4.3 Capital allowances (13)

Question 1

Capital allowances – s 11, s 12 & s 37B

Answer 1

Although in general deductions formula specifically excludes expenditure of a capital nature, there are sections in the Act that allow the deduction of capital allowances.

Question 2

Capital allowances are the

Answer 2

Write off of the cost of an asset over a period of years. (can differ from accounting write off period)
The cost of an asset includes moving, installation and erection costs and cost of foundations and supporting structures. But excludes VAT that is claimed as input tax and finance charges.

Question 3

Capital allowances include:

Answer 3

● Repairs and maintenance – s 11(d)
● Wear and tear – s 11(e)
● Losses on disposal of a fixed asset – s 11(o)
● Environmental expenditure allowance – s 37B

Question 4

Repairs and maintenance – s 11(d)

Answer 4

Repairs must be in respect of:
● Property occupied for purpose of trade on in respect of which income is receivable
● Treatment against attack by beetles of any timber forming part of such property
● Machinery, implements, utensils and other articles employed for purpose of trade
Can deduct even if not the owner of premises, etc

Question 5

Wear and tear – s 11(e)

Answer 5

Allowed a deduction of the value of an asset over its expected lifetime, if value diminishes due to wear and tear.
Based on either the value of the asset or market value.
Does not apply to buildings or structures of a permanent nature or assets subject to special depreciation allowances under S 12B or s 12C.

Question 6

Practice Note 47 provides the acceptable

Answer 6

Write off periods for each category of asset.
Assets are generally written off on straight-line basis over specified write-off periods based on expected lifetime.
Allowance MUST BE apportioned for part year usage.
Items under R7000 can be written off in full in year of acquisition.

Question 7

Losses on disposal of a fixed asset – s 11(o)

Answer 7

This is an elective provision and only applies in respect of an asset:
● On which a capital allowance was claimed (depreciable)
● Where the estimated useful life is less than 10 years
● Where the disposal is result of sale, scrapping, loss or destruction of the asset.

Question 8

Losses on disposal of a fixed asset allowance formula

Answer 8

SARS will look at tax value on date sold and selling price, if selling price less than can claim loss incurred.

Cost of the asset
LESS: Total capital allowance or deduction allowed
= Tax value of asset
LESS: Proceeds on disposal

Question 9

Section 12B allowance is claimable on the following assets in trades of:

Answer 9

● Farming plant and equipment
● Bio-diesel or bio-ethanol
● Generation of electricity (wind, sunlight, water, biomass)

Based on cost
(NOT apportioned):
● Year 1: 50% of cost
● Year 2: 30% of cost
● Year 3: 20% of cost

Question 10

Section 12C - special wear and tear allowance

Answer 10

For following assets:
● Machinery or plant
● Assets used by hotelkeeper
● Assets used by agricultural co-op
● Aircrafts or ships

Question 11

Section 12 C - special wear and tear allowance write off periods

Answer 11

For new assets used in production process
● Four year write off – 40% in first year, 20% for next three years
For used assets in production process
● Five year write off – 20% per year

Question 12

Guidelines as to what constitutes a process of manufacture

Answer 12

● Process must be complete and continuous
● There must be an essential change to material
● Process must contribute to end product

Question 13

Environmental expenditure allowance – s 37B

Answer 13

Provides for deduction of capital allowances for any new and unused environmental assets that are required by law in order to comply with measures that protect the environment.

Allowance is 40% cost in year 1, and 20% for next three years.

Environmental waste disposal asset which is of a permanent nature deducted at 5% over 20 years.