UNIVERSITY OF JOHANNESBURG

TAX300: TAXATION 300

S3BCTQ3: INTERMEDIATE TAXATION AND TAX PLANNING

MODULE

CAPITAL ALLOWANCES

2023

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1. OUTLINE:

The following sections must be studied and are examinable. Not all sections
will be lectured in class as most of these have already been covered in Tax
200 and in Tax 3A/3B.

Income Tax Act HAUPT & HAUPT

Section ref
WHERE TO FIND INFO
Capital allowances 7.1
1. Registration of intellectual property Section 11(gB) 6.4
2. Intellectual property Section 11(gC) 6.5
3. Wear and tear Section 11(e) 7.3.1- 7.3.2
4. Production of renewable energy Section 12B 7.5.1
Leave out farming equipment, and “exclusions”
Focus on s12B(1)(g)-(i); s12B(2)-(3).
5. Allowance for manufacturing assets Section 12C 7.5.2 , 7.5.4, 7.5.5
6. Manufacturing buildings Section 13 7.9.1; 7.9.2
7. Commercial buildings Section 13quin 7.9.6
8. Residential units Section 13sex 7.9.7
Definitions of a “residential unit” and of a Section 1
“low-cost residential unit” Section 1

9. Learnership agreements Section 12H 6.16

Leave out the following:
1) Any reference to s12N
2) Sections 23A , 23D and 23G
3) Any reference to pipelines, transmission lines,
railway lines, hotels or airports
4) S20B
5) 7.6, 7.7 and 7.8 in Haupt

Self Study
Small business corporation Section 12E 9.15

2. OBJECTIVES:
Module Learning Outcome
Identify and calculate amount deductible
(under capital allowance) when calculating the
taxable income of the entity.
Assessment criteria
Discuss (with reference to legislation) whether
the capital allowances are deductible for a
particular taxpayer and particular capital
expenditure.
Calculate the amount deductible for capital
allowances as part of calculating taxable
income

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3. TEACHING AND LEARNING MODEL

4. RESPONSIBLE LECTURER
Lecturer
Mr Siphamandla Makhaya
Name
Office C Ring 730 (middle passage)
Telephone (011) 559 3451
E mail address smakhaya@uj.ac.za
Consulting hours Consult by Email or request a blackboard collaborate or zoom
consultation session directly with the lecturer. The lecturer will
attempt to respond to email queries as soon as possible. But
please allow 24-hour turnaround time.

Face to face consults on Tuesdays and Fridays (between 10h00

and 12h00). Please check the lecturer’s availability for face to
face consult beforehand.

5. BACKGROUND

The general deduction formula, s11(a) of the Income Tax Act, prohibits the deduction of
expenditure incurred on capital assets as such expenditure is capital in nature. The
Income Tax Act does, however, provide the taxpayer with some relief for capital
expenditure incurred in the form of capital allowances. Not all capital assets qualify for a

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capital allowance. It is important that you acquaint yourself with the sections governing
capital allowances and the requirements of each section that have to be met before the
allowance may be claimed.

 Study paragraph 7.1 in Haupt

6. CAPITAL ALLOWANCES IN THE TAXABLE INCOME CALCULATION

R
Gross income XXX
Less: Exempt income (XXX)
Income XXX
Less: DEDUCTIONS AND ALLOWANCES (XX)
Add: Taxable capital gains XX
TAXABLE INCOME XXX

It must be noted that while structure above is used to calculate the taxable income, you
may also be asked to calculate the taxable income by starting with the profit before tax
(accounting profit) and make necessary adjustments to get to the taxable income.

7. CAPITAL ALLOWANCES

a. Registration of Intellectual Property – s11 (gB)

o This is the only section under which costs incurred for a trademark may qualify for an
allowance.
o To claim an allowance under this section, the costs incurred must not have qualified
for an allowance under another section in the Act.
o Costs related to the registration or renewal of registration will also qualify for the
allowance, for example legal fees incurred to register an intangible asset will also
qualify.
o Read the section very carefully to know which costs qualify for this allowance.
o The costs incurred are written off in full in the year they are incurred.

 Study s11(gB) of the Income Tax Act.

 Study paragraph 6.4 in Haupt & Haupt (leave out references to section
11(gA))

b. Intellectual property - s11(gC)

o This section only provides an allowance for intellectual property that is PURCHASED,
not for assets created or developed.
o There is no allowance available under this section for the acquisition of trademarks.
o This allowance is NOT apportioned for part of the year.

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  Study section 11(gC) of the Income Tax Act
 Study paragraph 6.5 in Haupt & Haupt

c. Wear and Tear Allowance – s11(e)

o This allowance is claimed on VALUE which means that the taxpayer can claim an
allowance in terms of this section even though he did not pay for the asset. As long
as the taxpayer is the legal owner he may claim 11(e) for these assets.
o Assets acquired through an instalment credit agreement (para (a)) will also qualify
for wear and tear allowance.
o An allowance under this section may only be claimed if the asset has not qualified
for any other allowance under other sections of the Act. Other sections take
preference over s11(e).
o Although there are two ways of calculating the allowance, i.e. the straight-line
method and the diminishing balance method, the straight line method will be the
default method, unless specifically told that the taxpayer uses the diminishing
balance method.
o Note that the write-off periods in terms of the Interpretation Note 47 and BGR 7 will
not always be provided to students in open-book assessments. Refer to page 315
in the SAICA Student Handbook Vol 3 (2022/23). I recommend you flag this page
on your SAICA Student Handbook.
o If write-off period for a particular asset is provided in an assessment, it should not
be interpreted to mean that s11(e) is applicable on that asset. Also if the write-off
period is not provided for a particular asset, it should not be interpreted to mean
that section 11(e) is not applicable on that asset.

 Study s11(e) of the Act

 Study paragraph 7.3.1 and 7.3.2 in Haupt & Haupt (leave out the portion
relating to assets previously used to produce exempt income)
 Do the examples under paragraph 7.3.1 in Haupt & Haupt.

d. Assets used to produce renewable energy – s12B

o An allowance is available under s12B for assets used in the production of bio-fuels
(i.e. bio-diesel and bio-ethanol) as well as the production of electricity from wind
power, solar energy, hydropower and biomass.
o Improvements to these assets also qualify for capital allowances.

 Study s12B(1)(g)-(i), s12B(2) and s12B(3) in the Act.

 Study para 7.5.1 in Haupt & Haupt. Leave out farming plant and equipment
and the all under the heading “exclusions”
 Do the example under 7.5.1 in Haupt. However, ignore “equipment hired for
letting”.

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e. Manufacturing Assets – s12C

o You will always be told that the asset is used in a process of manufacturing, never
assume it.
.
o Improvements to assets are treated as separate assets for the purposes of this
section.
o This allowance is NOT apportioned for part of a year even if the asset is used for
one day during the year.
o The allowance is calculated on COST. Thus no allowance may be claimed in terms
of this section of the taxpayer did not pay anything for the asset.
o MOVING COSTS are costs to move the asset from one place to another and these
can also be claimed as a deduction.
o Be aware that section 12C also applies to aircrafts and ships. You do not need to
know further details regarding the allowances on aircrafts and ships.

 Study s12C of the Act

 Study paragraph 7.5.2, 7.5.4 and 7.5.5 in Haupt & Haupt
 Do the example under 7.5.5 in Haupt & Haupt
 Do the removal cost example under 7.5.2 in Haupt & Haupt
 NB: Ignore all references to manufacturing assets used under
Automative Production and Development Programme, agricultural
co-operatives, hotelkeepers, in the Act and in Haupt and in the Act.

f. Manufacturing Building Allowance – s13 (Factories)

o The allowance is available to the taxpayer who erected or purchased a building

(whether new or second hand).
o The lessee of the building may therefore claim s13 allowances on a building that
they constructed as part of leasehold improvements which were not deductible
under s11(g).
o There is no allowance available for the land on which the building is erected.
Therefore the cost price of the property may have to be apportioned between the
land and the building.
o The building must be used wholly or mainly for manufacturing purposes either by
the owner or the lessee. Wholly or mainly means more than 50%. (i.e. it does not
include 50%). However the allowance will be calculated based on 100% cost even
if less than 100% of the building is used in a process of manufacture.
o The allowance is determined with reference to the year in which construction
started and this is year in which the foundations were laid.

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o An improvement is treated as a separate asset for the purposes of this section.
Thus it may happen that the building and the improvement will be written off at
different percentages.
o Ignore s13(3) for now. Refer back to it once you have done recoupments.
o Note that the table for the rates will only be provided in the assessments if the
construction of the building commenced prior to 1 October 1999.

 Study s13 of the Act

 Study paragraph 7.9.1 and 7.9.2 in Haupt & Haupt
 Do examples under 7.9.2 in Haupt & Haupt (leave out building recoupment
example)
 Ignore references to the recoupment provision, s12N and s23D

g. Commercial Buildings – s13quin

o To qualify for this allowance the building must be used wholly or mainly in the
production of income in the trade EXCLUDING the provision of residential
accommodation.
o This allowance is only available to the owner of the building. Thus if a lessee
effects improvements in excess of the contract amount, he cannot claim s13quin
on the excess.
o The allowance is NOT apportioned for part of a year even if the building is used for
one day during the year.
o This allowance is only available to administration buildings that were constructed
on or after 1 April 2007.
Take special note of what happens when part of the building was acquired by the
taxpayer (i.e. the taxpayer did not erect or construct these parts himself)

 Study s13quin in the Act.

 Study paragraph 7.9.6 in Haupt & Haupt.
 Do examples under 7.9.6 in Haupt & Haupt.

h. Residential Units – s13sex

o This section applies to units where their construction commenced on or after 21

October 2008.
o “Low-cost residential units” are defined in section 1 of the Act. Study the definition
carefully so that you are able to identify when the units are low-cost and qualify for
an additional 5% write off of the cost.
o Take special note of what happens when part of the building was acquired by the
taxpayer (i.e. the taxpayer did not erect or construct these parts himself)

 Study s13sex of the Act

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  Study the definitions of “residential unit”, “hotel keeper” and “low-cost
residential unit” in s1 of the Act.
 Study paragraph 7.9.7 in Haupt & Haupt.
 Do examples under paragraph 7.9.7 in Haupt & Haupt.

i. Learnership agreements – s12H

o Section 12H provides additional tax relief for formal learnership agreements
entered into by taxpayers as employers. Even though section 23B prohibits a
double deduction of expenditure incurred, a section 12H allowance can be
claimed in addition to any other expenditure actually incurred that is claimable in
terms of section 11(a).

You will be told in an assessment what the NQF level of the learner is and if the
learner has a disability. If the question is silent about the disability, then you
cannot assume the learner to have a disability.

 Study s12H of the Act

 Study paragraph 6.16 in Haupt & Haupt
 Do examples under paragraph 6.16 in Haupt & Haupt.

NQF LEVELS

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