At times, businesses may receive funds in their bank accounts without being able to correctly identify the sender or depositor. As a result, these funds are often recorded as unknown receipts or unidentified deposits. In some cases, the entity may use the accumulated deposits for business purposes, especially when no one claims ownership of the funds.
It is crucial for business operators to understand that these receipts are taxable, even if they are not linked to any specific goods or services provided. This article will explain why unknown receipts, despite common expectations, are still subject to income tax. For the purposes of this article, words denoting the masculine shall be deemed to include the feminine.
Enter unknown receipts
As mentioned earlier, unknown receipts typically arise from erroneous deposits made by a customer or processing errors by the bank. In cases where the error originates from the bank, the institution usually corrects it by processing an internal reversal. However, if a customer mistakenly provides an incorrect bank account number, such errors may go unnoticed, leaving the amount recorded as an unknown receipt in the company’s accounts indefinitely.
On the other hand, some customers may follow up, even after a significant period, to claim their funds. But what happens to those funds that remain in a company’s account indefinitely, which the company then uses because no one has come forward to claim them?
Enter Tax
First and foremost, it’s important to understand that income is only taxable when it accrues to a person. To clarify, the term “accrued” means that a person has derived an unconditional and legal claim to such income. When considering unknown receipts, it is clear that these deposits would have been made involuntarily, without any consent or legal obligation between the depositor and the company.
However, if the funds remain unclaimed indefinitely, it becomes prudent to acknowledge that the company has inadvertently gained a financial benefit. According to the Income Tax Act, gross income subject to tax includes “the market value of any benefit, whether or not convertible into cash, accruing in the course of business.”
As noted above, if a company uses unclaimed unknown receipts, it has effectively derived a valuable benefit. But for this benefit to be taxable, it must meet the “accrual” requirements of the Income Tax Act. In essence, a deposit can only accrue to a person if it originates from a legal obligation to make such a deposit. Thus, unknown receipts that result from chance events cannot be classified as arising from an unconditional legal obligation. This implies that unknown or erroneous deposits typically fall outside the scope of taxable income in the course of business.
However, if these receipts remain unclaimed for several years, they may eventually be deemed subject to income tax under Section 28 of the Income Tax Act. Should the depositor surface, say 10 years after the deposit, any refunded amount should be used to reduce the income tax previously paid to BURS.
Well folks, we hope that was insightful. As we, Yours Truly, say goodbye, remember to always pay your taxes diligently. If you’d like to consult, join our free Tax WhatsApp group, or learn more about our nine Tax e-books, send us a message at +267 71 81 836. You can also read more tax articles on our website, www.aupracontax.co.bw, under the ‘Tax articles’ tab.
