Budget 2022 - Proposed relief for lay-by sales - Tax - Insights

The implementation of the lower 27% corporate tax rate should be welcome news for tax-paying companies. For retailers and other taxpayers offering lay-by sales there may be further good news.

Currently, where a person has entered into any agreement with a customer to transfer ownership of property upon receipt of the full or a specified portion of the purchase price for that property, section 24 of the Income Tax Act, deems the full purchase price to have accrued on entering into the agreement, although the purchase price would be received over time. A taxpayer selling goods in terms of lay-by sales could fall within the application of section 24. The implication is that a taxpayer in these circumstances may be liable for income tax on a profit from the future disposal of property, where the full proceeds have not yet been received.

In recognising the adverse income tax cash flow implications that could arise for the seller in these circumstances, section 24 provides for a debtors allowance where at least 25% of the sales price is due and payable 12 or more months into the future. Section 24 provides SARS with a discretion to provide an allowance to the taxpayer and the application of this discretion is currently set out in SARS Interpretation Note No. 48. In practice the debtors allowance provides for an allowance equal to the gross profit percentage applied to the outstanding principal sum (excluding any portion of the principal debt which comprises finance charges, output VAT or amounts which have qualified for a doubtful debt allowance). The debtors allowance therefore seeks to give the taxpayer a tax allowance for the profit portion of the selling price that has not yet been received. The debtors allowance granted in one year is included in the income of the taxpayer in the next tax year and therefore this is only a temporary relief measure.

However, the debtors allowance relief currently offered by section 24 is unavailable in cases where more than 75% of the purchase price will be settled within 12 months of entering into the sale agreement. Typically, lay-by sales agreements provide that the full price will be settled within 12 months and therefore the section 24 debtors allowance is typically unavailable for taxpayers entering into lay-by sales. For these taxpayers, where the full selling price is received over two tax years, income tax could be payable on profits which have not yet been received – i.e. these taxpayers continue to face an adverse cash flow burden.

In Annexure C to Budget Review 2022, National Treasury proposes to review the current debtors allowance provided in section 24, in order to limit this adverse impact arising on lay-by sales arrangements. It is hoped that the outcome of this review will bring future relief to retailers and other taxpayers who enter into lay-by sales. Whilst not specifically mentioned in Annexure C, it is also hoped that through a review of the income tax treatment of lay-by sales, further relief may be offered for the cost of stock which, under the existing application of the Income Tax Act, may only be deductible when the stock is disposed of to the lay-by customer.