South Africans who rely on non-bank lenders for access to credit may in future find a decrease in the availability of this lending, together with an increase in the cost.
The main reason for this is a proposed amendment in the recent Taxation Laws Amendment Bill which, in essence, discriminates between banks and non-bank lenders in the taxation of doubtful debt.
Patricia Williams, a partner at law firm Bowmans, says the bill proposes the replacement of the current discretionary allowance (which may be as high as 100% of the doubtful debt) with a flat rate of 25%.
Currently, taxpayers are entitled to a tax allowance for debts that the South African Revenue Service (Sars), in its discretion, considers doubtful.
She says this is an important tax provision to address the mismatch between the taxation of income, which is ordinarily on an ‘accrual’ basis, and bad debts which are ordinarily deductible on a ‘realised’ basis.
“The doubtful debts tax allowance addresses this imbalance by giving a tax allowance for income that has accrued, but which is anticipated to be unrecoverable,” explains Williams.
“This prevents a taxpayer from having to pay tax on amounts that have not been and will never be received.”
The Income Tax Act was amended last year providing a doubtful debt regime for banks whereby they may use a sliding scale for the different stages of debtors according to the International Financial Reporting Standards (IFRS 9).
This is far more favourable than the flat rate that is now proposed, which will affect non-bank lenders who are not part of the doubtful debt regime introduced into the act.
The South African Institute of Tax Professionals (Sait) says in a submission to National Treasury that there is a “significant concern” that non-bank lenders will be at a competitive disadvantage compared to banks given the favourable regime for the banking sector.
“Legitimate non-bank lenders who provide credit and are subject to the National Credit Act and other regulations will be affected,” warns Lesley Bosman, chair of Sait’s business tax workgroup.
These include various stores that provide store credit as well as non-deposit-taking lenders. Bosman suggests in the submission that non-bank lenders should be treated on a similar basis as banks.
The banks get a sliding scale for the different ‘stages’ of debtors, starting with 25% for performing loans, 40% for underperforming loans, and 85% for non-performing loans.
Williams says there is no tax-based reason, or other legally based reason, that justifies the different treatment. “A different tax regime creates unfair competition, and does not promote the constitutional value of equality.”
If the current proposal for non-lenders is accepted, it means they will pay tax on 75% of income that has ‘accrued’ but which will never be received.
A tax deduction would be available in later years; however, lending is often done through a ‘special purpose vehicle’ which winds down.
“Bad debts are suffered when there is no longer any taxable income against which it can be claimed,” warns Williams.
She says a large portion of loans to low-income persons is advanced by non-bank lenders and some of this lending is categorised as ‘developmental credit agreements’.
This includes financing for low-income households for the purpose of building or expansion of homes; financing for entrepreneurs who operate micro-businesses and who may not have access to credit from bank lenders; and financing for educational purposes, such as school fees, university tuition, textbooks and school uniforms.
Bosman says there should be adequate consultation with the non-bank lenders to obtain a detailed understanding of their business, how they are regulated and how they manage their debtors.
She suggests further consultation with other industries to establish whether the proposed amendment is appropriate for avoiding unintended consequences.
Williams believes the amendment will lead to increased tax payments for non-bank lenders on amounts that they will never actually receive.
This will undoubtedly increase the cost of doing business, making components of their business less profitable or totally unprofitable.
She warns that the decreased availability of credit for low-income consumers may drive them towards unscrupulous and unregulated lenders or ‘loan sharks’.
Non-bank lenders should, at a minimum, be subject to the same basic tax regime as bank lenders (with tax allowances based on a sliding scale of 25%, 40% and 85% of the actual doubtful debts provisions).
“Even with these rates, the new tax proposals would result in significantly higher taxes.”
If the proposal is accepted despite the concerns raised, Sait proposes that it be phased in to minimise the impact of the higher taxes. Williams suggests a period of five years to limit the disruption of higher taxes.