Reserve Funds and When Can You Have a Tax Deduction
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If you’re keeping money aside for future costs, such as warranties, servicing, or long-term maintenance, SARS won’t let you deduct it for tax purposes unless the law specifically says you can. This is the message from the latest Interpretation Note 141, which looks at what counts as a “reserve fund” under section 23(e) of the Income Tax Act, and why most of them can’t reduce your taxable income.
What Is a Reserve Fund?
A reserve fund is money a business sets aside or provided for:
Future maintenance or repairs
Warranties or after-sales service
Big planned expenses that haven’t happened yet.
It is money that has been set aside and earmarked for future use. And SARS says: if it hasn’t actually been spent, you can’t claim it as an expense.
According to the Law
Section 23(e) is crystal clear: You can’t deduct amounts carried to any reserve fund or capitalised in any way. That applies even if:
The reserve is based on good faith estimates
You’ve moved the money into a separate account
You’re planning to spend it soon.
However, there are specific exceptions when a tax deduction can apply.
Exceptions: When You Can Deduct a Reserve
There are a few clear exceptions where SARS allows deductions for reserve-type provisions, including:
Doubtful debts (section 11(j))
Future contract costs (section 24C)
Stock write-downs (section 22)
Short-term insurance liabilities (section 28)
Farming drought reserves (First Schedule para 13A).
If your reserve doesn’t fall under these categories, it’s not deductible.
What About Insurance Policies?
Buying an insurance policy to cover future expenses? SARS will look at:
Is there real risk transfer to the insurer?
Or is it just disguised saving (like a self-funded reserve)?
If it’s the latter, it may still be treated as a reserve fund, and blocked under section 23(e).
What This Means in Practice
Watch out for provisions or reserves as they probably won’t reduce your client’s tax bill.
Review whether any of your client's reserves are backed by legal allowance.
Use this rule to manage client expectations: money set aside is not money spent. No spending, no tax deduction.
