Through the years taxpayers have attempted to circumvent gross income by designating certain monetary amounts as a deposit, as it did not fit the definition of gross income by being a separate amount from “the total amount”, as defined.
The reason being that deposits are often advance payments for work that still need to be concluded and cannot be construed as income.
However, SARS has been adamant. Deposits need to be included in gross income if received “on the taxpayer’s own behalf for his own benefit”. That includes a rental deposit on a property.
The reasoning relates to the wording “received” in the definition of gross income. The law does not provide for any exclusions as deposits cannot be excluded from gross income if the deposit is already received.
But then came the Pyott case with a loophole.
The judgement stated that if the money received as deposits are deposited into a separate trust account set up specifically for the deposits received, then such amounts deposited cannot constitute gross income.
However, there is still a grey area if the taxpayer does not intend to repay the deposit. Then it may have to be included in gross income in any event.
It is also clear that a deposit cannot be exposed to double taxation. For example, if a deposit is paid to a second party as part of an agreement for goods or services to be delivered, that taxpayer will then be liable for the tax as income.
Should the agreement not be fulfilled, and the deposit is paid back to the original issuer, then that amount was already taxed, or should have been taxed by SARS. The original issuer cannot therefore be held liable for the amount, as it was already taxed.
That also is applicable to deposits received as advance payments, but with the goods or services still outstanding or not delivered. In those cases, the taxpayer will be taxed on the deposits received in the year of assessment it was received or accrued, in line with the definition of gross income.
When the services or goods are actually delivered or made in the subsequent tax year, it cannot again be taxed and must be excluded from gross income.
Deposits come in many forms, and each case should be judged on its own merits.
This article is general information about South African tax and is not tax advice. Tax outcomes depend on the specific facts of each matter. See our Website Terms of Use for more.
Been assessed on a deposit you don't think is income?
SARS doesn’t always get this distinction right. If a deposit has been taxed as income and you believe it shouldn’t be, there may be solid grounds to object.