The taxability of rental deposits received
A general pitfall we see being applied in practice is that landlords argue the fact that because they have an unconditional liability to repay the rental deposits this means that the deposits received are not taxable.
This is not entirely correct.
In the context of the gross income definition, income is taxable on the earlier of receipt or accrual.
“Reveived by” or “accrued to” is not defined in our Income Tax Act and we normally refer to case lase to establish the meaning thereof.
In the case of Geldenhuys v CIR 1947 (3) SA 256 (C); 14 SATC 419, the court held that “income is received by or accrued to a taxpayer once the taxpayer is unconditionally entitled to the income and received such income for its own benefit.”
In the case of Greases (SA) Ltd v CIR 195 (3) 518 (A); 17 SATC 358, the court held that “for a deposit amount to be excluded from gross income, it must be received and held in a “trust”. The money should not be allowed to freely mix with the business money and uses it as deems fit, but rather kept separate to earn interest for the benefit of the person to be refunded.”
As can be seen from the above guidance, careful consideration must be given on how you receive this money and what you apply it for.
Once the deposit is deposited into your normal operational bank account, and you are able to use the deposit as you deem fit (e.g. to fund you normal daily expenses), you are considered as having received it for your own benefit and on your own behalf. Therefore the amount received is taxable even though you might, at a later stage, have a liability to refund the deposit again.
Landlords must thus remember to plan for the tax effect of rental deposits received to ensure that the tax is correctly accounted for.
Johan Nel is a partner: corporate tax service at PwC Namibia. This series on tax is published in Market Watch bi-monthly on a Monday.
This is not entirely correct.
In the context of the gross income definition, income is taxable on the earlier of receipt or accrual.
“Reveived by” or “accrued to” is not defined in our Income Tax Act and we normally refer to case lase to establish the meaning thereof.
In the case of Geldenhuys v CIR 1947 (3) SA 256 (C); 14 SATC 419, the court held that “income is received by or accrued to a taxpayer once the taxpayer is unconditionally entitled to the income and received such income for its own benefit.”
In the case of Greases (SA) Ltd v CIR 195 (3) 518 (A); 17 SATC 358, the court held that “for a deposit amount to be excluded from gross income, it must be received and held in a “trust”. The money should not be allowed to freely mix with the business money and uses it as deems fit, but rather kept separate to earn interest for the benefit of the person to be refunded.”
As can be seen from the above guidance, careful consideration must be given on how you receive this money and what you apply it for.
Once the deposit is deposited into your normal operational bank account, and you are able to use the deposit as you deem fit (e.g. to fund you normal daily expenses), you are considered as having received it for your own benefit and on your own behalf. Therefore the amount received is taxable even though you might, at a later stage, have a liability to refund the deposit again.
Landlords must thus remember to plan for the tax effect of rental deposits received to ensure that the tax is correctly accounted for.
Johan Nel is a partner: corporate tax service at PwC Namibia. This series on tax is published in Market Watch bi-monthly on a Monday.
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