Capital allowances worked examples

Worked example 1 – s11(e) Wear-and-tear

Question:

Company A acquired the following assets during the current year of assessment
ended 31 December:

 A delivery vehicle for R50 000 (Excl. VAT) on 1 September

 A motorbike from a connected person for R15 000 (Excl. VAT) on 1 October
(the market value of the motorbike at the date of purchase is R12 000 (Excl.
VAT))
 A laptop computer for R6 500 (Excl. VAT) on 1 November

Both assets were brought into use immediately in the production of income. Calculate
the wear and tear allowance for Company A for its current and next year of
assessment, assuming IN47 stipulates a 4-year write-off period for vehicles and
motorbikes and a 3-year write-off for computer equipment.

Solution:

Delivery vehicle:

 Y1: 50 000 x ¼ x 4/12 = R4 167

 Y2: 50 000 x ¼ = R12 500

Motorbike:

Bought from a connect person so allowances are based on the lower of cost vs
market value.

 Y1: 12 000 x ¼ x 3/12 = R750

 Y2: 12 000 x ¼ = R3 000

Computer equipment:

 Y1: R6 500 as this is an asset below R7 000

 Y2: 0

Worked example 2 – s12C

Question:

Company A acquired the following manufacturing machines in the current year:

 A 2nd hand machine for R1 500 000, and

  A new machine for R2 000 000.

Installation expenses on the new machine amounted to R50 000. In Year 2, both
assets were moved to new premises at a cost of R30 000 each. Calculate the
allowances that Company A may claim in the current and next financial years.

Solution

Year 1:

 Second hand asset: 12C: 1 500 000 x 20% = 300 000

 New asset: 12C: (2 000 000 + 50 000) x 40% = 820 000

Moving expenses are claimed over the remaining tax life of the capital asset. The new
asset has 3 years left of allowances, the second-hand asset has 4 years left of
allowances.

Year 2:

 12C: 15 00 000 x 20% + 30 000/4 = 307 500

 12C: (2 000 000 + 50 000) x 20% + 30 000/3 = 420 000

Worked example 3 – s13(1)

Question:

In June Y1, Company A (with a 31 December year-end) erected a factory building at

a cost of R3 000 000 (excl. VAT). The building was brought into use on 1 November
Y1. Calculate the allowances on this building for the current year.

Solution:

3 000 000 x 5% = R150 000 per annum

Worked example 4 – s13quin

Question:

In June Y1, Company A (with a 31 December year-end) purchased a new commercial

building purchased for R4 200 000 (excl VAT) and brought it into use immediately.
During February Y2, the building was improved by the addition of a new service
elevator at a cost of R800 000 (Excl. VAT).
In April Y2, Company A purchased 2 floors in an adjacent building to be used as office
space for R1 600 000 (Excl. VAT).

Calculate the income tax allowances for Y1 and Y2.

Solution:

Year 1:
 R4 200 000 x 5% = R210 000

Year 2:
 Original building: R4 200 000 x 5% = R210 000
 Improvement to original building: R800 000 x 5% = R40 000
 Purchase of 2 floors in adjacent building: R1 600 000 x 55% x 5% = R44 000

Worked example 5 – Leases

Question:

On 1 July Y1, Company A entered into a 10-year lease agreement with a local
property agent for a property in Johannesburg. The contract specified the following
conditions:

 Company A would be required to pay an upfront lease premium of R200 000

 Company A would pay a monthly rental of R10 000 from 1 July, escalating
annually in line with inflation.
 Company A would erect a factory on the premises at a cost of R1 000 000. The
factory was completed on 1 September at a cost of R1 200 000 and occupied
from that date.

Calculate all necessary allowances, assuming a 31 December year end.

Solution:

Note: Company A will only be incurring expenses in the production of income from 1
September – the date they take occupation of the factory. These expenses could be
claimed via s11A (pre-production expenditure) as long as this is a new trade.

Lease premium (s11(f)): 200 000 x 1/10 x 6/12 = R10 000

Lease rentals (s11(a)): 10 000 x 4 = R40 000

Leasehold improvements (s11(g)): 1 000 000 x 4 months/118 months remaining =

R33 898

S13(1): (1 200 000 – 1 000 000) x 5% = R10 000

Worked example 6 – s8(4)(a)

Question:

Company A, a manufacturer acquired a second-hand manufacturing machine for

R100 000. The company used the machine for 3 months in Year 1 and 6 months in
Year 2. IN47 allows the taxpayer to claim allowances over a 5-year period. The
company sold this asset in Year 2.

Calculate the income tax consequences in Y2, assuming:

1. Company A sells the asset for R92 500.

2. Company A sells the asset for R55 000.
3. Company A sells the asset for R115 000.

Solution:

1. Tax base, Y2:

 Manufacturing asset so use 12C
 W&T Year 1: R100 000 x 20% = R20 000
 W&T Year 2: R100 000 x 20% = R20 000
 100 000 – 40 000 = R60 000
Recoupment = R92 500 – R60 000 = R32 500
2. W & T = R20 000
S11(o) scrapping allowance = R60 000 – R55 000 = R5 000
3. W & T = R20 000
Recoupment = R100 000 – R60 000 = R40 000
Capital gain = R115 000 – R100 000 = R15 000

Worked example 7 – s8(4)(e)

Question:

Company A lost a manufacturing machine (M1) when their factory flooded in

September Y1. The machine cost R500 000 on 1 January Y1 and an initial 12C
allowances of 40% was granted on this machine. Company A received an insurance
pay out of R450 000 which they used to fund a new replacement asset (M2) for R600
000 on 1 October Y1. Calculate the effect on taxable income in Y1 and Y2.

Solution:

Tax base of M1 at disposal date: 500 000 x (1-40%) = R300 000

Y1:
  s12C on M1: 500 000 x 40% = (R200 000)
 s12C on M2: 600 000 x 40% = (R240 000)
 Recoupment: (450 000 – 300 000) x 40% = R60 000
Y2:
 s12C on M2: 600 000 x 20% = (R120 000)
 Recoupment: (450 000 – 300 000) x 20% = R30 000

Worked example 8 – s8(4)(k)

Question:

Company A, a manufacturer acquired a new manufacturing machine for R100 000

(Excl. Vat) in Y1. The company used the machine for 3 months in Year 1 and 6
months in Year 2. IN47 allows the taxpayer to claim allowances over a 5-year period.
The company sold this asset in Year 2 to a connected person for R25 000 (Excl. Vat),
when a fair market value was R50 000 (Excl. Vat)

Calculate the income tax consequences in Y2:

Solution:

Tax base, Y2:

 Manufacturing asset so use 12C

 W&T Year 1: R100 000 x 40% = R40 000
 W&T Year 2: R100 000 x 20% = R20 000
 100 000 – 60 000 = R40 000

As disposal is to a connected person, the recoupment is based on market value:

Recoupment = R50 000 – R 40 000 = R10 000

Worked example 9 – s8(5)

Question:

Mr X hired office equipment for his business from Company A for 3 years at an annual
rental of R25 000, which was fully deductible. AT the end of the lease he exercised
his option to buy the equipment for R100 000 less 1/3 of the lease rentals paid by
him (R100 000 – 1/3 x 25 000 x 3 = R75 000. Calculate the amount to be included in
Mr X’s taxable income.

Solution:
 S8(5) recoupment of R25 000
Summaries:
s11(e) vs s12C
s11(e)
Nature of assets All
Basis for allowance Value
Apportioned? Yes – based on months
Lessees vs lessors
Lessor (Owner)
Asset purchases Capital allowances
dependent on the nature
of the asset purchased
Periodic lease payments Gross Income
Lease premiums Gross Income (par g)
Leasehold improvements Gross Income (par h)
Deductible under the
relevant capital allowances
section.
Sale and leaseback New owner can claim
transactions allowances on the lower of
cost vs the amount
calculated in s23D
s12C
Specifically manufacturing
assets
Cost – if acquired for no
cost, revert to s11(e)
No
Lessee (User)
Not applicable
s11(a) deduction
s11(f), written off over the
life of the lease term
(limited to 25 years)
s11(g), written off over the
life of the lease term
(limited to 25 years)
Excess deductible under
s13(1) if applicable
Payments, premiums and
improvements per the
above, if applicable