CAPITAL ALLOWANCES AND RECOUPMENTS

Section 11(a) of the Act (the general deduction formula) permits the
deduction of :
 Expenditure and losses
 Actually incurred
 During the year of assessment
 In the production of the income
 Not of a capital nature
Section 11(a) specifically states that expenditure of a capital nature is not
deductible in terms of the Act. There are two types of expenditure
namely capital expenditure and revenue expenditure. Revenue
expenditure are deductible under section 11(a).
CAPITAL ALLOWANCES AND RECOUPMENTS; REPAIRS –
Section 11(d)

• Capital expenditures are incurred to acquire non-current assets which are used by the
entity to produce income. Capital expenditure therefore creates a lasting benefit. Because
expenditure of a capital nature is not deductible in terms of the general deduction formula,
the Act does however , contain a number of sections in terms of which capital allowance
may be deducted. Capital allowance is synonymous to depreciation. Therefore capital
allowance is essentially a write-off of the cost of a capital asset over a period of time.
REPAIRS – Section 11(d)
• The cost of repairing an asset does not qualify as deduction in terms of section 11(a)
because it is of a capital nature. Section 11(d), however allows as a deduction:
 Expenditure actually incurred
 During the year
 On the repairs of property, implements, utensils and other articles used by the taxpayer for
the purposes of his trade or for beetle treatment of the timber of the property mentioned.
CAPITAL ALLOWANCES AND RECOUPMENTS;-REPAIRS
section 11(d)

• Please take note of the following in relation to repairs in terms of section 11(d) of the Act.
 The term “repairs” is note defined in the Act, but the courts came to the following conclusion
in the case of CIR v African Product Manufacturing Co Ltd, 1944 TPD)
1. A repair is a restoration by a renewal or replacement of a subsidiary part of a whole.
2. The material used need not be the same as the original material.
3. A repair is different from an improvement or renewal. Renewal is a reconstruction of the
entirety or substantially the entirety, whereas improvement is the creation of a better asset.
4. When an asset is improved the result is a better asset which possibly has an improved
earning capacity.
5. In order for an asset to be repaired, there must be damage or deterioration to part of the
original asset or structure and the intention of the taxpayer must be to restore the asset or
structure to its original condition.
REPAIRS AND IMPROVEMENTS (SECTION 11(d))
• In most cases when expenditure is incurred on an asset, taxpayers find it difficult to
allocate such expenditure as either a repair or an improvement. If an expenditure is
classified as a repair, it may be deducted immediately in full during the current year of
assessment. On the other hand if classified as an improvement it would be an expenditure
of a capital nature and the specific provisions regarding capital allowances may apply.
EXAMPLE:
Raag (Pty) Ltd incurred the following expenses during the current year of assessment ended
28th February, 2023.
R
Repairs to a leaking roof 7 500
Replacement of worn carpet (cost: R9 600) in the shop with tiles 23 000
Paving the area in front of the shop to prevent excess dust 35 000
Painting the shop interior, which was damaged due to the leaking roof 15 600
You are required to determine the expenses to be deducted:
REPAIRS AND IMPROVEMENTS (SECTION 11(d))
Example (continuous) : Solution;
R
Repairs to a leaking roof 7 500
Replacement of worn carpet (cost: R9 600) in the shop with tiles 23 000
Paving the area in front of the shop to prevent excess dust -------
Painting the shop interior, which was damaged due to the leaking roof 15 600
46 100
1. The repair to the roof is the restoration of a part of the shop.
2. Although the cost of tiling exceeds the amount that would have been spent on
replacing the carpet, it is not necessary that the materials used be identical to
the materials replaced.
3. The cost of the paving is not deductible as it was an improvement to the asset.
4. The cost of painting is deductible as it is the restoration of a part of the shop to
its original condition.
COST OF AN ASSET
The computation of the allowance is based on the cost of a depreciable asset (asset
in respect of which a deduction or allowance determined wholly or partly with
reference to the cost or value of that asset is allowable in terms of the Act for the
purposes other than the determination of any capital gain or capital loss.
The cost of an asset consists of ;
• Value-Added Tax (VAT) which cannot be claimed as input tax;
• Custom and excise duty;
• Improvements;
• Installation and erection costs;
• The cost of foundations and supporting structures;
• The cost of moving an asset from one location to the other.
But Excluding (a) Vat that is claimed as an input tax ;and (b) Finance charges
WEAR AND TEAR ALLOWANCE (SECTION 11(e)
• The cost of articles of a capital nature, owned and used by the taxpayer in his trade is not allowed
for deduction in terms of s11(a) of the Act. However, a deduction is allowed under s.11(e) if the
value of an asset has diminished as a result of wear and tear. Section 11(e) wear and tear
allowance does not apply to a special depreciation allowance under any of the following sections:
• s12B (farming equipment)
• s12C (Manufacturing plant and machinery, new research and development equipment, certain
hotel assets, ships and aircraft)
• s12DA (Rolling stock)
• s12E (manufacturing plant and equipment used by a small business corporation)
• s12U (additional deduction in respect of roads and fences in connection with the production of
renewable energy).
• s37B (environmental expenditure)
• s24D (National key points)
• Buildings or other structures or works of a permanent nature
WEAR AND TEAR ALLOWANCE (SECTION 11(e)
• Wear and tear allowance is based on COST as the Act refers to value as a criterion for the calculation
of the allowance. The implication is that it is possible to calculate wear and tear on an asset that has
no cost (eg. assets received by way of a donation, inheritance etc). Thus where a taxpayer has
acquired an asset for no consideration, wear and tear is claimable and is based on the market value
of the asset , at the date of acquisition. The rate of wear and tear is set by SARS in contrast to
depreciation which is set by the management.
• The s11(e) wear and tear allowance is ;
• The amount by which the value of any machinery, plant, implements, Utensils and articles;
• Owned by the taxpayer or acquired by him under an instalment credit agreement; and
• Used by the taxpayer for the purposes of his trade;
• Has been diminished
• By reason of wear and tear or depreciation during the year of assessment as determined by the
commissioner on the basis of the period of use listed for this purpose in a public notice issued by
the commissioner, or for a shorter period of use approved by the commissioner on application.
• Where an allowance has been granted under s11(d)-repairs, the taxpayer must take into account
the s11(d) allowance in determining the wear and tear allowance.
WEAR AND TEAR ALLOWANCE (SECTION 11(e)
• No allowance is giving for depreciation on buildings or other structures of a permanent
nature.
• Wear and tear allowance is made in respect of a foundation or supporting structure if it is
designed for an asset which qualifies for the allowance and has a similar useful life.
MOVING COST OF AN ASSET:
The value of an asset is increased by the cost of moving it from one location to the other.
Where an asset has been partly written off, the cost of moving it from one location to another
should be written off over the period left for claiming the write-off of the capital allowance.
Where the cost of an asset has been fully written off, it is submitted that the moving costs
should be fully written off.
Read on the ff:
Previous use of an asset: No quantifiable cost: Instalment credit agreement: foundation on
supporting structure.
WEAR AND TEAR ALLOWANCE {SECTION 11(e)}
Eg: Moatshe (Pty) Ltd acquired a motorcycle at a cost of R40 000 (excluding VAT) on
1 March 2021 and immediately brought it into use in its business, for the purpose
of making deliveries. It used the motorcycle for the rest of its year of assessment
ending 31 August 2021 and throughout its year of assessment ending 31 August
2022.
Calculate the wear-and-tear allowance to be claimed in the 2021 and 2022 years of
assessment.
SOLUTION
31 August 2021
Wear-and-tear allowance (R40 000/4 × 6/12 (s 11(e)) .....(R5 000)
31 August 2022
Wear-and-tear allowance (R40 000/4) ........................ (R10 000)
WEAR AND TEAR ALLOWANCE {SECTION 11(e)}
The s11(e) allowance can be claimed only on assets that do not qualify for other
allowances. The allowance can never be claimed on buildings. The s11(e) allowance
has to be apportioned for the period it was used in the taxpayer’s trade. As the Act
does not prescribe the method of apportionment, either the number of days or the
number of months used in the taxpayer’s trade during the year of assessment could
be applied.
Example: sheto (Pty) Ltd acquired a Bakkie at a cost of R40 000 (excluding VAT) on 1
March 2021 and immediately brought it into use in its business, for the purpose of
making deliveries. It used the bakkie for the rest of its year of assessment ending 31
August 2021 and throughout its year of assessment ending 31 August 2022.
Calculate the wear-and-tear allowance to be claimed in the 2021 and 2022 years of
assessment. The taxpayer elects the straight-line method. Binding General Ruling
(Income Tax) No. 7 and Interpretation Note No. 47 (which is in line with the
Commissioner’s public notice) allow a four-year write-off period on a bakkie.
WEAR AND TEAR ALLOWANCE {SECTION 11(e)}
31 August 2021:
• Wear-and-tear allowance (R40 000/4 × 6/12 (s 11(e)) .... (R5 000)
31 August 2022:
• Wear-and-tear allowance (R40 000/4) ............................ (R10 000)
ALLOWANCE IN RESPECT OF THE DISPOSAL OF ASSETS : SECTION 11(o)
The section 11(o) allowance deal with allowance on the disposal of assets at a loss. The section
provides for an allowance at the election of the taxpayer for the amount;
The cost of the “depreciable asset” (In terms of s.1 mean an asset order than trading stock for
which a capital deduction or allowance is calculated on the cost or value –allowed in terms of
the Act- for purposes other than capital gains tax in terms of schedule 8 of the Act) exceeds the
sum of the proceeds from the alienation, loss or destruction and the amount of capital
allowance allowed up to date of disposal.
The cost of the asset is the actual cost plus any cost of moving the asset from one location to
another.
NOTE: The allowance does not apply if;
• The asset is sold to connected person to the taxpayer or
• The expected useful life of the asset for tax purposes exceeds ten years calculated from date
of acquisition.
The allowance is claimable on the following assets which qualify for an allowance or deduction
in terms of the listed sections below:
ALLOWANCE IN RESPECT OF THE DISPOSAL OF ASSETS : SECTION 11(o)

• Implements, Utensils and articles (With a useful life not exceeding ten years)
• Research and development (section 11D)
• Farming equipment (section 12B)
• Plant and machinery (section 12C)
• Rolling stock (section 12DA)
• Small business corporation assets (section 12E)
• Environmental expenditure (section 37B)
Note: This allowance is not applicable to land and buildings
The deduction used to be called “scrapping allowance”, but now it can be claimed
even if an asset is not scrapped. The asset however must be disposed off, that is to
say; sold, given away or thrown away before the taxpayer will qualify to claim the
allowance.
ALLOWANCE IN RESPECT OF THE DISPOSAL OF ASSETS : SECTION 11(o)

Kumbi Limited ,a registered vendor purchased a second-hand manufacturing plant for R690 000
on 1 January 2020 (inclusive of vat at 15%). The machine was sold on 30 th November 2021 for
R276 000 (Excluding Vat) because it was developing series of faults. You are required to
calculate the allowance on the sale of the plant for the current year of assessment ended 28
February 2022. A 4 year write-off was allowed by SARs.
Solution:
Cost………………………………………………….........R690 000
Less VAT at 15% (690 000 *15/115)………… (R 90 000)
R600 000
W & T allowance: year ended 28 Feb. 2020 =600 000 * 25/100 *2/12 =R25 000
W & T allowance: Year ended 28 Feb. 2021=600 000*25/100*12/12 =R150 000
W & T allowance: Year ended 28 February 2022=600 000*25/100*9/12=R112500
Tax value =R600 000-R25 000-R150 000-R112 500=R312 500
Section 11(o)=R276 000-R312 500 =(R36 500)
ALLOWANCE IN RESPECT OF THE DISPOSAL OF ASSETS : SECTION 11(o)

Note the following:

The taxpayer must elect that the provisions of section 11(o) will apply.
The section 11(o) is only available to assets that have been alienate, lost or
destroyed but not available to assets merely removed from the production
process.
The allowance is not available if the asset was never used.
The disposal and claim for the allowance must occur in the same year. Therefore
if the disposal occurred in the previous year or it has not occurred, the allowance
will not be available.
The section 11(o) is based on cost. Thus if an asset was originally acquired for no
consideration and subsequently disposed off at a loss, the taxpayer cannot claim
any s 11(o) allowance.
SPECIAL DEPRECIATION ALLOWANCE: SECTION 12C ALLOWANCE

The section 12C allowance provides for a special depreciation allowance in respect of
the following new or used assets that are owned by the taxpayer (lessor) or were
acquired by him in terms of an instalment sale agreement and were brought into use
for the first time by the taxpayer.
The allowance is applicable to the following assets:
• Industrial machinery or plant (after 15 December 1989)
• Industrial machinery or plant used under a supply agreement in the Automotive
industry (years of assessment ending on or after 1 January 2016)
• Agricultural co-operatives (after 15 December 1989)
• Hotelkeepers (after 15 December 1989)
• Machinery or plant used for research and development purposes (on or after 1
October 2012 but before 1 October 2022)
• Aircraft and ship (on or after 1 April 1995)
• Improvement to any of the above assets
SPECIAL DEPRECIATION ALLOWANCE: SECTION 12C ALLOWANCE

• Section 12C is not available for an asset that is let, unless the asset is let under an
‘operating lease’ as defined in s 23A(1) or the asset is let under any other lease and the
lessee under the lease derives income (as defined in s 1) in the carrying on of his trade
(s12C(3)(a)).
• If a taxpayer qualifies as a small business corporation, allowances on manufacturing plant
and machinery can be claimed under the provisions of s12E(1).
FOUR YEAR WRITE-OFF:
In terms of the s12C special depreciation allowance, a four-year write-off is granted in
respect of the cost of any new or unused machinery or plant owned by the taxpayer if such
machinery or plant was;
-Acquired and brought into use by the taxpayer on or after1 march 2002, in a process of
manufacture or a similar process carried on in the course of the taxpayer’s business.
The allowance is;
• 40% on the cost of the asset in respect of the first year in which the machinery or plant is
first brought into use.
SPECIAL DEPRECIATION ALLOWANCE: SECTION 12C ALLOWANCE
• 20% in each of the subsequent three years
Allowance (new and unused manufacturing assets) = Cost ×40%/20%/20%/20%
FIVE-YEAR WRITE-OFF:
In all circumstances in which the section 12C asset does not qualify for the four-year write-off,
the write-off period is five years, i.e per annum.
Allowance (all other assets) = Cost × 20% per year. The s 12C allowance will normally be 20%
of the cost of the asset or improvement to the taxpayer in each year for five years.
Example: Pumva Ltd has a 31 march 2021 year-end. It carries on a printing business (process
of manufacture). On 1 November 2020 it purchases and brings the following into use:- New
printing machine at a cost of R6 000 000
-Second-hand binding machine costing R1 600 000.
The s12C allowance for the year is;
Printing machine, R6 000 000 * 40% =R2 400 000
Binding machine R1 600 000 * 20% =R320 000
.
SPECIAL DEPRECIATION ALLOWANCE: SECTION 12C ALLOWANCE
The accelerated allowance (40:20:20:20) is not available where the asset is let.
• The accelerated allowance applies only to new or unused machinery or plant (and is
therefore not available to an aircraft and a ship).
• The 20% rate applies to both new and used assets (including aircrafts and ships).
• The s 12C allowance is not apportioned, but can be claimed in full, if the asset was used for
any period of time in the required manner during a particular year of assessment.
• The total deductions allowed under ss 12C and 11(o) (the alienation, loss or destruction
allowance) can never exceed 100% of the cost.
• The s 12C allowance is only available if the asset is brought into use for the first time by the
taxpayer (or his lessee, where applicable). This requirement prevents a taxpayer from
claiming the s 12C allowance twice on the same asset.
• If a taxpayer brings the same asset into use in a process of manufacture for the second time,
the taxpayer may not claim s 12C again, but may apply the s 11(e) wear-and-tear allowance.
• Any improvement to a s 12C asset is treated as a ‘new asset’ in that it is written off from the
time that the improvements are first brought into use.
SPECIAL DEPRECIATION ALLOWANCE: SECTION 12C ALLOWANCE
Example: Section 12C: 20% and 40% allowances, moving and installation cost:
• Kan CC acquired Machine A (a second-hand machine) for R1 500 000 and
brought it into use in its manufacturing process on 10 January 2016.
• Kan CC acquired a new manufacturing Machine B for R3 000 000 and brought it
into use in its manufacturing process on 15 December 2018. Kan CC spent an
additional R50 000 on installation expenditure for Machine B.
• Kan CC decided to move to another site and both machines were moved on 15
July 2019 at a cost of R10 000 for Machine A and R60 000 for Machine B (both
amounts not claimable under s 11(a)).
• Calculate the allowances that Kan CC may claim under s 12C in its years of
assessment ending at the end of June 2019, 2020, 2021 and 2022 (ignore VAT).
SPECIAL DEPRECIATION ALLOWANCE: SECTION 12C ALLOWANCE

• SOLUTION
Year ended 30 June 2019:
Machine A:
• s12C allowance (20% of R1 500 000 – 20% as a second-hand machine) =(R300 000)
Machine B:
• Section 12C allowance (40% of (R3 000 000 + R50 000 (installation cost
included)) (new and unused) – the allowance is granted in full even though the
machine was used for only part of the year) .........................................=(R1 220 000)
Year ended 30 June 2020
Machine A:
Section 12C allowance (20% of R1 500 000, plus R10 000 (moving cost – as
Machine A is written off in full in the 2020 year, the full amount will be claimed)) ....
(R310 000)
SPECIAL DEPRECIATION ALLOWANCE: SECTION 12C ALLOWANCE

• Machine B:
• Section 12C allowance (R610 000 (20% of R3 050 000) plus R20 000 of R60 000 –
the moving cost is deductible in equal instalments over the remaining years over
which the s 12C allowance is to be claimed, thus three years) =(R630 000)
• Year ended 30 June 2021, 2022
Machine B:
• Section 12C allowance (R610 000 (20% of R3 050 000) plus R20 000
• of R60 000) =(R630 000)

NOTE: The s 12C allowance for a year of assessment can be claimed in

full (thus no apportionment), even if the asset was used for only a few
days in the taxpayer’s trade.
SPECIAL DEPRECIATION ALLOWANCE: SECTION 12C ALLOWANCE

The cost of an asset for the purposes of s 12C is the lesser of the actual cost to the
taxpayer to acquire that asset, or the direct cost under a cash transaction
concluded at arm’s length on the date on which the purchase transaction was
concluded (market value),
Including
the direct cost of installation or erection of the asset (also shipping and delivery
charges)
– cost of foundation/supporting structure
– moving cost
but excluding
interest and finance charges.
CAPITAL ALLOWANCE : PROCESS OF MANUFACTURE:

The term “process of manufacture” is not defined in the Act, but various court
cases have laid down the following guidelines:
• The process must be a complete process. That is to say, it must be continuous,
without a break which would indicate the end of the process.
• There must be an essential change from the material introduced into the process
to the end product.
• The process need not produce the end product as long as it contributes towards
the finished product and provided it is an essential or important stage in the final
production of that end product.
Read on the following in the textbook: Page 183-184, 2021 ed.
The case of SIR v Safranmark (Pty) Ltd (1982 AD)
The Case of CIR v Stellenbosh Farmers Winery Limited (1988 AD).
The case of Automated Business Systems (Pty) Ltd (1986 TPD)
Read page 185 : “Similar process of manufacture”
BUILDING ALLOWANCE: Section 13(1) –PURCHASED INDUSTRIAL / FACTORY BUILDINGS

• This allowance is calculated on the cost to the taxpayer of a building or improvements.

Take note of the following in calculating the cost:
• If a taxpayer acquires a building without giving any consideration (for example by donation or
inheritance), he is not entitled to the allowance, since he incurred no cost.
• The portion of interest and other expenditure relating to any part of a building that has been
brought into use or is available for letting is deductible under s 24J(2).
• In practice, SARS considers that the cost of a building for purposes of s 13 excludes
– the cost of clearing and levelling the site preparatory to construction
– the cost of excavations, and
– the cost of external paving and fencing.
Only the cost of a building qualifies for the allowance; a lump sum consideration paid for both a
building and the land on which it stands, will have to be apportioned.
Improvements to any building will qualify for the allowance (s 13(1)(f )).
The section 13 annual allowance is calculated as 5% on the cost of the building and it is not apportionable.
In the case of a purchased building, the allowance is claimable on the cost of the building for the purchaser
but not on the original cost.
BUILDING ALLOWANCE: Section 13(1)
No wear and tear may be claimed on the cost of buildings as they are permanent structures. No scrapping
allowance per s11(o) may be claimed on the buildings when they are demolished. The Income Tax Act however,
has a number of provisions in terms of which a taxpayer may claim an annual allowance on the cost of buildings:
When will s 13 be applicable?
Section 13 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 s 13(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 (or tenant or subtenant if the building was let) during the year of assessment for
trade purposes (other than mining or farming) for a process of manufacture, research and development (as
defined in s 11D or similar process).
• ‘Wholly or mainly’ used:
The buildings should be ‘wholly or mainly’ (more than 50%) used for a qualifying purpose. In practice,
SARS requires more than 50% of a building, measured either by floor space or by volume, to be used
for qualifying purposes for a process of manufacture, research and development (as defined in s 11D or similar
process).
CAPITAL ALLOWANCE & RECOUPMENT: URBAN DEVELOPMENT ZONE ALLOWANCE(UBZ)
S13quat.

• When will s 13quat be applicable?

• The section is available to owners or lessors who bring neglected or obsolete
properties in demarcated areas (as published by the Minister of Finance in the
Government Gazette) in certain municipalities back onto the market.
• The section was inserted into the income tax Act at the end of 2003. The aim of this
incentive is to encourage the private sector to embark on urban and inner city
renewal and revival. Taxpayer who take advantage of this incentive will be entitled
to one of the following capital allowances, based on the cost of them or
refurbishment.
• Refurbishment of existing building: 20% straight-line depreciation allowance over a
5-year period (where the existing structural or exterior framework is preserved).
Any incidental extension or addition is acceptable.
• Construction of new buildings and extension of existing buildings: 11-year write-off
period (20% in the first year and 8% per annum thereafter for the next 10 years.
CAPITAL ALLOWANCE & RECOUPMENT: URBAN DEVELOPMENT ZONE ALLOWANCE(UBZ) S13quat.

If the taxpayer purchased the building from a developer, he will only qualify for the
urban development zone building allowance (s 13quat) if
• the contract for the sale was concluded on or after 8 November 2005
• the developer did not claim the allowance under s 13quat, and
if it is an improvement, the developer should incur expenditure in respect of those
improvements that is equal to at least 20% of the purchase price of the taxpayer in
respect of the building or part thereof (s 13quat(2)(d)).
The allowance will no longer be available if a building
• ceases to be used solely for the purposes of trade
• was disposed of in the previous year of assessment, or
• was brought into use after 31 March 2021 (s 13quat(5)(c)).
• The erection or improvements should commence on or after the date of
publication of a notice in the Gazette declaring the area as an urban development
zone to qualify for this allowance.
CAPITAL ALLOWANCE & RECOUPMENT: URBAN DEVELOPMENT ZONE
ALLOWANCE(UBZ) S13quat.

General rule:
Allowance (construction) = Cost × 20% year 1 (and 8% for next 10 years) and Allowance
(improvements) = Cost × 20% per year.
This section provides an accelerated depreciation allowance on the cost of the buildings. The
allowance depends on whether the building was
• erected or extended (construction), or
• improved (refurbishment).
The cost on which the allowance is calculated depends on whether the allowance is claimed by
• the developer, or
• by a taxpayer buying directly from the developer.
Where a new building is erected, or an existing building is extended (construction), the
allowance is calculated as
• 20% of the cost of the erection or extension in the year in which the building is brought into
use, and
• 8% in each of the following 10 years (s13quat(3)(a)).
CAPITAL ALLOWANCE & RECOUPMENT: URBAN DEVELOPMENT ZONE ALLOWANCE(UBZ)
S13quat.

• If the building is a ‘low-cost residential unit’ as defined in s1 this allowance will be available for the building,
part thereof or improvement thereto, brought into use on or after 21 October 2008 and will be allowed as
follows:
Where a new building is erected, or an existing building is extended, the allowance is
– 25% of the cost of the construction in the year brought into use, and
– 13% in the following five years and 10% in the last year (Year 7) (s 13quat(3A)(a)).
Where an existing building, or part of that building, is improved, the allowance is
– 25% of the cost of the improvement in the year brought into use, and
– 25% in each of the succeeding three years (s 13quat(3A)(b)).
• The cost of an asset for s 13quat is the cost actually incurred for erecting, adding to or
improving a building
including
• the cost of demolishing existing buildings
• excavating land, and
• cost of structures providing certain services (water, power, parking, drainage,
security, waste disposal and access to the building but excluding
• interest and finance charges (s 13quat(1)).
CAPITAL ALLOWANCE & RECOUPMENT: URBAN DEVELOPMENT ZONE
ALLOWANCE (UBZ) S13quat.
• Allowance (construction) = Cost × 20% year 1 (and 8% for next 10 years) and
• Allowance (improvements) = Cost × 20% per year.
This same allowance will be available if a building or a part of a building in an urban
development zone was purchased from the developer, but the cost will be limited as follows
55% of the purchase price if the building or part of the building purchased was erected or
extended by the developer (construction), and
30% of the purchase price if the building or part of the building purchased was improved by
the developer.
Example:
On 30 June 2020, Zone (Pty) Ltd completed the erection of a new building in an urban
development zone at a total cost of R3 500 000, and immediately brought it into use. Calculate
the allowances for Zone (Pty) Ltd on the building for the years of assessment ending on 28
February 2021 and 28 February 2022.
SOLUTION:
2021: R3 500 000 × 20% (s 13quat(3)(a)) .... (700 000)
2022: R3 500 000 × 8% (s 13quat(3)(a)) .......(280 000)
CAPITAL ALLOWANCE & RECOUPMENT: Deduction in respect of certain residential unit-S 13sex

Section 13sex provides that where a taxpayer acquires a residential unit or an

improvement to a residential unit on or after 21 October 2008, or commences the
erection of a residential unit which he intends to keep on or after that date, a 5%
residential allowance may be claimed by the taxpayer, provided the requirements
of the section are meet:
Requirements;
1. The residential units must be new and unused. It cannot be second-hand.
2. If the allowance is to be claimed only on an improvement, then only the
improvement needs to be new and unused
3. The taxpayer must own the unit. Therefore the allowance cannot be claimed on
an improvements made to property that the taxpayer occupies as tenant.
4. The unit or improvement must be used by the taxpayer solely for the purposes
of a trade which he carries on.
5. The unit must be situated in south Africa
6. The taxpayer must own at least 5 residential units
CAPITAL ALLOWANCE & RECOUPMENT: Deduction in respect of certain residential unit-S
13sex

Residential allowance:
The allowance is claimable annually until the full cost is written off.
Low-cost residential unit’ is defined in s 1 as:
A stand-alone unit (a building qualifying as a residential unit located in
SouthAfrica) with a cost of R300 000 or less (excluding the cost of land and bulk
infrastructure), and on which the owner does not charge a monthly rental of
more than 1% of that cost or
An apartment (qualifying as a residential unit in a building located in South Africa
with a cost of R350 000 or less, and on which the owner does not charge a
monthly rental of more than 1% of that cost. If the unit is sold, the allowance on
that unit stops. The annual allowance is as follows;
• Normal residential unit: 5%
• Low-cost residential unit: 10%
CAPITAL ALLOWANCE & RECOUPMENT: Deduction in respect of certain residential
unit-S 13sex

On 15 January 2021, TDK (Pty) Ltd bought six brand new flats in a residential
building directly from the developer at a total cost of R650 000 each. All of these
residential units were rented out, effective from 1 February 2021. Calculate the
allowances for TDK (Pty) Ltd on the flats for the year of assessment ending on 31
October 2021.
SOLUTION : 2021: Section 13sex applicable (more than five units owned and used
in trade in South Africa) (R650 000 x 6 units) × 55% (as a part is required from a
developer (s 13sex(8)) = cost of R2 145 000 × 5% (s 13sex(1)) (the full allowance
allowed, although only used for a part of the year) ………….(R107 250).
Low-cost residential units on loan account (s 13sept)
When will s 13sept be applicable?
Employers are moving away from leasing low-cost employer-owned residential units
towards the selling of residential units to employees. Employers will be allowed tax
relief under s 13sept for the sale of employer-provided low-cost residential units to
employees or employees of associated institutions (as defined in the Seventh
Schedule)), in a year of assessment ending on or before 28 February 2022, via an
interest-free loan.
The deduction seeks to provide relief to the employer for the provision of an interest-
free loan to the employee and is applicable to any disposal on or after 21 October
2008.
The deduction = 10% of the outstanding loan amount at year-end.
The deduction is not allowed if any one of the following applies;
1. The disposal is subject to any condition
2. The employee has to pay interest to the employer
3. The employee buys the unit for more than what it cost the taxpayer
Low-cost residential units on loan account (s 13sept)
Recoupment:
• This section contains its own internal recoupment provision, which
applies if any outstanding amount on the loan account of the
employee, is paid back to the employer. This deemed recoupment will
be
• The lesser of the amount repaid on the loan by the employee, or
• The amount claimed in the current or any previous year (under s
13sept) that was not yet recouped or recovered in a previous year (s
13sept(4)).
CAPITAL ALLOWANCE & RECOUPMENT: Low-cost residential units on loan accounts s13 sept

• On 31 October 2018, Khumbelo Ltd commenced with the erection of a low-cost

residential unit for purposes of selling it to an employee. Khumbelo Ltd incurred a
total cost of R150 000 for the erection of the unit. On 1 December 2018 this unit
was sold to one of their employees for R125 000. The employee is required to pay
R25 000 in cash up front and the remaining R100 000 is incurred via an interest-
free loan account from Khumbelo Ltd. The employee repaid R15 000 in 2019,
R12 500 in 2020 and made no repayment in 2021.
• Calculate the allowances or recoupments for Khumbelo Ltd on the residential unit
for the years of assessment ending on 31 December 2018 to 2021.
• SOLUTION
• 2018: R100 000 × 10% (s 13sept(2)) (the full allowance allowed,
although only used for a part of the year) ....................(R10 000)
CAPITAL ALLOWANCE & RECOUPMENT: Low-cost residential units on loan accounts
s13 sept
• 2019: Allowance on the outstanding loan balance: R100 000 – R15 000 =
• R85 000 × 10% (s 13sept(2)) .........................................................................................................................(R8 500)
• Recoupment of R15 000 repayment – since allowances claimed to date
• equals R18 500, full repayment recouped (s 13sept(4)) ..............................................................................R15 000
• 2020: Allowance on the outstanding loan balance:
• R85 000 – R12 500 = R72 500 × 10% (s 13sept(2)) .......................................................................................(R7 250)
• Recoupment: Allowances claimed and not yet recouped = R3 500 (allowances
• of R10 000 (2018) and R8 500 (2019) of which only R15 000 has
• already been recouped) + R7 250 = R10 750 – thus the recoupment is the
• lesser of: the repayment of R12 500 or the previous allowances not yet
• recouped, namely R10 750 (The difference: R12 500 – R10 750 = R1 750
• will be carried forward for possible recoupment in 2021) (s 13sept(4)) ......................................................R10 750
• 2021: Allowance on the outstanding loan balance: R72 500 × 10% (s 13sept(2)) ...................................... (R7 250)
• Recoupment: Allowances claimed and not yet recouped of R1 750 (from
• 2020) carried forward for recoupment in 2021 (limited to the lesser of
• repayment made and not yet recouped (R1 750) or amounts previously
• claimed as allowances (R7 250)) .................................................................................................................. R1 750
 CAPITAL ALLOWANCE & RECOUPMENT : General recoupment provisions-s8(4)(a)
The sale of capital asset results in a capital receipt or accrual. Where the allowances
which reduced the assets tax value were previously allowed and the asset is subsequently
sold for a price in excess of its tax value, the difference between the selling price (up to a
maximum of the original cost) and tax value is a taxable recoupment (recovery) of the
deductions previously claimed. In terms of s8(4)(a) such recoupments are included in the
taxpayer’s income, unless the special provision of s8(4)(e) apply.
It is important to remember that the recoupment is taxable in one sum in the year in
which it occurs.
• A recoupment of allowances can also result from a receipt of money
derived from an insurance company representing compensation received
upon the destruction of the asset by fire or some other hazard
• If the taxpayer disposes of an asset for consideration which cannot be
quantified in terms of s 24M, the amount of the recoupment should be taken
into account in the years of assessment when the consideration becomes
quantifiable (s 24M(3)).
CAPITAL ALLOWANCE & RECOUPMENT : General recoupment provisions-s8(4)(a)

Example:
Short Lived (Pty) Ltd ceased manufacturing operations on 30 June and sold or ceded the
following assets to Better Equipped Ltd:
Amount realised Book value: Proceeds CA/Tax Value
• Land and factory buildings (note 1 of solution) R6 000 000 R4 000 000
• Trade marks (acquired at no cost)…………………….R1 000 000 nil
• Machinery and plant ..........................................R2 500 000 900 000
• Motor vehicles ...................................................R 200 000 150 000
• Office furniture and fittings………………………………R 250 000 300 000
• Trading stock ......................................................R3 000 000 2 500 000
COST
• Debts due (all recoverable) (note 5 of solutn ....R1 500 000 1 700 000
• (face value)
• Leasehold land and buildings .............................R2 500 000 1 800 000
CAPITAL ALLOWANCE & RECOUPMENT : General recoupment provisions-s8(4)(a)

Short Lived (Pty) Ltd rendered accounts from 1 January to 30 June covering the six
months’ trading to the date of cessation of business. These accounts showed a taxable
profit of R1 000 000 before the following transactions were taken into account. Further
information about assets are as follows:
Land and factory buildings:
The original cost was R5 000 000. Over the years the company wrote off R1 000 000
depreciation in its books but no allowance for wear and tear in terms of the proviso to s
11(e) was permitted. The buildings did not qualify for the annual allowance in terms of s
13.
Machinery and plant, motor vehicles, office furniture and fittings:
• The income tax values are the same as the book values. The following allowances have
been permitted so far:
• Section 12C allowance on manufacturing assets ....................... R1 100 000
• Wear-and-tear allowances: Motor vehicles ...................... R 170 000
• Wear-and-tear allowances: Office furniture and fittings ............R 100 000
CAPITAL ALLOWANCE & RECOUPMENT : General recoupment provisions-s8(4)(a)

Leasehold land and buildings:

The book value of R1 800 000 represents a cash premium of R500 000 paid for the right of use, plus R1 300
000 expended on buildings that Short Lived (Pty) Ltd was forced to erect on the hired land. So far, R100 000
in terms of s 11(f) for the premium, and R250 000 in terms of s 11(g), for the improvements, have been
allowed.
• Calculate the taxable income of the company on the assumption that it received no other income for the
remaining six months of the year of assessment. (Capital gains tax can be ignored in the calculation of
taxable income, but will be mentioned for the sake of completeness.)
• SOLUTION:
Taxable profit (in accounts) ........................................................ R1 000 000
Add: Recoupment of s 12C allowance on machinery and plant:
Proceeds of sale .......................................................R2 500 000
• Less: Income tax value ............................................. (900 000)
• Profit ........................................................................R1 600 000
• NB: Recoupment limited to allowances claimed (N.6)1 100 000
-Or recoupment = R2 000 000 – R900 000 = R1 100 000)
Balance of profit, R500 00 is of a capital nature.
 CAPITAL ALLOWANCE & RECOUPMENT: S.8(4)(a)-solution to example

Add: Recoupment of wear-and-tear allowances on motor vehicles

• Proceeds of sale ....................................................................................... R200 000
• Less: Income tax value .............................................................................. (150 000)
• Recoupment (note 6) ................................................................................................. R50 000

Add: Difference between realised value of trading stock and its cost (R3 000 000
(gross income) less R2 500 000 (s 22)) (note 3) ..........................................................R500 000
Add: Recoupment of allowances made on leasehold land and buildings
• Proceeds of cession of rights .................................................. R2 500 000
• Less: Income tax value (R1 800 000 less R350 000) ................ (1 450 000)
• Profit ........................................................................................ R1 050 000
• Recoupment limited to total allowances granted (note 6) ....................................... 350 000
• (Or recoupment = R1 800 000 – R1 450 000 = R350 000)
• Balance of profit, R700 000, of a capital nature
• Taxable income ................................................................................................ .....R3 000 000
CAPITAL ALLOWANCE & RECOUPMENT: S.8(4)(a)-solution to example
• Notes
(1) The profit on the sale of land and factory buildings of R2 000 000 is a capital profit, and since no
wear-and-tear allowances or annual allowance have been granted on this asset, there is no taxable
recoupment in terms of s 8(4)(a).
(2) The amount realised for the trade marks is a receipt of a capital nature.
(3) A profit on the sale of trading stock is taxable, despite the closing down of the business.
(4) The loss of R50 000 (R250 000 – R300 000) on the sale of office furniture and fittings has not
been allowed in the example, being a loss of a capital nature. The allowance under s 11(o),
does not apply when the asset is disposed of on the total abandonment of trading operations,
since they are no longer carrying on a trade (requirement in first part of s 11 not met).
(5) The loss on the sale of the debts due is not allowed, since it is not a loss incurred in
the production of income. (If the company did not cease trading and did not sell the debts to
the purchaser but retained them, any bad debts incurred in later years would be allowed as
a deduction from trade income in those years.)
(6) The profits derived from the sale of the plant and machinery, motor vehicles and the lease
are of a capital nature. Remember, however, the recoupment of allowances previously made
Recoupments: Disposal of an asset to a connected person
On 1 October 2021, Fast Ltd (with an October year-end) sold a manufacturing machine
to Slow (Pty) Ltd (its 100% subsidiary) at R1 500 000 (when market value was R1 800
000). Fast Ltd originally acquired the new machine for R3 000 000 on1 March 2020.
Calculate all the tax implications of the disposal of the machine for Fast Feathers Ltd for
the 2021 year of assessment.
Recoupment in respect of sold machinery under s 8(4)(a):
Proceeds) in terms of s 8(4)(k))…………………………………………………R1 800 000
• Less:({R3000000 *40%} +{3000 000*20%}=1200000+600000)
Tax value : R3000000-R1 200 000-R600000= (R1 200 000)
• (R3 000 000 – R1 200 000 (R3 000 000 × 40%(s 12C – 2020))= R 600 000
(R3 000 000 × 20% (s 12C – 2021 (allowance)) = R600 000
Allowance (s 12C) ........................................................................ (R600 000)
Recoupment ..................................................................................R600 000
DEFERMENT OF RECOUPMENT-Section 8(e),8(eA) to 8(eE)

Prior to its amendment in 2003, Section 8(4)(e) provided that a recoupment arising
from the damage or destruction of assets could be set off against the cost of a new
replacement asset rather than be included in income.
In terms of the amended s 8(4)(e), a recoupment may in certain circumstances not
be included in income in the year in which it arises. The recoupment is then dealt
with in subsequent years in terms of the provisions of s8(4)(eA) to (eE). This means
the recoupment is deferred. In terms of s 8(4)(e), a recoupment on the disposal of
an asset will not be included in income where the taxpayer has made an election in
terms of para 65 or 66 of the eight schedule.
When will s 8(4)(e) be applicable?
Section 8(4)(e) will be applicable if a taxpayer has replaced one asset with another
asset (the replacement asset), and has elected that paragraph 65 (that deals with
involuntary disposal) or paragraph 66 (that deals with reinvestment in replacement
assets (all of which are depreciable)) of the Eighth Schedule applies in respect of
that disposal.
DEFERMENT OF RECOUPMENT-Section 8(e),8(eA) to 8(eE)
• The most important requirement (other than the fact that the full proceeds
should be reinvested in the replacement asset(s)) that needs to be met before
either of paragraphs 65 or 66 of the Eighth Schedule can be elected is that;
proceeds = base cost
OR
proceeds > base cost on disposal of the asset.
What will the implications be if s 8(4)(e) is applicable?
• Amounts recovered or recouped by the taxpayer upon the disposal of an asset will
not be included in his income, but will be deferred (under s 8(4)(eA)–(eE)).
• The deferral in terms of s 8(4)(e) takes preference over the provisions of s 8(4)(a),
which would have deemed the full recoupment to be included in income in the
year of assessment of the disposal of the asset.
• Amounts recovered or recouped by the taxpayer upon the disposal of an asset will
not be included in his income, but will be deferred (under s 8(4)(eA)–(eE)). The
deferral will be treated as follows:
DEFERMENT OF RECOUPMENT-Section 8(e),8(eA) to 8(eE)
• The deferral will be treated as follows:
The treatment of the deferral of the recoupment will depend mainly on the type
of replacement asset that is acquired:
If the replacement asset is a ‘depreciable asset”(pars 66 of the 8thschedule
• The recoupment on the original asset is spread and included in income over the
same period as the deduction or allowance is claimed on the replacement asset.
This is calculated by apportioning the recoupment allocated to the replacement
asset in the same ratio as the amount of the deduction or allowance in that year
bears to the total amount of the deductions or allowances claimable for the
replacement asset for all years of assessment (s 8(4)(eB)).
-If the replacement asset is not a depreciable asset:
• The recoupment is deferred until the replacement asset is disposed of and the
full recoupment is then included in income. This will only be applicable if the
taxpayer has elected to apply the provision of paragraph 65 of the Eighth
Schedule (involuntary disposals).
DEFERMENT OF RECOUPMENT-Section 8(e),8(eA) to 8(eE)
EXAMPLE :Recoupments: Deferred recoupment of allowances:
• During the 2021 year of assessment, Diverse Ltd’s plant and
machinery was destroyed in a fire. The plant and machinery qualified
for the accelerated s 12C allowance. The company was insured, and
received an insurance payment of R1 800 000 in the same year of
assessment. The amount was immediately used to fund the
acquisition of a new, similar plant and machinery for R2 000 000. The
recoupment of allowances (under s 8(4)(a)) on the destroyed plant
amounted to R700 000. Diverse Ltd’s year of assessment ends on the
last day of February.
Calculate the allowances and recoupments with regard to the above if
Diverse Ltd elected the application of par 66 of the Eighth Schedule
(ignore capital gains tax implications and VAT).
DEFERMENT OF RECOUPMENT-Section 8(e),8(eA) to 8(eE)
• SOLUTION
• Year ending 28 February 2021
Section 12C allowance on new plant and machinery………………………………………….R800 000
(40% × R2 000 000)
Recoupment in respect of destroyed plant and machinery – deferred in accordance to allowance
on new asset
R700 000 × R800 000/R2 000 000 (or R700 000 × 40%) ........................................R280 000
Years ending 28/29 February 2022, 2023 and 2024:
Section 12C allowance on new plant and machinery purchased in 2021
(20% × R2 000 000) ...........................................................................................(R400 000)
Recoupment in respect of destroyed plant and machinery – deferred in
accordance to allowance on new asset
R700 000 × R400 000/R2 000 000 (or 20% × R700 000) ................................... R140 000

UNQUANTIFIABLE AMOUNTS-Section 24M:

Refer to textbook page 205/6 (Notes on South African Income Tax, 2022)
LEASE PREMIUMS-SECTION 11(f)
A lease premium has been held by the court in the case of CIR v Myerson 1947 to be :
• A consideration having an ascertainable monetary value
• Paid by a lease to a lessor
• In addition to or in lieu of rent
• In summary, a lease premium is an amount, with a specific money value, paid by a lessee
to a lessor for the use or right of use of an asset which is separate from and in addition to,
or an alternative to, rent paid (Interpretation Note No. 109 (issued on 7 February 2019.)
• The person receiving the premium is obliged to include in his gross income the full
premium in the year of its receipt or accrual (par (g) of the definition of the term ‘gross
income.
• In calculating the s 11(f ) allowance the following should be remembered:
-The allowance will be apportioned taking into account the period during the year of
assessment it was used for the production of income or from which income is generated.