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Income Tax Act, 1962 (Act No. 58 of 1962)

Department of Finance

Practice Note No. 12

Allowance Granted in terms of Section 24 of the Income Tax Act


Date: 27 February 1991


1) The effect of section 24 of the Act is, inter alia, that where goods are sold under a suspensive sale agreement and ownership only passes to the purchaser after the payment of the whole or portion of the purchase price, the full amount of the transaction, including finance charges, is deemed to accrue to the seller on the day the agreement was entered into. It further provides that the Commissioner for Inland Revenue (the Commissioner) may, in certain circumstances and in his discretion, make an allowance in respect of amounts which are deemed to have accrued but which have not been received. For the purposes of this practice note the allowance which the Commissioner may make will be referred to as the "hire purchase debtors allowance".


2) The Margo Commission made the following recommendation regarding finance charges—

"In a transaction containing both profit and finance charges elements the latter should be separated from the former and amortised over the period of the loan with reference to the outstanding capital amount. The Commission recognizes, however, that not all transactions can be dealt with in this way...."

This recommendation was accepted by Government and it is hereby notified for general information that the practice with regard to the determination of the hire purchase debtors allowance will be amended in respect of all contracts formally and finally signed by every party to the contract on or after 1 March 1991.


3) Recognition of Finance Charges

Finance charges are considered to be taxable over the period in which these are earned based on the amortisation of the said charges over the period of the with reference to the outstanding balance of the capital in accordance with accepted accounting practice (GAAP).

In essence this approximates finance charges accruing on a day to day basis where payments are received, each payment must be allocated firstly to the charge element and the balance, if any, allocated to the outstanding capital. This reflects a constant periodic rate of return on the outstanding capital balance the effective rate of interest applicable. Where GAAP is followed and substantially the same result as described above, the accounting provision unearned finance charges will be the same amount as the allowance granted.


4) Taxpayers who earn both finance charges and a gross profit element will continue qualify for the allowance on the gross profit element. This portion of the allowance will continue to be determined in accordance with current practice until further notice.


5) The right is reserved to limit the allowance on any particular transaction. This limitation will not be invoked in normal business transactions of a taxpayer but will be implemented where a taxpayer has entered into a transaction which is not related to his normal business activities or where a scheme is entered into to make use the gross profit element of the allowance.


6) A further practice note dealing with the hire purchase debtors allowance granted in respect of transactions entered into before 1 March 1991 will be issued shortly.