Tax 3701 – Business Tax

Tutorial Class
Bloemfontein Campus

Unit 6: Capital Allowances

Presented by:
Mr TK Raseleka
 Schedule
Feb Tutorial Topic Assignment Closing Date
Tutorial Sessions
24 Introduction
Mar Tutorial Topic
02 Value-added Tax
09 Turnover Tax & Income of Entities
16 General Deductions; and Special Deductions 20 March: Assignment 1
30 Capital Allowances & Recoupment
Apr Tutorial Topic
06 Capital Gains Tax & Taxation of companies 17 April: Assignment 2
20 Provisional Tax & Donations Tax
27 Revision 12 June: Examinations
General Deductions
 Capital Allowances
• Specific provisions for allowances as expenditure of a
capital nature is not deductible under the general
deduction formula
• capital assets used by a small businesses (s 12E);
• assets used in a process of manufacture (s 12C);
• wear-and-tear allowances (s 11(e)) used by a taxpayer
in the course of his/her trade; and
• several capital allowances relating to buildings
• (s 13, s 13quin, s 13sex and s 13sept).
 Capital Allowances
• Depreciation is calculated according to accounting
principles, but capital allowances are calculated
in terms of the Income Tax Act.

• As a result, these calculations differ, and accounting

depreciation is not allowed as a deduction for
income tax purposes.

• The correct capital allowance determined by the Act will

be an allowable deduction from taxable income.
Capital Allowances
 Repairs & Improvements s11(d)
• A repair is deductible immediately in full in the year of
assessment during which the repair was done.

• However, if it is classified as an improvement, it would be

an expenditure of a capital nature and the special
provisions regarding capital allowances may apply.

• Repairs are needed mainly owing to damage to or

deterioration of capital assets; the intention of the
taxpayer is to restore the assets to its original condition,
whereas an improvement is the creation of a better asset.
 Cost of Asset
• A capital allowance is calculated on the cost price of
an asset.

• It is therefore important to determine which costs are

included in or excluded from the cost price on which
the wear-and-tear allowance is calculated.
 Cost of Asset
• You will be told in a question if you can ignore any VAT
consequences. If not indicated:

• You will have to consider whether the taxpayer could claim

VAT. If VAT could be claimed, then you must exclude the
input VAT amount from the cost price of the asset
before calculating the capital allowances.

• If the VAT could not be claimed, then you would calculate

the capital allowances on the cost including VAT.
 Cost of Asset
• The cost of moving an asset from one location to
another will also be included in the cost of the asset.

• If moving costs are incurred on an asset still being

written off, such costs will be written off over the
remainder of the write-off period.

• If the asset has been written off in full, the moving costs
incurred will be fully deductible during the year in
which they were incurred.
Cost of Asset
 Leasehold Improvements (s12N)

• In terms of section 12N, if a lessee has a contractual

agreement with the lessor to make improvements to
the asset leased,

• the lessee is entitled to claim a capital allowance

on these leasehold improvements,

• provided the lessor includes the leasehold

improvements in his/her taxable income
 Assets Used By A Small Business
Corporation (Sec 12E)
Favourable capital allowance in respect of capital assets:

• Manufacturing assets
– 100% deduction of the cost of the asset

• Non-manufacturing assets, deduct:

– 50% of the cost of the asset in year 1
– 30% in year 2
– 20% in year 3
 Assets Used By A Small Business
Corporation (Sec 12E)
• Note that both new and used (second-hand) assets may
qualify for the section 12E capital allowance. The
taxpayer must own these assets.

• A section 12E allowance can never be apportioned,

even though the asset is only used for part of a year.

• In practice, sec 11(e) may also be used in determining

the capital allowance for non-manufacturing assets of a
SBC, if it is more beneficial to the taxpayer
 Assets Used In A Process Of Manufacture
(Section 12C)
• Special deduction on plant and machinery

• used directly in the manufacturing or similar process

by a taxpayer and brought into use for the first time

• (whether new or second hand) by the taxpayer in

his/her trade.
 Assets Used In A Process Of Manufacture
(Section 12C)
• New - 4 years = 40;20;20;20

• Used – 5 years = 20;20;20;20;20

• Never apportioned

• The taxpayer must own the manufacturing asset to be

able to claim this allowance.
 Wear and Tear Allowance – Sec 11(e)
• Movable assets used by the taxpayer, which do not
qualify for section 12C or 12E allowances

• Granted for movable assets (do not apply to structures

of a permanent nature) that are not used in a
manufacturing or similar process. However, the asset
must be used for the purposes of trade.

• Binding General Ruling (BGR) No. 7 provides the

acceptable write-off periods, in years, for a wide
range of capital assets
 Wear and Tear Allowance – Sec 11(e)
• This allowance is calculated pro rata for the period
over which the asset was in use in the year of
assessment – thus, it is only allowed as a deduction for
the number of months during which the asset was
used in the year of assessment.

• Small items costing less than R7 000 may be

written off in full during the year of purchase.
Remember to consider this when you claim a section
11(e) allowance.
 Wear and Tear Allowance – Sec 11(e)
• Company X (a registered VAT vendor) purchased one mainframe
computer on 1 August 2019 for R115 000 (VAT inclusive). The
company has a March year end and BGR No. 7 allows a five-
year write-off period in respect of these computers.

• The company also incurred R9 000 for installing the computer.

• On 1 June 2020, Company X moved the mainframe computer to

its new offices and incurred moving costs of R11 000.

• Calculate the wear-and-tear allowance on the mainframe

computers for the 2020 and 2021 years of assessment.
Wear and Tear Allowance – Sec 11(e)
 Wear and Tear Allowance – Sec 11(e) Notes

• VAT excluded on the cost price, as Company X is entitled to

claim an input tax credit on the purchase price of the
mainframe computer.

• the apportionment of the allowance only when the asset is

brought into use in the 2020 year of assessment.

• When moving costs are incurred on an asset, subject to

wear-and-tear, the moving cost forms part of the cost of the
asset and it will be written off over the remainder of the
write-off period of the asset.
 Wear and Tear Allowance – Sec 11(e)
• Moving costs of R11 000 were incurred on 1 June 2020 for a
mainframe computer purchased on 1 August 2019 (the asset
will be claimed over 5 years; thus, until 31 July 2024).
Therefore, from the date at which the moving cost was incurred,
only 50 months remained to write off the computer (1 June 2020
to 31 July 2024).

• Therefore, the wear-and-tear to be claimed regarding moving

costs will be 10/50 x R11 000 = R2 200. Because the moving
costs were incurred after the purchase date of the asset, the
allowance on the moving costs is calculated separately,
although it forms part of the cost of the asset (hence, the
deduction of a wear-and-tear allowance on the moving cost).
 Wear and Tear Allowance – Sec 11(e)
When calculating a capital allowance relating to movable
assets, you should remember:

1. first to determine the tax status of the taxpayer (small

business corporation or not),

2. then the type of asset (manufacturing or other) and

3. lastly the purchase date (for pro rata calculations, if

applicable).
 Building Allowances – Sec 13
• Buildings used in a manufacturing process or research can
also qualify for a capital allowance, but the tax-payer
must use the building in the course of his/her trade.

• A taxpayer, incurring cost (which excludes the cost of the

land, but which may include capitalised finance costs)
to erect or purchase a manufacturing building, may qualify
for an annual allowance of 5%

• Used “wholly or mainly” (more than 50%) for carrying on

a manufacturing process
 Building Allowances – Sec 13

• In terms of a lease agreement, the lessee of a building may

effect improvements to the leased property, and the cost
of these improvements may qualify for a section 13
allowance. (i.e. excess improvement costs)

• Not apportioned, even when the asset is only used for

part of the year, or is brought into use during the year.
 Deduction for commercial buildings
(sec13quin)
• Any new or unused commercial building will qualify for a
capital allowance of 5% per annum.

• If a taxpayer has acquired part of a building (without

erecting or constructing it), the allowance will be adjusted
to 55% or 30%, depending on whether it was part of a
building acquired or an improvement effected.

• No deduction will be allowed if another deduction can be

claimed
 Residential units (section 13sex)
• Any new or unused residential unit (or improvement) will
qualify for a capital allowance of 5% per annum.

• If used solely for purposes of trade, in RSA and owns > 5 units

• Additional 5% (therefore 10%) for low-cost units (R350k

apartment / R300k building & 1% monthly rental + 10% inflx)

• If a taxpayer has acquired part of a building (without

erecting or constructing it), the allowance will be adjusted to
55% or 30%, depending on whether it was part of a building
acquired or an improvement
 Sale of low-cost residential units on a
loan account (section 13sept)
• Employer sold low cost units to employees via interest-free
loan accounts at amount not exceeding actual cost

• Disposal must not be subject to conditions except selling

back to employer for amount equal or less than cost upon
termination of employment

• …or consistent failure to pay for more than 3 months

• 10% of amount owed to employer for max 10 years

• Repayments is recoupment of lesser of payment or deduction

Residential units (section 13sex) and the sale of low-cost
residential units on a loan account (section 13sept)
 Disposal of Assets

• When a business's assets (on which a capital allowance

was claimed previously) are sold, damaged beyond
repair, or removed from use, a recoupment or a
section 11(o) scrapping allowance may arise.

• Note that if an asset is sold for an amount exceeding the

original cost, a taxable capital gain may arise. This
taxable capital gain is calculated in terms of the
provisions of the Eighth Schedule to the Act
 Disposal of Assets
To summarise:

• Recoupment = Selling price > Tax value (limited to

allowances previously claimed)

• Scrapping allowance (section 11(o)) = Selling price <

Tax value

• A recoupment must be added to income and a

scrapping allowance is an allowable deduction if the
taxpayer has elected section 11(o).
 Disposal of Assets: Recoupment (sec
8(4)(a))
• If an asset is sold for an amount exceeding the tax
value (original cost price less allowances),

• the net result represents a recoupment of the taxable

allowances previously claimed.

• The recoupment (limited to allowances previously

claimed) should be included in gross income.
 Disposal of Assets: Recoupment (sec
8(4)(a))
Company B purchased a used motor vehicle for use in its
trade. The cost of the vehicle was R250 000, excluding
VAT, and wear-and-tear was claimed over four years
according to the straight-line method. The vehicle was
brought into use on 1 April 2016 and the company has a
February year-end.

Calculate the amount that will be recouped and included in

taxable income if the vehicle is sold for R280 000 on 30
June 2019.
Disposal of Assets: Recoupment (sec
8(4)(a))
 Replacement Asset: Recoupment
(sec 8(4)(e))
• When a recoupment is calculated on a manufacturing
machine and this machine is replaced by another (new
or used) manufacturing machine,

• then section 8(4)(e) offers relief to the taxpayer if the

taxpayer elects that paragraph 65 or 66 of the Eighth
Schedule should apply.
 Replacement Asset: Recoupment
(sec 8(4)(e))
• This section provides that in certain circumstances, this
recoupment will not be included in full in the year during
which the old asset is sold,

• but that the recoupment can be spread over the same

period during which the capital allowance on the
replacement asset will be claimed.

• As a result, the taxation payable on the recoupment is

effectively postponed to future tax periods
 Replacement Asset: Recoupment (sec 8(4)(e))

Company C purchased a new machine A from a registered VAT vendor for

R650 000 (excluding VAT) on 1 May 2019 and brought it into use on the
same date. This machine was destroyed in a fire on 1 January 2020 and
Company C received an indemnity payment of R480 000 from the
insurance company on 1 February 2020.

Machine A was replaced by machine B. Machine B was purchased second

hand on 1 February 2020 for R850 000 (excluding VAT) and brought into
use on the same day.

Calculate the recoupment amount that must be included in Company C's

taxable income for the year of assessment ending 31 March 2020, if
Company C elected that paragraphs 65 and 66 of the Eighth Schedule
should apply.
Replacement Asset: Recoupment
(sec 8(4)(e))
 Donations and dividends: Recoupment
(section 8(4)(k))

• Section 8(4)(k) is an anti-avoidance provision, which

means that when a company donates depreciable assets or
distributes them as a dividend,

• such donation or distribution cannot take place without a

recoupment being recognised as if the asset had been
sold.
 Leased Assets
A taxpayer can decide to rent the assets (or some of them)
needed for his/her business activities rather than to purchase
them. If this is the case, the taxpayer will be the lessee.

Three main types of expenses are related to leased assets:

• Rent paid (normally deductible according to the general

deduction formula in s 11(a))
• Lease premium (deductible i.t.o. sec 11(f))
• Leasehold improvements (deductible i.t.o. sec 11(g))
 Leased Assets - Rental paid (section 11(a)) and lease
premiums (section 11(f))

• Determine if the asset was in use for the full period for
which rent was paid. If this is not the case, you can claim
only that part of the expense that was incurred during
the period in which the asset was brought into use,

• that is, from the date at which it was brought into use
until the end of the year of assessment.
 Leased Assets - Rental paid (section 11(a)) and lease
premiums (section 11(f))
• A lease premium is effectively an “upfront payment” of
part of the rent that should be paid.

• Normally, if a person pays a lease premium, the monthly

rental he/she pays will be less than that of a person who did
not pay a lease premium.

• Lease premium is also calculated pro rata for the period

during which the asset was in use,

• that is, from the date at which it was brought into use until
the end of the year of assessment.
 Leased Assets - Leasehold improvements (section 11(g) and
(h))

• Leasehold improvements refer to a situation where the

person who is renting the premises must either build a
specific building or make certain improvements to
the building or factory he/she is leasing.
 Leased Assets - Leasehold improvements (section 11(g) and
(h))
The original cost as stipulated in the contract (but limited to
the actual cost of the improvements) must be divided by the
following period:

• the original period as determined in the contract

• minus the period from right of use until the date of

completion of improvements.

This gives the amount in respect of leasehold

improvements that can be deducted (every year) over the
term of the contract.
 Leased Assets - Leasehold improvements (section 11(g) and
(h))

If the improvements were brought into use in the current

year for less than a full year, the amount as calculated above
must be multiplied by

• the period from the date of bringing the improvements

into use until the end of the year of assessment.
 Leased Assets - Leasehold improvements (section 11(g) and
(h))

• If the taxpayer is leasing an asset to another taxpayer, the

taxpayer will then be a lessor.

• If this is the case, any rental received, lease premium

received and leasehold improvements “received” will be
deemed income in the hands of the lessor.

• Note the special allowance for lessors in terms of section

11(h) with regard to leasehold improvements.
 Leased Assets - Leasehold improvements (section 11(g) and
(h))

• On 1 August 2018, Decibel (Pty) Ltd (Decibel) entered into a lease

contract with Rentals Ltd for a period of five years, with the option to
extend the contract for another five years. In terms of the contract,
Decibel had to effect improvements on the premises to the value of R450
000. The building improvements, which commenced on 1 September
2019, were completed on 1 December 2018 and were brought into use
on 1 January 2020. The total cost of the improvements was R480 000.

• Determine the leasehold improvement amount that will be allowed as a

deduction for the year of assessment ending 28 February 2020 in
Decibel (Pty) Ltd’s taxable income calculation.
Leased Assets - Leasehold improvements (section 11(g) and
(h))
 Deductions and Allowances
1. Repairs to Factory (see capital nature: structure vs operations; enduring; permanent)

2. Insurance - Machine (see sec12C allowance 40% vs 20%)

– Indemnity Payment and Recoupment

3. Foreign Machine (see transaction vs translation vs realisation dates)

– Forex gain/loss

4. Computers (write-off period) ( for operations)

5. Research and Development (sec 11D) (150%) (50:30:20)

6. Learnership agreements (Disability; NQF) (40’/20’or 60’/50’) (Commence + complete)

 Lessons Learned

Recap
Self Assessment
1. (Q6.1 Besta)
2. (Q6.3 Whizzers)
 Next Session Prep

• Collective feedback on Questions

• Self-assessment questions