We have a client who uses a deposit system for their clients.

What they basically do is request a deposit to cover the direct costs of the transaction. The final invoice is prepared as soon as the final product has been delivered to the customer, and the remaining portion is then paid by the customer.

For example:

Our client's final invoice is R 100. Cost of the sale is R60. Profit on the transaction is R40. Our client requests a deposit of R60 and pays the costs. No invoice is raised by our client at this point in time. They install the product at their customer, raise an invoice for R 100, and the customer pays the remianing R 40.

The actual sale is only declared when the final invoice is prepared.

We have a problem now, as the timeline from the deposit payment to the final invoice was basically over two financial years. The client's year end is in February. Deposit was received in January 2011, final invoice prepared (and declared for VAT) in March 2011. The deposit received was reflected as a creditor on the Annual Financial Statements for the year ended 28 February 2011.

Sars now bascially wants to include the deposit received as taxable income for the 2011 financial year, and not in the 2012 financial year as it should be.

We have looked at 24C on the Income tax act 1962 (Act 58 of 1962) - allowance in respect of future expenditure on contracts, which basically states that the income should be included in taxable income, but an expense to the value of the same amount should be allowed as an expense. The problem is that the client already incurred the actual direct costs in the 2011 financial year, so this allowance will not be applicable.

Please advise.