Should deposits be included in gross income?

The question of whether deposits should be included in a taxpayer’s gross income has become a contentious topic in recent months following SARS’ increased interest in deposits. Taxpayers are, typically following submission of the ITR14 and subsequent IT14SD, requested to explain why deposits should not be included in gross income. In our view, the rationale behind this special attention from SARS is that taxpayers are taxed on the earlier of receipt or accrual and since a deposit has been physically received, deposits are prima facie taxable. Deposits are therefore a ‘soft target’.

However, the mere receipt of funds does not necessarily mean that the amount has been “received” for tax purposes and hence funds physically received may well not be taxable.  Understanding when an amount is considered ‘received’ for tax purposes is accordingly vital to surviving SARS’ scrutiny and explaining to SARS, either in response to the request or subsequent objection, why the deposits should not be included in gross income.

Case law

In the case of Geldenhuys v CIR 7947 (3) SA 256 (C), the court held that an amount physically received is only received for the purposes of the gross income definition if it is “received by the taxpayer on his own behalf for his own benefit”. Taxpayers who receive deposits are typically required to repay the deposit under certain circumstances and one would think that this is sufficient to show that a deposit is not received by the taxpayer for its own benefit.

However, in the cases of Brookes Lemos Ltd v CIR 1947 (2) SA 976 (A), 14 SATC 295; Greases (SA) Ltd v CIR 1951 (3) SA 518 (A), 17 SATC 358 and Pyott Ltd v CIR 1945 AD 128, 13 SATC 121 , it was, held that even if a taxpayer has an obligation to return money to a customer under the contract with the customer, the amount can still be received by the taxpayer for its own benefit if the taxpayer receives the money as its own.

Application of case law

While the case law on the meaning of ‘received’ is clear, the application thereof is often difficult in practice.  The reason for this lies mainly in the fact that, in terms of section 102 of the Tax Administration Act, taxpayers bear the onus of proving that an amount is not taxable. Stated differently in context, taxpayers bear the onus of proving that an amount has not been received by a taxpayer for its own benefit.

The onus of proof

Discharging the onus of proof in tax matters often requires producing evidence as opposed to simply making statements of apparent proven facts.

What will be necessary to prevent an assessment by SARS to include deposits in gross income (or to defend SARS’ inclusion in gross income following an additional assessment) will depend on the facts and circumstances of the taxpayer. It is recommended that taxpayers who find themselves in the position of having to explain why deposits are not taxable obtain advise from experts in dealing with SARS both pre and post additional tax assessment.