Capital

allowances

Learning Unit 6
Sections that may be ignored

– 5.6
– 5.7
– 5.11
– 5.12.4
– 5.13.2
– 5.13.3
– 5.13.6
– 5.14
– 5.15
– 5.16
Where are we in process?
S11(d) - Repairs

– Repairs are allowed as a deduction.

– Improvements are not deductible and may be capitalised into
the cost of an asset and written off in terms of the capital
allowances section.
– Repairs are needed mainly owing to damage to or
deterioration of capital assets and the intention of the
taxpayer is to restore the assets to its original condition,
whereas an improvement is the creation of a better asset.
– A taxpayer may use a different material to repair an asset (for
example, replace a damaged tin roof with a tiled roof), it
remains a repair
– Consider if:
– The asset has been enhanced (increase income-earning
condition)
– There is something there now that was not there before
 Terminology

Accounting Taxation

Depreciation Wear and tear or capital allowance

Carrying value Tax base or tax value

Profit on sale of asset Recoupment

Loss on sale of asset Scrapping allowance/ loss

Overview

Lease
Obtain Moveable
Capital Acquire
assets Immoveable
Income tax
Disposal
and CGT
 Steps to follow:
Steps to follow Calculation to perform
1) Remove VAT (if applicable) from Selling price
Use VAT rules to calculate the VAT correctly
and costs
This includes all costs to bring the asset to a
2) Calculate cost
state that it will be used in

3) Calculate the allowance that is applicable for Cost x rate applicable for that particular asset
the current year of assessment

4) Calculate the tax base of the asset Cost – cumulative allowances

5) Calculate the recoupment or scrapping loss

that needs to be included in the taxable ((< Selling price or cost price) - tax base)
income calculation

6) Decide what to do with recoupment or loss

7) Calculate the capital gain/ loss (Proceeds – base cost) (SU 7)

SP will be replaced with MV and insurance proceeds where applicable

The VAT effect on acquisition

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 will calculate the capital allowances on the
cost including VAT.

If transaction is a instalment credit agreement (Finance lease or suspensive sale) – VAT is

removed up front and thus the LESSEE claims the instalment or rental as a deduction as
follows:
• Instalment inclusive of VAT – (VAT input claimed upfront X (instalment for the period /total instalments))

If transaction is not a instalment credit agreement: VAT is removed per the VAT fraction
off each payment
Example

– A Ltd, a registered vat vendor, bought the following assets:

– A truck for R115,000 from a vat vendor
– A motor car for R230,000 from a vat vendor
– New furniture from a non vendor for R11,500. The market value was
R12,000
– Second hand furniture from a non vendor for R21 850 (excl VAT).

– What will the cost/value be from which a deduction in terms of

section 11(e) can be claimed? Assume all amounts include vat
where applicable.
Solution

– Truck: 115 000 x 100/115 = 100 000

– Motor car: Input vat denied thus cost is 230 000
– New furniture from non vendor: VAT cannot be claimed
thus cost is 11 500
– Second hand furniture: Notional input vat claimed on the
lower of cost or market value thus:
– VAT = 21 850 x 100/115 = 19 000
When can – For all allowances, the taxpayer can only
start claiming allowances once the asset
you start is brought into use and can only be
claiming? claimed if the asset is used for the
purposes of trade.
 – For all sections except S11(e), the allowance is based on
the lower of:
What is the – Actual cost or

allowance – The costs the person would have incurred if he had

acquired the asset under a cash transaction concluded
at arms length
based on? – Start claiming allowances when asset is brought into
use

– This has the following impact:

– This implies that if an asset is sold between connected
person (not arms length), the allowance is claimed on
the lower of cost or market value.
– If an asset is not purchased for consideration, no
allowance will be granted in terms of those sections as
no cost has been incurred

– S11(e) refers to value and thus this does not apply

Cost of an asset

– Includes:
– Cost of the asset
– VAT where input vat could not be claimed
– Improvements
– Installation or erection costs
– Cost of foundation and supporting structures (if it is regarded as being integrated with the
machine)
– Other costs to get the asset ready for use
– Excludes:
– VAT claimed and
– finance charges
– In order to claim any allowance the asset must be used for the purposes of trade and in the
production of income
– Other capital costs may not be added to claim allowances but may still be added to base cost
Moving costs

– If moving costs are not incurred after acquisition to move

the asset from one location to another:
– S11(e): Can be claimed over the remaining write off period
of the asset if it was not allowed under S11(a)

– S12C and S12E:

– If a deduction is available for the asset: Deduct in equal
instalments in each year deduction is available
– If the asset has been written off: Deduct in full
Moveable assets

– Refer to workbook
 Examples
– Alf (Pty) Ltd manufactures pens and has a 30 September year end. The
company buys the following assets during the year:
Asset purchased Date Acquired Amount paid

Plastic rolling machine (used in manufacturing) 1 December R250 000

(new) 2021
Cutting machine (used in manufacturing) (used) 1 April 2022 R190 000
Delivery vehicle (write off period = 4 years) 30 June 2022 R169 000
Office chair 30 August 2022 R 4 500

– Calculate the capital allowances that can be claimed in 2022 if they are a:
– Normal private company
– Classified as a small business corporation
Solution

– Plastic rolling machine (new):

– 12C allowance 250 000 x 40% (100 000)
– Cutting machine (used):
– 12C allowance 190 000 x 20% ( 38 000)
– Delivery Vehicle:
– S11(e) 169 000/4 x 3/12 ( 10
563)
– Office chair:
– S11(e) write off in full as < 7 000 ( 4
499)
Solution: SBC

– Plastic rolling machine (new):

– 12E allowance 250 000 x 100% (250 000)
– Cutting machine (used):
– 12E allowance 190 000 x 100% (190 000)
– Delivery Vehicle:
– S12E 169 000 x 50% ( 84 500)
– Office chair:
– S11(e) write off in full as < 7 000 ( 4 499)
 Immoveable assets
– Refer to workbook
Disposal of an asset

– Refer to diagram
 Steps to follow:
Steps to follow Calculation to perform
1) Remove VAT (if applicable) from Selling
Use VAT rules to calculate the VAT correctly
price and costs
This includes all costs to bring the asset to a
2) Calculate cost
state that it will be used in
3) Calculate the allowance that is applicable Cost x rate applicable for that particular asset
for the current year of assessment

4) Calculate the tax base of the asset Cost – cumulative allowances

5) Calculate the recoupment or scrapping loss

that needs to be included in the taxable ((< Selling price or cost price) - tax base)
income calculation
6) Decide what to do with recoupment or loss
7) Calculate the capital gain/ loss (Proceeds – base cost) (SU 7)

SP will be replaced with MV and insurance proceeds where applicable

The disposal of an asset

– The disposal of an asset can result in a recoupment or a scrapping loss.

– The question is what do we do with these amounts as not all
recoupments are taxable immediately and not all losses can be
deducted

– A recoupment or capital gain can be deferred of par 65/66 is elected.

This can only be done if:
– Full proceeds are invested in replacement asset(s)
– Proceeds are ≥ base cost
– Replacement asset must be purchased within one year and brought
into use within 3 years after disposal
Example 1

– A Ltd (not a SBC) bought a new manufacturing machine for

R115 000 inclusive of VAT on 1 September 2020. The
machine was sold on 30 June 2022. The company has a 30
September year end.
– Calculate the impact on the taxable income calculation if A
Ltd sold the machine for:
– A) 90 000
– B) 15 000
Solution

– Cost (115 000 x 100/115) 100 000

– Allowance 2020 (40 000)
– Allowance 2021 (20 000)
– Allowance 2022 (20 000)
– Tax base 20 000

– (< R100 000 or R90 000) – 20 000 = 70 000 recoupment

– (< R100 000 or R15 000) – 20 000 = 5 000 loss
Example 2

– A Ltd (not a SBC) bought a new manufacturing machine for

R115 000 inclusive of VAT on 1 September 2020. The
machine was sold on 30 June 2022. The company has a 30
September year end. The machine was sold R120 000 and a
new replacement machine was purchased at a cost of R150
000 on 1 August 2022 and brought it into use the next day.
– Calculate how much must be included in taxable income for
the 2022 year of assessment (Ignore CGT)
Solution

– Cost (115 000 x 100/115) 100 000

– Allowance 2020 (40 000)
– Allowance 2021 (20 000)
– Allowance 2022 (20 000)
– Tax base 20 000

– (< R100 000 or R120 000) – 20 000 = 80 000 recoupment

– Allowance on new asset: 150 000 x 40% = 60 000 deduct
Example 3

– A building with an original cost of R650 000 and

accumulated allowances of R400 000 was sold for R200
000.

– Calculate what the impact is on the taxable income

calculation
Solution

– Tax base = 650 000 – 400 000 = 250 000

– (< of R650 000 or R200 000) – 250 000 = (50 000)

– Cannot be claimed as this is building and S11(o) is not

available for this loss
– Capital gain/loss: 200 000 – (650 000 – 400 000) = 50 000
(can be set off against other gains made in the year unless
it was sold to a connected person)
Example 4

– ABC Ltd has a December year end. They purchased a factory on 27

December 2016 for R1 800 000 and immediately brought it into use. In
August 2022, the company sold the building for R2 000 000 and a new
factory was purchased at a cost of R2 300 000.

a) Calculate the amount that must be included in the tax calculation for
the 2022 year of assessment
b) How would your solution change if this was a commercial building
instead of a factory?
c) How would your solution change if this was a commercial building that
was destroyed in a fire and the insurance company paid out R2 300 000
as compensation (which was used to buy the replacement building)
Solution (a)

– Cost 1 800 000

– Allowances: 2016 to 2021: 1 800 000 x 5% x 6 (540 000)
– Allowance: 2022: 1 800 000 x 5% (90 000)
– Tax base 1 170 000

– Recoupment: < of 2000 000 or 1800 000 – 1170 000 = 630 000

– Allowance: (2 300 000 – 630 000) x 5% = 83 500

– Capital gain: (2000 000 – 630 000) – 1 170 000 = 200 000 (no deferral –
voluntary) x 80% = 160 000
Solution

– B) As this is not factory, we need to see if it qualifies for an 8 th

schedule rollover. The building was sold (voluntary disposal) and as
allowances were granted per the permitted sections the recoupment
cannot be deferred and therefore will be included in full ie R630 000

– C) If the building was destroyed, this is a involuntary disposal and thus

the rollover relief is available for ALL assets and therefore can be
deferred in the same ratio as the allowance on the new asset:
– Deduction: 2 300 000 x 5% = 115 000
– Recoupment: 630 000 x 5% = 31 500
– Capital gain: 200 000 x 5% x 80% = 80 000