Where a company, trading as a hotel, receives a deposit to confirm a guest booking, we would like clarity on the VAT & the Income Tax treatment for these amounts. There is a cancellation policy in place - more than 30 days, full refund; less than 30, but
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
Income Tax Act:
In terms of the relevant definition of gross income, in section 1(1) of the Income Tax Act: the total amount, in cash or otherwise, received by or accrued to or in favour of such resident, would be gross income.
In this instance it is the part “received by or accrued to or in favour of” that requires interpretation. The phrase, ‘received by’, is not defined in the Act itself.
At issue here, as far as the normal tax is concerned, is whether the deposit paid by prospective guest is an amount that was not “received by or accrued to or in favour of” the hotel for purposes of the definition of gross income in section 1(1) of the Income Tax Act. It is relevant to deposits paid to the hotel before the end of its year of assessment and where the guest has not actually arrived at the hotel or forfeited the deposit.
In arriving at the “tax position”, that it is not a receipt, one will be aware that the taxpayer bears the burden of proving that the “amount, transaction, event or item is … otherwise not taxable”.
In Geldenhuys v CIR (25 June 1947), the meaning of the word ‘receipt’ for tax purposes was in issue.
The judge made the following comments:
There was, therefore, no surplus progeny to which she was entitled. The whole flock, and ergo the proceeds realised on the sale, belonged to the heirs.
and then held as follows:
I do not attach any importance to the facts that (i) the proceeds were paid to her and that she gave a receipt in her own name and (ii) the proceeds were first placed in the bank to her own account and afterwards invested in bond in her name.
… when the appellant sold the flock of sheep and converted it into cash … the proceeds did not accrue to her personally. The proceeds accrued to the heirs.
Based on this, an amount will be received, as gross income, if it ‘belongs’ to the taxpayer. It is not relevant that the initial amount was placed in the taxpayer’s own bank account.
Other decisions in the Supreme Court of Appeal (Appellate Division):
Judge Schreiner, in CIR v Genn & Co. (Pty) Ltd, said that
“It certainly is not every obtaining of physical control over money or money's worth that constitutes a receipt for the purposes of these provisions. If, for instance, money is obtained and banked by someone as agent or trustee for another, the former has not received it as his income. At the same moment that the borrower is given possession he falls under an obligation to repay. What is borrowed does not become his …”
Other decisions in the Supreme Court of Appeal (Appellate Division):
According to Judge Goldstone, in Minister of Finance and Another v Law Society of the Transvaal:
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“… the words "received by or accrued to the levypayer". Those words in a revenue statute, over many years, have been judicially interpreted to describe a receipt by, or an accrual to, the taxpayer on his own behalf or for his benefit …”
Judge Smalberger, in KBI v Van Blommestein (minority):
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… het die Volle Hof bevind dat die woorde "received by or accrued to or in favour of' in die Engelse woordomskrywing van bruto inkomste (gross income) beteken "received by the taxpayer on his own behalf for his own benefit" …
Judge Schreiner, in CIR v Genn & Co. (Pty) Ltd, said that
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“It certainly is not every obtaining of physical control over money or money's worth that constitutes a receipt for the purposes of these provisions …”
According to the Oxford Dictionary, a deposit, when used as a noun in English, means:
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“1A sum of money paid into a bank or building society account.
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2A sum payable as a first instalment on the purchase of something or as a pledge for a contract, the balance being payable later.”
The Consumer Protection Act, 2008, in section 65, deals with the “supplier’s accountability to consumers”. In terms of section 17(3) of the Consumer Protection Act, 2008, a supplier who makes a commitment or accepts a reservation to supply goods or services on a later date may-
(a) require payment of a reasonable deposit in advance; and
(b) impose a reasonable charge for cancellation of the order or reservation, …
Section 65 specifically deals with a deposit.
The hotel is not one of the suppliers excluded from the application of section 65 – not a bank; a mutual bank; or any other financial institution that is similarly licensed and authorised to conduct business and take deposits from the public in terms of any national legislation.
Section 65(2) is then relevant and reads as follows:
When a supplier has possession of any prepayment, deposit, membership fee, or other money, or any other property belonging to or ordinarily under the control of a consumer, the supplier—
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must not treat that property as being the property of the supplier;
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in the handling, safeguarding and utilisation of that property, must exercise the degree of care, diligence and skill that can reasonably be expected of a person responsible for managing any property belonging to another person; and
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is liable to the owner of the property for any loss resulting from a failure to comply with paragraph (a) or (b).
The wording in the Consumer Protection Act, with respect to deposits, differs from the words used with respect the other prepayments. It doesn’t specifically say that “the amount so paid remains the property of the consumer until the supplier makes a charge against it”. It merely says that the supplier must not treat that prepayment or deposit “as being the property of the supplier”. Paragraph (b) however, when it refers to “managing any property belonging to another person” confirms that the prepayment or deposit is not the property of the supplier. Paragraph (c) goes further and makes the supplier responsible to return the deposit to the consumer.