Here's what the experts at the Practical Tax Loose Leaf
have to say about doubtful debts.
Remember that a doubtful debt allowance recognises probable bad debt (since the actual bad debt is only recognised one financial year later).
A debt can go bad immediately, such as when a previously good customer suddenly goes into liquidation. So not all
bad debts must follow two stages, i.e. become doubtful before actually going bad.
So what is a doubtful debt and how can I use it to my advantage?
A doubtful debt is where debt has passed the settlement date and initial efforts to collect have failed.
Based on this, you could claim a doubtful debt allowance against the debts that will probably be recognised as bad and unrecoverable in the next financial period.
An allowable deduction for doubtful debt is subject to the discretion of SARS. To apply for this deduction, you must submit a detailed list of doubtful debts together with your annual tax return.
In practice, SARS allows 25% of doubtful debts as a deduction.
Just make sure that you include any doubtful debts that SARS allows you to deduct, in your income the following year.
Of course, SARS being SARS, there are a few hoops you have to jump through before you can claim the allowance. To qualify for the doubtful debt allowance, you must be able to prove you've made some effort to collect the outstanding amounts.
That's why it's a good idea to set up a doubtful debt policy document to ensure the allowance is consistently applied using sound reasoning.
What should your doubtful debt policy contain?
This policy should contain:
- Your company credit policy indicating terms of payments;
- Possible actions to collect outstanding amounts;
- Possible actions where either the debt is possibly not recoverable or legal action is to be pursued to aid the collection; and
- Treatment of further dealings and sales with the defaulting debtor, such as suspending further credit and sales to that debtor in an effort to limit possible losses.
You should also:
- levy interest on overdue accounts;
- perhaps offer settlement discounts;
- send letters of demand; and
- pursue legal actions.
This will justify your claim to SARS that the debt is potentially irrecoverable. If assets or stock were sold to the debtor, consider the possibility of recovering the remaining assets or stock not paid for!
Develop these policies today, if you don't already have them, and make the most of this doubtful debt allowance to save money.