You need to be careful when your business receives deposits of any kind, to make sure you get the tax treatment right.
Deposits received by businesses are not reflected as income for accounting purposes, but the tax treatment of these receipts may be different.
This is because the Income Tax Act taxes "receipts or accruals", provided that they also satisfy certain other criteria.
Consequently, it is necessary to decide whether your business needs to bring any amount which it has received in cash into its income for tax purposes.
Insofar as deposits are concerned, the questions that you need to ask yourself are:
* Is this a payment received in advance for goods or services to be supplied at a later point in time?
If the answer is yes, then, unless the remaining proceeds of the item being supplied will, when received, be non-taxable for another reason (for instance if they are capital in nature, or not from a South African source), the amount should be taxed;
* Is this the payment of a deposit which, in truth, represents a part of the purchase price of the article being sold? Again, assuming the proceeds of the item would ordinarily be taxable, the amount should be taxed; and
* Is this a loan which will need to be repaid at a future date? In this case the amount should not be taxed.
I will expand on each of these scenarios a little further to provide more clarity.
Deposits which are effectively payments in advance can be illustrated as follows:
* Say you own a clothing boutique, and a customer decides he or she would like to buy a certain garment.
The customer asks you to keep the garment until the following week when he or she gets paid, but puts down a deposit of 20 percent of the purchase price straight away to ensure that you keep it.
This amount will be immediately taxable in your hands since it represents an advance payment of the purchase price;
* If you run a guest house and you receive deposits from guests to secure their accommodation at a later date, the deposits must be taxed when they are received and not when the guest uses the accommodation and pays the balance of the purchase price.
The tax law does provide some relief where some expenses may need to be incurred in the future to fulfil the obligations in terms of which you have received the amount in advance, but that could be the subject of another article.
To illustrate the situation where the deposits represent a part of the purchase price, even if they may, at some time in the future, be refunded to the person who has paid the deposit, I will give brief details of a couple of tax cases that set out the principles.
The first is the Pyotts' case, in which biscuits were sold in biscuit tins.
The price at which the biscuits were sold was set at a fixed amount plus an amount (the deposit) which would be returned to the customer if they returned the biscuit tin in good condition.
The second is the Brookes Lemos case, in which bottles containing juices were sold on the basis that if the bottle, or a similar one, was returned, the deposit would be refunded.
The court held, in both instances, that the deposits were fully taxable in the recipient's hands, though it was inevitable that some of the tins or bottles would be returned.
The judges laid great emphasis on the fact that, firstly, until, and unless, the purchaser returned the container, the seller had no obligation to pay the deposit back to the purchaser.
Secondly, they emphasised that the monies received were mixed with all the other funds of the business, and not separated out and held in a trust fund for safe return to the customers on return of the containers.
If you receive such deposits and want to ensure that they are not taxed until you are sure the customers will not return the containers, you would need to open up a trust account and to put the deposits into that account for safekeeping.
Finally, if you receive an amount that is genuinely a loan, which must be repaid in the future, ie there is no question that you may retain the amount, then such a receipt should not be a deposit, and would not generally be taxable.