A taxpayer has a rental contract for her tenants however she has not been paid since the start of the lockdown to current. She is registered on the invoice basis. Please advise on the following: 1. Must the taxpayer continue to declare output tax
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
The VAT Act Sections dealing with accounting for output tax Section 16(3) of the VAT Act requires a vendor to compute the amount payable to SARS by deducting from the amounts of output tax attributable to a tax period, certain amounts of input tax and other deductions. Section 16(4) of the VAT Act attributes output tax to the tax period in which the time of supply takes place. Once an amount of output tax has been attributable to a tax period there is no mechanism in the VAT Act to undo the attribution. Section 9(3)(a) of the VAT Act determines that where goods are supplied under any rental agreement, the supply of the goods is deemed to be made in the tax period in which each rental payment becomes due or is received, whichever event takes place first. Sections dealing with adjustments for irrecoverable debts Section 16(3)(a)(v) of the VAT Act allows a vendor a deduction of input tax in relation to amounts calculated in accordance with, amongst others, section 22(1) of the VAT Act (adjustments for irrecoverable debts). Section 22(1) of the VAT Act determines that a vendor may make a deduction in terms of section 16(3) of the VAT Act to the extent that the consideration for a supply has become irrecoverable where: 1. The vendor has made a taxable supply for a consideration in money; 2. The vendor has furnished a VAT return in respect of the tax period for which the output tax on the supply was payable and has properly accounted for the output tax on the supply; and
 3. The vendor has written off so much of the consideration as has become irrecoverable. The law Meaning of “has written off” Inland Revenue, New Zealand, indicated that the phrase means that the debt must be written off in the accounting and record-keeping systems maintained by the vendor. The minimum requirements to satisfy the “written off as irrecoverable” test may vary for different classes of taxpayers based on the differing nature and level of sophistication of the taxpayer’s accounting records (Tax Information Bulletin Vol. 12 No. 5).
Meaning of “as has become irrecoverable” This phrase refers to the individually identifiable debts that have become irrecoverable. Section 22 of the VAT Act does not allow a general provision for doubtful debts. SARS regards a debt as irrecoverable if the vendor has complied with both the following requirements (VATNEWS 8 and Guide for Vendors (VAT 404)): (i) The vendor must have done all the necessary entries in its accounting system to record that the amount has been written off; and (ii) Must have ceased any recovery action taken by himself and have decided to either not take any further action or have handed the debt over to an attorney or debt collector. Inland Revenue, New Zealand, stated that whether a debt has become bad is an objective test. The question is whether a reasonable prudent business person would conclude that there is no reasonable likelihood that the debt will be paid. Factors that are likely to be relevant in this regard are the length of time a debt is outstanding, the efforts that the vendor has taken to collect the debt, information relating to the debtor’s financial position and payment of other debts, which information is often gained through recovery action takes. They have also stated that it is not a requirement that recovery action is taken before a decision is taken that a debt is bad. Furthermore, a debt may be bad even though the vendor is taking action to recover the debt, as recovery action may be taken for a number of reasons, even when it is believed that there is no reasonable likelihood that the debt will be recovered (Tax Information Bulletin Vol. 12 No. 5). Application of the principles Output tax payable The time of supply rule applicable to rentals payable in terms of rental/lease agreements is that VAT (output tax) on the rentals must be declared in the tax period that the rentals become due or are actually received, whichever event takes place first. Output tax must therefore be declared to SARS in the tax period that any of the above events takes place, whether or not an invoice or tax invoice has been issued for the rentals. In the case where rentals become payable but remain unpaid, output tax must be declared in the tax period that the rentals become payable in terms of the requirements of the lease agreement. The only relief for a VAT vendor under these circumstances is a potential adjustment for irrecoverable debts. Deduction for irrecoverable debt If the VAT vendor is in a position to comply with the requirements to classify the debt as irrecoverable (see above discussion), the VAT vendor will be entitled to make a deduction of the VAT element of the rental charge that has become irrecoverable.