For as long as we can remember, the deduction for doubtful debts was calculated according to the same formula. That is, the South African Revenue Services (“SARS”) allowed 25% of the doubtful debt provision raised in the financial statements as a deduction, subject to certain conditions being met. Because this formula has become ingrained in most accountants and taxpayers, the recent change to S11(j), which determines the amount that is allowed as a doubtful debt allowance seems to have gone relatively unnoticed.

For years of assessment commencing 1 January 2019, taxpayers are no longer entitled to claim the “standard” 25% allowance. Instead, S11(j) provides for different deductions, depending on the financial reporting framework of the taxpayer.

For taxpayers not applying IFRS9 (applicable to most SMEs):

SARS allows a deduction for this category of taxpayers calculated as follows:

• 40 percent of any debt due to the taxpayer that is 120 days or more in arrears; and
• 25 percent of any debt due to the taxpayer, if that debt is 60 days or more in arrears (but less than 120 days in arrears):

Unlike the old allowance, the amount that can be claimed is not related to the provision in the taxpayer’s accounts but is rather calculated by analysis of the taxpayer’s debtors age analysis.

By way of example, assuming a taxpayer has the following age analysis and has raised a provision in the accounts equal to R10,000 (being the amount in the 120+ column)

Days in arrears	Current	30	60	120+	Total
Amount	30,000	15,000	50,000	10,000	105,000
SARS allowance %	–	–	25%	40%	N/A
SARS allowance R’s	–	–	12,500	4,000	16,500

The taxpayer would therefore be entitled to a deduction of R16,500 even though they have only raised a provision of R10,000 in the books.

It is important to note that the above formula is applied based on the days in arrears, not the days outstanding since invoice date. The days in arrears is determined in accordance with the repayment terms offered to a debtor. For example, where a debtor is offered a 60 day repayment term, assuming that the debt is now 120 days old, that debt would be regarded as being 60 days overdue and accordingly subject to an allowance of 25%.

For taxpayers applying IFRS9: 

For this category of taxpayers, SARS allows a deduction equal to a percentage of the impairment loss recognised in the financial statements.

This is calculated as the sum of:

1. 40 per cent of the aggregate of—
   • the loss allowance relating to impairment that is measured at an amount equal to the lifetime expected credit loss, as contemplated in IFRS 9, in respect of debt other than in respect of lease receivables as defined in IFRS 9; and
   • the amounts of debts included in the income of the taxpayer in the current or any previous year of assessment that are disclosed as bad debt written off for financial reporting purposes and that have not been allowed as a deduction under section 11 (a) or (i) for the current or any previous year of assessment; and
2. 25 per cent of the loss allowance relating to impairment, as contemplated in IFRS 9, in respect of debt other than in respect of lease receivables as defined in IFRS 9 or debt taken into account under item 1.

Clearly, taxpayers need to take cognisance of the reporting framework that they apply and determine the S11(j) deduction in accordance with the applicable formula above.

We highlight the recent tax proposals which require that the doubtful debt allowance for non-IFRS 9 taxpayers be determined by reducing the outstanding debt by any security available and then applying the relevant percentages. This proposal still has to go through the commentary and parliamentary processes and is not yet effective. However, should it be accepted without any changes, this change will apply for years of assessment commencing 1 January 2021.

Should you require further information, please don’t hesitate to contact one of our PKF Octagon Partners or tax specialists.

Prepared by Ziyaad Moosa : Partner, PKF Octagon