DEDUCTIONS

2147. Timing of deductions

JANUARY 2013 – ISSUE 160

When conducting an audit, the SARS does not only focus on whether or not an expense ranks for deduction in accordance with the Act but also focuses on the timing of the deduction. Where a deduction is found by the SARS to have been taken prematurely by a taxpayer, the SARS may seek to levy additional tax, penalties and interest.

Bonus accruals, audit fee accruals and liabilities for contributions by employers to benefit funds are just some of the common examples of where taxpayers, in practice, may claim a deduction in the tax computation prematurely.

Broadly speaking, bonuses and audit fees are deductible in terms of section 11(a) of the Income Tax Act, No 58 of 1962 (the Act), read with section 23(g). In order for an expenditure or loss to rank for deduction against income in terms of section 11(a), an amount must have been 'actually incurred' by the taxpayer during the year of assessment. Where the legal obligation in respect of a liability is, at the end of the year, uncertain, in the sense that the obligation is conditional in any way on the occurrence of a future uncertain event, the liability will not be regarded as having been 'actually incurred' during the year and should be added back on the tax computation.

Bonus accruals that are raised at the end of a financial year but which are only paid subsequent to year end are often conditional on the employee remaining within the taxpayer's employ for the intervening period post year end. This condition is frequently overlooked by taxpayers with the result that the full bonus accrual is claimed as a deduction in the year of assessment in which that accrual is raised for accounting purposes.

Similarly, audit fee accruals raised at the end of a financial year are often not added back on the tax computation on the basis that they are considered to be an 'accrual' and not a 'provision' from an accounting perspective and are therefore overlooked. If, however, the services to which the audit fee liability relates are only performed after year-end, the audit fee should be added back on the tax computation.

The deductibility of contributions by employers to pension, provident and benefit funds is not governed by section 11(a) of the Act, but is in fact catered for by section 11(l) of the Act. An important distinction between section 11(a) and section 11(l), is that while section 11(a) requires an amount to have been 'actually incurred', section 11(l) requires the amount to have been 'contributed' to the pension, provident or benefit fund. Consequently, liabilities raised for contributions by employers to these funds which have not been paid at year end, should technically be added back on the tax computation on the basis that the employer has not “contributed” the amount to the fund in terms of section 11(l) of the Act.

As noted above, the SARS are inclined to detect these timing errors during an audit, and while the add back is merely a timing difference, it can lead to unnecessary additional tax, penalties and interest.

Ernst & Young 
ITA: Sections 11(a), 11(l) and 23(g)