Author: Heinrich Louw (CliffeDekkerHofmeyr)
The South African Revenue Service (SARS) released Binding Private Ruling 154 (ruling) on 3 September 2013.
The ruling deals with the transfer of a debtors book as part of a transaction in terms of s45 of the Income Tax Act, No 58 of 1962 (Act) and to what extent a transferee may claim allowances for doubtful debts in terms of s11(j) of the Act.
The facts on which the ruling is based were as follows:
The applicant (transferee) and another company (transferor) formed part of the same group of companies. The two companies would agree that the transferor transfers to the transferee a business unit as a going concern in terms of s45 of the Act. The transfer would include the transfer of a debtors book of the business unit.
The purchase consideration would remain outstanding on loan account. Specifically, the debtors book would be transferred at its tax value.
It appears that uncertainty arose as to whether s45(3)(a)(ii) of the Act would apply to the transaction, specifically in respect of any allowances claimed or to be claimed in terms of s11(j) of the Act.
Generally, s45(3)(a) of the Act provides that where an allowance asset is transferred in terms of an intra-group transaction, no recoupment will arise in the hands of the transferor, and the transferee will be able to calculate allowances and any recoupments as if it were the transferor.
Section 11(j) of the Act provides that an allowance may be claimed by a taxpayer in respect of doubtful debt. Doubtful debt is essentially debt that has not yet become bad but for which an allowance would have been claimable had it actually become bad, such as in terms s11(i) of the Act.
SARS confirmed in its ruling that s45(3)(a) of the Act would apply to the transaction, provided that it constitutes an intra-group transaction for purposes of s45 of the Act. Specifically, SARS ruled that the transferee would be entitled to the same doubtful debt allowances in terms of s11(j) as the transferor was entitled to in respect of the debtors book. SARS also ruled that the transferee could use the ‘historical financial information’ of the transferor to calculate the allowance.