Gross Income
1468. Discount allowed to customers - does this constitute gross income or not?
December 2006 – Issue 88

 

 

Introduction

A company may supply goods and services on the basis that its customers are entitled to a discount if the debt due is settled within a prescribed period of time. Historically, a determination would be made of the total discount allowable at the end of the financial year and that amount would be excluded from the taxpayer’s taxable income on the basis that such amount did not accrue to the taxpayer during the year of assessment in question. This approach was supported by the comments contained in Silke on South African Income Tax which stated as follows:

 

"Also based on the principle is the view that in circumstances in which goods are sold on credit subject to a discount if payment is made within a specified period the amount accruing is not the full selling price but the value of the resulting debt in the light of the discount available. In this way a provision for discounts created for accounting purposes may be taken into account in the determination of taxable income. SARS accepts this view in practice. It is submitted that, in the light of what is said in paragraph 2.6, this practice is correct."

 

The erstwhile Income Tax Special Court decided in ITC 563 (13 SATC 319) that the taxpayer was entitled to exclude the discount allowed for income tax purposes. In light of a recent decision handed down by the Tax Court in Durban, SARS has changed its view on the treatment of discounts allowed for tax purposes.

 

The Judgment in ITC 1815

More recently, in ITC 1815 (68 SATC 312) decided on 24 May 2006, Levinsohn DJP had to decide whether the taxpayer was correct to exclude the discount allowed from the tax computation or not.

 

Levinsohn DJP analysed the contractual arrangements in place between the taxpayer and its customers and the definition of "gross income" contained in section 1 of the Income Tax Act No. 58 of 1962 (the Act).

 

The judge pointed out that the customer was debited with the full consideration due for the supply of goods and only if the debt was paid timeously would a credit be given equal to the discount allowable. Levinsohn DJP accordingly held as follows:

 

"We hold therefore that the accrual occurred as at the statement date in respect of the full invoiced amount. The Commissioner’s contentions are therefore correct, the assessment is confirmed and the appeal falls to be dismissed."

 

The court therefore held that the discount allowed amounting to R4 371 015 at 30 June 2003 could not be excluded from the taxpayer’s gross income. It remains to be seen whether the decision will proceed on appeal to a higher court.

 

The gross income definition

Section 1 of the Act defines "gross income" as comprising the amount in cash or otherwise received by or accrued to or in favour of a taxpayer. Where the amount has not yet been received reference must be made to those amounts that the taxpayer is entitled to receive. Where goods are sold or services are rendered by a taxpayer, a claim arises against the customer for payment of the debt due. Where a discount is allowed by the supplier of goods, the question that arises is whether the face value of the debt can be said to be the amount to which the taxpayer is entitled or whether it is the amount, net of the discount that may be allowed if the customer settles their account timeously.

 

Tax is an annual event and the value of the entitlement must be determined at the end of each year of assessment. Based on the decision of Levinsohn DJP, the fact that a discount may be allowed after the end of the year of assessment is to be disregarded in determining the value of the entitlement for the particular year of assessment. If the discount is allowed in the subsequent year, the taxpayer would be entitled to a deduction for that amount in that it represents an amount not received in that year of assessment but represents a reduction in the amount that was originally charged for goods supplied.

 

Conclusion

Those taxpayers granting discounts to customers and claiming that discount as a reduction in gross income need to be aware of the decision of the Tax Court dealing with this issue. It is difficult to continue justifying the deduction for discount allowed in light of the conclusion reached by Levinsohn DJP.

 

Edward Nathan Sonnenbergs

 

IT Act:S 1, definition "gross income"