At year-end, I gathered my supporting documents to hand over to my accountant. The purpose was to compile the first set of annual financial statements and tax returns for a company that I had established for my editing business.
I was not unaware of what my business had brought in – I have a spreadsheet on which all income and expenses are recorded monthly. However, the point of providing the documents was to enable my accountant to generate a first-hand account of the operations of the business and to be able to justify the figures she would be recording for me – or, more correctly speaking, for the business, which has a separate corporate identity from me.
Many of the documents were at hand: bank statements reflecting inflows and outflows, invoices issued to editing clients, and third-party invoices received, for example from internet service providers, contractors with whom I partnered, software companies and contractors who provided repair and upgrade services for my laptop.
When a client hasn’t paid
However, I had mislaid documents for certain expenses (eg stationery purchased) and, while these outflows were reflected on my bank statements (signalling that not all was lost), it was a learning experience that taught me to pay more attention to this issue in the future.
There were certain items, however, about which I had to think:
- How to handle invoices for work completed in the financial year for which I had not received full payment at its end.
- Could bad debt be claimed for a client who had withdrawn her work from me despite my handing over a complete product to her? Could bad debt be claimed for clients who had not paid me and what steps did I need to take to show that I had tried to recover the money?
- Could home office expenses be claimed?
In this blog post, I deal with the first question: Invoices issued by year-end for which payment had not yet been received. Note that the information below applies to us all. If you can identify with these examples, the section of the Income Tax Act that I refer to applies to you. It does not matter what form you are using to trade (sole proprietor, partnership, trust, company, close corporation); the Income Tax Act does not discriminate.
I had completed work for a client, issued an invoice, but as the client was awaiting funds to be released from the university, no payment had been received. A second client had asked for a payment arrangement but at the end of the tax year, I had only received one of three instalments.
The income tax system is based on an annual determination of tax
The Income Tax Act defines gross income, in relation to any year or period of assessment, to mean: in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident. (I have extracted only that part of the gross income definition that is applicable to my situation.)
The part of the definition that applies here is ‘received by or accrued to’. It is clear that for one client no amount had been ‘received’. For the other, only one of three parts had been ‘received’ at year-end. The question was whether the outstanding amounts owing to the company were ‘accrued’ for the purposes of declaration in the corporate income tax return. Since the income tax system is based on an annual determination of tax (French & Stretch, 2025), the issue here is one of timing – what amount is to be included at year-end?
Accrual or cash?
The concept ‘received by or accrued to’ is not defined and the meaning of the words must therefore be sought in case law (De Koker & Williams, 2025). The language of the Act borrows from financial accounting principles, which differentiate between accounting on an accrual basis or a cash basis. Accrued means entitled to receive payment.
In my instance, I had completed the work and handed it over and, as such, the income accrued to me. This occurred in the tax year and I was therefore required to include the income in the tax year despite my not having received the payment. Accrual occurred before receipt.
All that is left for me to do is to ensure that when I do receive the money in the subsequent tax year, I do not include these amounts in gross income for the new tax year. That’s because the use of the disjunctive ‘or’ in the phrase ‘received by or accrued to’ establishes the principle that an amount that has been included as an accrual cannot be included again when it actually becomes a receipt (De Koker & Williams, 2025).
References
De Koker, AP & Williams, RC 2025 Silke on South Africa Income Tax. South Africa: LexisNexis.
French, D & Stretch, R 2025 Income Tax in South Africa. South Africa: LexisNexis.
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