Abstract
M.Comm.
Due to uncertainties experienced while working for the South African Revenue
Services and the fact that there are no specific sections in the Income Tax Act no. 58
of 1962 dealing with interest, foreign exchange and bad and doubtful debts of
commercial banks there were a need to undertake a study. The study therefore
undertakes an examination to determine if the existing sections of the Income Tax Act
dealing with interest, foreign exchange and bad and doubtful debts are enough
legislation to deal with the interest, foreign exchange and bad and doubtful debts of
commercial banks. The study also try to clear all existing uncertainties experienced
and mentioned in this study. The study can be divided into the following four parts:
A literature study of the definition of "bank" and "banking operations", in
terms of history and current legislation.
A study of the definition of "interest" and "finance charges", in terms of
sections of the Income Tax Act, Act no. 58 of 1962 and applicable court
cases. The chapter also concentrates on the application of section 24J of the
Income Tax Act on the interest-transactions of commercial banks as well as
the identification of any short falls of the section. Before interest can be
treated in terms of section 24J of the Income Tax Act, the source of the interest
will have to be in South Africa. General sourse principles applicable to
commercial banks as well as the deductability of interest expenses when
expenced to generate exempt income will therefore also be covered in this
chapter. A study of the application of section 241 of the Income Tax Act dealing with
the foreign exchange of commercial banks.
An examination of the way commercial banks should treat their bad and
doubtful debts and the factors taken into account in court decisions relating thereto.
The most important activities of a bank are identified in this study as the acceptance of
deposits, the provision of credit, rendering of financial services and the trade in
exchange and the utilisation of money and interest received.
In terms of section 24J of the Income Tax Act, interest include finance charges,
premiums or disconto's, all interests and the difference between all amounts payable
or receivable in terms of a sale and leaseback agreement. It was found that all the
interest of a commercial bank are included in the definition of interest and all the
transactions of a commercial bank are treated in terms of section 24J of the Income
Tax Act for income tax purposes. Section 241 of the Income Tax Act focuses on foreign exchange transactions and are
found to be enough legislation for the foreign exchange transactions of commercial
banks.
Although bad and doubtful debts are not part of the activities of a commercial bank
they are part of the uncertainties experienced while working for the South African
Revenue Services. During the study it was found that doubtful debts can not be
deducted in terms of section 11(a) of the Income Tax Act but only in terms of section
11(j) of the Income Tax Act. It is practice for the South African Revenue Services to
only allows 25% of the full amount of doubtful debts, but as this discretion is subject
to objection and appeal, the bank is entitled to claim a higher percentage as a
deduction if they can provide proveto justify a higher deduction. It was also found
that commercial banks can claim their bad debts in term of section 11(a) of the
Income Tax Act.