Bad Debt Deductions for Bodies Corporate: Income Tax Implications

Bad Debt Deductions for Bodies Corporate: Income Tax Implications

• 15 July 2025
• Tax Opinions
• The Tax Faculty

This article is based on tax law for the year ending 29 February 2026.

Question:

The auditors of a body corporate deducted "bad debts" from taxable income in the income tax computation. The taxable income comprises sundry and penalty income, while levy income is tax-exempt. The question is whether it is appropriate to deduct all bad debts, or whether such deductions should be limited to bad debts arising from taxable income sources only.

Answer:

The Problem / Facts

The auditors of a body corporate deducted "bad debts" from taxable income in the income tax computation. The taxable income comprises sundry and penalty income, while levy income is tax-exempt. The question is whether it is appropriate to deduct all bad debts, or whether such deductions should be limited to bad debts arising from taxable income sources only.

Analysis of the Tax Issues Identified

The core issue is whether a body corporate may deduct bad debts relating to both exempt (levies) and taxable (sundry and penalties) income. Where bad debts arise from exempt income, a deduction is generally not allowed, as the income was never included in taxable income. Only bad debts linked to income previously subject to tax may potentially qualify for deduction.

Tax Provisions and Relevant Legislation

• Deductibility of bad debts: Section 11(i) of the Income Tax Act 58 of 1962
• Exemption of levy income: Section 10(1)(e) of the Income Tax Act 58 of 1962
• Apportionment of expenses: General principles from Section 23(f)
• General deduction formula: Section 11(a)

Application of the Law to the Facts

A deduction under Section 11(i) is only permitted where the bad debt relates to income that was previously included in taxable income and has subsequently become irrecoverable. Since levy income is exempt in terms of Section 10(1)(e), bad debts arising from unpaid levies are not deductible, as such income was never included in taxable income. This position is further supported by the principles in Section 23(f), which limit deductions relating to exempt income.

Only bad debts linked to taxable income – such as sundry or penalty charges – may be deducted. It is therefore essential for auditors to distinguish and allocate bad debts appropriately between exempt and taxable income sources to ensure compliance with SARS requirements and applicable tax legislation.

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