debts that should fall within the ambit of this section. Both the Ageing Analysis and Commissioner's discretionary bases appear to fall short of achieving the purpose of section 11(j), due to a common underlying issue. The use of arbitrary factors under these bases likely results in the determination of an allowance that is not reasonable when all factors relevant to the debt are taken into account.