It is not uncommon for businesses to receive funds in their bank accounts without being able to identify the client or payer accurately. As a result, these funds are often treated or accounted for as unknown receipts or unidentified deposits. In such cases, business operators may utilize the accumulated deposits for business purposes since no one claims ownership of them. However, this can lead to confusion regarding the tax treatment of such receipts for impacted business operators. To clarify this issue, let us delve into when unknown receipts are taxable.
Enter unknown receipts
As mentioned earlier, unknown receipts typically arise from erroneous deposits by a customer or errors made by the bank during deposit processing. In cases where the bank is at fault, it usually initiates an internal reversal to rectify the error. However, if a customer provides an incorrect bank account number, such errors may go unnoticed, resulting in the amount remaining as an unknown receipt in the company’s accounts indefinitely. Conversely, some customers may eventually follow up and claim their funds. This raises questions about the fate of funds that remain unused in a company account indefinitely due to lack of claims.
Enter Tax
It is crucial to understand that income is taxable only when it accrues or is deemed to have accrued to a person. Accrued income refers to income for which a person has an unconditional and legal claim. In the case of unknown receipts, where funds are deposited without consent or legal obligation between the depositor and the recipient, the company may unintentionally receive a financial benefit if the funds remain unclaimed indefinitely. According to the Income Tax Act, gross income subject to tax includes the market value of any benefit accruing in the course of business, whether or not convertible into cash.
As alluded to above, it is undeniable that if a company utilises unclaimed unknown receipt it would have technically derived a valuable benefit. Ordinarily, an unknown receipt remains untaxable for income tax purposes as long as the receiver holds it as a liability to the unknown depositor. The moment the receiver converts the unknown receipts into his cash, then he would have derived a benefit subject to tax per the Income Tax Act. In other words, the receiver would have earned some income from the conversion, when in fact he would not have rendered any services or goods. On the other hand, a forfeited deposit will also trigger VAT in the hands of the receiver the day the forfeiture occurs.
Conclusion
In a nutshell, unknown receipts can only be taxable when they are used by the receiver as his income. This usually happens after some time and when no one claims the monies as theirs.
Well, folks, we hope that was insightful. As we the two Yours Trulies say goodbye, remember to pay Caesar what belongs to him. If you want to consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send a text to +267 7181 5836 or email us at jhore@aupracontax.co.bw. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.
