Tax implications of deposits, overpayments received

Christo Retief - Do you require customers to pay a deposit to secure their goods or services? Do your debtors sometimes overpay their accounts?

Then you should be aware of the timing of when those receipts are considered part of your income for tax purposes.

Income is taxable in terms of the definition of gross income at the earlier of the date of receipt or accrual. Therefore overpayments received from customers, as well as deposits received, generally would become taxable in the year of assessment that the amounts were received. This applies even if the amounts received are refundable to the customer.

It can perhaps be argued that even though the deposits were received, the taxpayer has an unconditional liability to repay the deposits and thus cannot be regarded as having “received” the deposits.

The question to be raised at this point in time should rather be whether the taxpayer is entitled to utilise the money as he/she sees fit?

Once the deposit is deposited into the taxpayer’s operational bank account and the taxpayer is able to use the funds as he/she deems fit (e.g. to fund normal daily expenses), the deposits and overpayments received are considered received for your own benefit and own behalf.

PRECEDENT

A clear precedent has been set that to ensure that such amounts will be excluded from taxable income it must be received and held ‘in trust’. This holds true even though the taxpayer may at a later stage have a liability to refund the deposit again.

Where refundable amounts received are not kept separate as specified above, then it is highly likely that the amounts are to be included in your taxable income in the year in which it is received.

What happens when people use the credits on their account for future purchases, or you refund the amounts held?

If you tax the amounts received in the year of receipt, you won’t be taxed on it in a subsequent year when the customer spends their credits and you recognise revenue. Any amount you tax as income received in advance in the current year, should be excluded when calculating your taxable income any subsequent year when those amounts reflect on your income statement.

Any amounts subsequently refunded, but taxed in the year of receipt, may also be deducted when calculating taxable income in subsequent years as at the end of the day no income was generated which was taxable.

* Christo Retief is the manager: corporate tax services at PwC Namibia. Contact him at [email protected]