Companies

A quick reminder
Page 733-740
 Companies

 Companies (defined in Act) are taxed a flat rate of

28%
For years of assessment ending on any date between on or after 31 March
2023 the rate of tax has been updated to 27%
 Calculation of normal tax for companies 
three methods:
1. Start by adjusting the accounting profit  take out accounting
items and include taxable income and applicable deductions
OR
2. Start from calculating gross income - less deductions =
TAXABLE INCOME
3. Accounting for transactions that were not taken into
consideration in the calculation of taxable income.
Framework for calculation of company’s taxable income
(page 736)
COMPANIES
NET PROFIT OR LOSS BEFORE TAX AS REFLECTED ON Rxxxx
STATEMENT OF COMPREHENSIVE INCOME (SOCI)
LESS:
NON-TAXABLE AMOUNTS CREDITED TO THE SOCI (Rxxxx)
SPECIAL ALLOWANCES AVAILABLE FOR TAX (Rxxxx)
PURPOSES
ADD
NON-DEDUCTIBLE AMOUNTS DEBITED TO THE SOCI Rxxxx
AMOUNTS NOT CREDITED TO THE SOCI Rxxxx
ALLOWANCES GRANTED IN PREVIOUS YEARS OF Rxxxx
ASSESSMENT THAT ARE REVERSED IN THE
CURRENT YEAR
RECOUPMENTS Rxxxx
= SUB-TOTAL Rxxxx
ADD: TAXABLE CAPITAL GAIN Rxxxx
LESS: DONATION – Section 18A (Rxxxx)
LESS: ASSESSED LOSSES (Rxxxx)
TAXABLE INCOME Rxxxx
Capital Allowances
Silke – Chapter 13
Learning outcomes

Identify when a person is a connected person for normal tax purposes, and
apply the connected person’s rules pertaining to depreciable assets and
capital allowances.
Distinguish between the different types of assets and the capital allowances
applicable to each.
Calculate and discuss the tax consequences of leased assets.
Core concepts

• Capital assets do not qualify for deduction in terms

of s11(a), but certain assets qualify for a capital
allowance.
• A calculated allowance is deducted against taxable
income
Core concepts

Connected persons.
• Defined in s1 of the Income Tax Act. Refer to page 396/397 for
connected persons and examples in SILKE.
• It is important to understand the implications for connected persons
should a transaction arise.
Connected person rule.

• Any relative of the person including adoptive parents, children

• Within the third degree of kinship
Natural
person

• Holds more than 50% of voting rights or equity shares in each controlled group company
• Any person that individually or jointly (with their connected person) hold 20% or more shares or voting rights
with
• Any company that holds 20% or more shares or voting rights individually or with a connected person
• Any company if the company is managed or controlled by a connected person
Company • Any other company that would be part of the same group of companies

• Any member
• Any relative of the that is a connected person in relation to a member
• Any other cc which is a connected person to one of the members or relative or trust
Close Corp
Relevant sections

s11(e) – Wear and tear allowance

s12C – Manufacturing
s12E – Small business corporations
s13 – Buildings and improvements
s13quin – Commercial buildings
s11(f) – Lease premium
s11(g) – Leasehold improvements
s11(h) – Relief for lessors
Relevant sections

Movable Immovable
assets assets Leases

• s11(e) • S13 • s11(f)

• s12C • s13quin • s11(g)
• s12E • s11(h)
Movable assets

s11(e)
s12E small Wear and
business tear
corporations allowance

s12C
Manufacturing
assets
s11(e) – Wear and tear

An allowance for movable assets

• Allowance is available to the tax payer if:
• The value of any machinery, plant, implement, utensils and
articles, owned by the taxpayer or acquired by them as
purchaser of an instalment sale agreement, used by them for the
purpose of their trade has been diminished by reason of wear
and tear or depreciation during the year of assessment.

GENERAL RULE
Allowance = value/expected useful life x number of months
used in the year of assessment
s11(e) – Wear and tear

What information is required to be maintained:

• Date of acquisition of capital asset
• Date capital asset is brought into use
• Disposal date of capital asset
• Value of the asset
• Write off period of the asset, and information to determine the write
off period
• The income tax value of the asset at the end of the previous year of
assessment
• When an asset is disposed of, the proceeds received on disposal or
scrapping
s11(e) – Wear and tear

Value of the asset (determined excluding VAT):

• Direct cost of the asset
• Direct cost of installation or erection of the asset
• Includes shipping and delivery
• Excludes foreign travel expenses
• Cost of foundation or supporting structure
• Where the foundation is regarded as being integrated with the
asset
• The useful life of the foundation/structure is limited to the useful
like of the associated asset.
• Moving costs
• if used for the purposes of trade and not deductible under 11(a)
• Excludes interest and finance charges
• Assets acquired at no value (donation, inheritance) base the
allowance on the market value of the asset
s11(e) – Wear and tear

Write off period

• Determined in accordance with Binding General Rule: No. 7
• The allowance is apportioned if the asset is not used for the
purposes of trade for a full year.
• Taxpayers who believe a shorter write off period should be used are
required to apply for approval from the Commissioner.
• Assets acquired for less than R 7 000 are written off in full (Binding
General Rule: No 7) (Exception: Lessors – see page 401).
Example section 11(e)

Tezo (Pty) Ltd acquired a motorcycle at a cost of R40 000 (excluding

VAT) on 1 March 2023 and immediately brought it into use for purpose
of making deliveries. The year of assessment ends 31 August 2023.
Binding General Rule: No 7

Required:
Calculate the wear and tear allowance for 2023
Solution

31 August 2023
Wear and tear allowance (R40 000/4 x 6/12) = R5 000
 S12C allowance

An allowance for movable assets

• Allowance is available to the taxpayer for assets acquired and
brought into use for the first time.
• Must be used specifically for purposes of trade
Examples: Hotelkeepers – assets used for the
purposes of hotelkeeping activities.
Manufacturer – assets are used
directly in the process of
manufacture
S12C allowance

Allowance calculations:
• Normal rule (if below does not apply)
• 20% per annum based on the cost of the asset or improvements
• New or unused used for the process of manufacturing
• 40% of the cost in the year brought into use and then
• 20% in each subsequent (3 years) year of assessment

Taxpayer who is
a small
business
corporation , will
claim s12E
S12C allowance

Other important information to note:

• Any improvements to an asset qualifying for the 12C allowance is
treated as a “new asset” and therefore write off commences from
when the improvement is first brought into use.
• There is no apportionment for assets brought into use during the year
of assessment.
• Cost of the asset is determined as the lesser of the actual cost and
the market value.
All other considerations are the same as for s11(e)
• Except moving costs – which are deductible in equal
instalment of the remaining write off period of the asset
Question, Example 13.3, SILKE, pg. 409

Kanyetu CC acquired Machine A (a second hand machine) forR

1 500 000 and brought it into use in its manufacturing process on 10
January 2018.
Kanyetu CC acquired a new manufacturing Machine B for R3 000 000
and brought it into use in its process of manufacture on 15 December
2020. The CC also spent an additional R50 000 on installation
expenditure for Machine B.
Kanyetu CC decided to move to another site and both machines
were moved on 15 July 2021 at a cost of R10 000 for Machine A and
R60 000 for Machine B (both amounts not claimed under section
11(a)).

Calculate the allowance that Kanyetu CC may claim under section 12C in
its years of assessment ending June 2021, 2022, 2023 and 2024 (ignore
VAT).
Solution: Example 13.3, SILKE, pg. 409

Year ended 30 June 2021

Machine A :
Section 12C allowance (20% of R1 500 000 = R300 000 used 20% as a second hand machine)
Machine B :
Section 12C allowance (40% of R3 050 000) = R 1 220 000 used 40% as it is a new machine)
Year ended 30 June 2022
Machine A:
Section 12C allowance (20% of R1 500 000 = R300 000 plus R10 000 moving costs (as Machine
A is being written off in full in the 2021 year, the full amount of moving costs will be claimed)
Machine B:
Section 12C allowance (R3 050 000 x 20%) plus (R60 000 x 1/3) = R630 000.The moving cost is
deductible in equal installments over the remaining years over which the section 12C is to be
claimed thus three years)
Year ended 30 June 2023 and 2024
Machine B:
Section 12C allowance (R3 050 000 x 20%) plus (R60 000 x 1/3) = R630 000
S12E Small Business Corporations

s12E allows for certain deductions on movable assets for small

business corporations (SBC).
Allowances available
• Manufacturing assets
Allowance = Cost x 100%
• Non-manufacturing assets (elect s12E or s11(e))
50% in year 1
30% in year 2
20% in year 3
• Moving expenses
Allowed in equal instalments over the
remaining capital deduction
S12E Small Business Corporations

A business must meet the requirements of a Small Business Corporation to

apply s12E page 767-768 of SILKE.
For non-manufacturing assets, taxpayer elects s12E or s11(e), choose the most
favorable option.
There is no apportionment if assets is bought into use during the year of
assessment, provided the taxpayer elected s12E
The same principles relating to s12C apply when determining the cost of the
asset.
Example S12E

KUFUZU CC, started trading a manufacturing business on 1

November 2021, the company has February year end.
The following assets were bought and brought into use:
• Non-manufacturing canteen machine on 15 September 2021
R1 000 000, moving costs R50 000
• Manufacturing machine 1 January 2022 R1 250 000, moving
costs R30 000.

Required: Calculate capital allowances for 2022 year of

assessment.
Solution to the example

2022 year of assessment

Non manufacturing machine R1 000 000*50% R500 000
Non-manufacturing machine moving costs R50 000*50% R25 000

Manufacturing machine R1 250 000*100% R1 250 000

Manufacturing machine moving cost R30 000* 100% R30 000
Immovable assets

s13quin s13
– –
Commercial Buildings and
buildings improvements
Section 13

S13 allows a taxpayer to deduct an annual allowance on the cost of a

building that was:
• Erected by the taxpayer; or
• Purchased by the taxpayer from another person, who was entitled.
to the s13(1) annual allowance, or
• Purchased by the taxpayer from another person, where the
building was never used before;
and is
• wholly or mainly used by the taxpayer;
• during the year of assessment
• for trade purposes for a process of manufacture or research and
development

General rule: Allowance =Cost * 5% per year not apportioned

Section 13

GENERAL RULE
Allowance calculation can
Allowance = Cost x 5% per annum vary depending on dates
No apportionment required of construction of the
building.
Important terminology: Page 414
Erection of building
• The commencement date of erection is determined based on the
date when the laying of the foundations commences.
Wholly or mainly
• More than 50%
Section 13

Cost considerations includes:

• The lesser of actual cost and market value
• Where a taxpayer acquires a building without giving consideration, no allowance and no
cost incurred
• Improvements will qualify, provided they are not considered repairs
• Land on which the building is built is excluded from cost
• Interest and finance charges are excluded
• Other costs exclude
• Cost of clearing and levelling a site
• Cost of excavations
• Cost of external paving and fencing
Example
Nomatema (Pty) Ltd erected a factory building at a total cost of R1 800 000.
The erection of the building commenced on 01 March 2017, and it was brought
into use in October 2017. The year end for the company is 28 February.

REQUIRED: Calculate the allowances available to the company in respect of

this building, for the year ended February 2022.
SOLUTION: Section 13(1) allowance for the manufacturing building: R1 800 000 x
5% = R90 000.
S13quin – Commercial buildings

A taxpayer is allowed to claim an allowance on a commercial building

and improvements to these buildings which are not provided for in
another section of the Act. Construction must have commenced on or
after 1 April 2007.
Applicable if the taxpayer:
• Owns a new and unused building;
• the building/improvements are used wholly or mainly by the taxpayer during the year
of assessment for producing income
• in the course of his trade
• excluding residential accommodation
Section 13 quin

GENERAL RULE:
Allowance = Cost x 5% per year
No apportionment required
Cost includes:
• Cost consideration is the same as that of s13
UNLESS
• Part of the building was acquired on/after 21 October 2008, without the taxpayer erecting
or constructing, then the cost will be
• 55% of the acquisition price if a part is acquired; and
• 30% of the acquisition price if an improvement part is acquired
Leases

s11(f)
s11(h) –
– Lease
Relief for
premium
lessors

s11(g)
–
Leasehold
improvements
s11(f) – Lease premium

An allowance is deductible if a taxpayer paid a premium as consideration

for any of the following:
• Right of use/occupation of land and buildings
• Right of use of plant or machinery
• Right of use of a motion picture film or any sound recording or
advertising matter connect to a film
• The right of use of: Right of
• Patent use is
• Design important
• Trademark to note
• Copyright
• Any other property of a similar nature
• Providing of knowledge or the undertaking to provide knowledge
• The right of use of any pipeline, transmission line or cable or railway
• The right of use of any line, transmission line or cable of electronic
communications
It is used for the production of income or from which income is derived
s11(f) – Lease premium

A premium is an amount, paid by the lessee to the lessor for the right
of use of an asset, which is separate from and in addition to rent paid.
The person receiving the lease premium is obliged to include in his
gross income the full premium received in the year of receipt/accrual.
The allowance is also available to a sub-lessee.
The following do not qualify as a lease premium:
• An amount which does not qualify as income for the recipient (tax exempt person)
• When a lease is transferred from one lessee to another(between lessees)
• If the lessor paid the lessee to vacate before end of the lease
• An amount paid by the lessee to cancel the lease (not for right of use)
s11(f) – Lease premium

GENERAL RULE:
Total lease premium DIVIDED BY number of years (max 25)
MULTIPLED BY period in the year of assessment (x/12)
Note:
Apportionment does apply.
If right of use is ceded/surrendered
• A full year’s allowance is granted in the year of cession/surrender
• The balance of the premium not yet deducted will fall away
SILKE, page 439 – 441, example 13.16

Calculate the lease premium allowance deductible in terms of s11(f)

in the following instance. (Assume that all years of assessment end
on the last day of February):
For a lease over premises entered into on 01 September 2022, Walter
paid the lessor a premium of R150 000. He is entitled to occupation
for 15 years. The annual rental is R120 000.
28 February 2023
R5 000 (R150 000/15 x 6/12)
2024 - 2037 years of assessment
R10 000 each year (R150 000/15)
28 February 2038
R5 000 (R150 000/15 x 6/12)
s11(g) – Leasehold improvements

An allowance is available for:

• Expenditure actually incurred by the taxpayer;
• Enforced by the lease agreement;
• To undertake improvements on land or to buildings;
• Used or occupied for the production of income.

Note:
The lessor is required to include in his gross income the value of the
improvements allowable as a deduction.
The provisions do not apply if:
• The value of improvements does not constitute income of the lessor
 s11(g) – Leasehold improvements

GENERAL RULE:
Stipulated value of improvements DIVIDED BY number of years of use (limited to 25
years) MULTIPLED BY period in the year of assessment
Notes:
Apportionment applies for commencement date.
Lease renewal periods must be taken into account in terms of probably duration.
Any unclaimed portion on termination can be claimed in the year of assessment in
which termination takes place.
The amount claimable is limited to the lesser of the stipulated amount per the lease
contract and the actual amount.
If the improvements are greater than the stipulated amount, the excess amount may
be claim another building allowance in terms of s13.
If no amount is stipulated, then a fair and reasonable amount should be determined.
SILKE, page 433, example 13.17

In terms of a lease agreement of land, Builder, the lessee has to erect a

factory (for sole use in its manufacturing operations) to a value of R3
000 000 within a period of 18 months from the date of commencement of
the lease, which was 01 January 2022. The lease is for a period of 20 years.
On the expiry of the lease, the factory will revert to the landlord without
compensation to Builder. At the end of the first year (30 June 2022), the
factory had not been completed but R1 250 000 had actually been spent on
its erection. The building was completed on 31 March 2023 at a total cost
of R3 500 000, and the factory was immediately let to tenants (that also
carries on a qualifying manufacturing trade).

Calculate the allowance to be granted to builder in terms of section

11(g), as well as any other allowances for which the factory may
qualify for.
 SILKE, page 433, example 13.17

Leasehold improvements allowance :

Year ended 30 June 2022
No allowance, since the factory was not completed during the year of
assessment.
Year ended 30 June 2023
Factory completed on 31 March 2023. Lease expires in 18 years and 9
months (total of 225 months) after completion. Therefore, the value of
the improvements stipulated in the lease is to be amortised over a
period of 18 years and nine months but must be reduced since the
buildings were brought into use only on 31 March 2023.
Annual allowance (R3 000 000/ 225 months) x 3 months = R40 000
Allowance for the remaining period per annum (R3 000 000/225) x 12 =
R160 000
SILKE, page 433, example 13.17

Year ended 30 June 2042 (end of lease)

Allowance: (R3 000 000/ 225 months) x 6 months = R80 000

Section 13(1) Allowance

This allowance is on the excess cost of improvements cost not
qualifying for the section 11(g) allowance
Year ended 30 June 2022: No allowance, since the factory was not yet
brought into use in a process of manufacture.
Year ended 30 June 2023: Annual allowance 5% of R500 000 = R 25
000
If the lease contract was for a period longer than 20 years, Builder
then should have elected to write off the R3 000 000 in terms of s13(1)
(over 20 years at 5% per year ) instead of writing off in terms of s11(g)
over such longer period. NOTE 100/5= 20 years.
s11(h) – Relief for lessor

Provides a taxpayer in special circumstances with an allowance

(lessor’s special allowance).
• Onus is on the taxpayer to prove there are special circumstances

The allowance relates to the amounts included in gross income under:

• S11(g) – lease premiums
• S11(h) – leasehold improvements

The lessor’s special allowance may not be applied where:

• The lessor or lessee is a company and the other party has an interest of more than 50%
of the shares
• If both the lessor and the lessee are companies and any third party has an interest of
more than 50% of the shares in each of the companies
s11(h) – Relief for lessor

GENERAL RULE
Amount included in gross income LESS present value of the amount
included in the lessor’s gross income

Steps to follow:
1. Establish the amount included in gross income
2. Discount the amount to its present value at 6% over the period
(including renewals)
3. Set the lessor’s special allowance amount at an amount sufficient to
reduce the amount referred to in point 1 to the discounted amount in
point 2
SILKE, page 446, example 13.18

Lessor Ltd lets premises to Mr. Lessee for a period of 5 years, with an
option to renew the lease the lease for a further 3 years. The lease
forces Mr. Lessee to effect improvements to the leasehold premises to
the value of R1 800 000. The Commissioner regards the duration of
the lease to be 8 years.

Show the effect of the improvements on Lessor Ltd.'s taxable

income in the year of assessment in which the lease is signed.
 SILKE, page 435, example 13.18

Value of improvements included in gross income in terms of para(h) of the

‘gross income’ definition :…… …………………….......................R1 800 000
Less: deduction in terms of section 11(h)
Equals R1 800 000 – R1 129 342..………………………………..(R670 658)
( FV= R1 800 000, n=8, i=6%, Comp PV = R1 129 342)
Taxable income in respect of improvements …………………….R1 129 342

NOTE: The deduction under s11(h) is calculated to discount the amount

required to be expended by the lessee on the improvements to its present
value worth 6% over the period of the lease.
Recoupments and the s11(o) allowance

 s8(4)(a) applies if a taxpayer recovered or recouped

amounts that were allowed as deductions
 s8(4)(a) covers deductions from s11 – 20, s24D, s24F,
s24G, s24I, s24J, s27(2)(b), s37B(2)
 Recoupment calculation = Proceeds (ltd to cost) less Tax
Value = Recoupment
 Tax Value = Cost less all allowances claim to date
 NB!!!  Proceeds must be > Tax Value
 If proceeds < Tax value  s11(o)
QUESTIONS
Please contact me if you have any questions at
pmpompoza@ufh.ac.za and we can set up a
meeting.