Learning Unit 7 - expenditure and allowances relating to capital assets Flashcards
May a lessee deduct leaseholds improvements from their taxable income where they have not capitalized the asset? (Make reference to the relevant section)
In terms of section 11(g), a taxpayer that is a lessee may claim an allowance in respect to the costs incurred for leasehold improvements but only if the lessor includes the cost of these leasehold improvements in his taxable income.
Describe section 12E, assets used by a small business corporation.
In terms of section 12E, the cost of new or used plant or machinery brought into use after 1 April 2001 for purposes of trade by a small business corporation, may be claimed in full in the year it was brought into use.
What are the general principles regarding repairs and maintenance as established in case law such as Flemming case and African Products Manufacturing Co case.
The principles from the various court cases can be summarized as follows:
- Repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal is the reconstruction of an entirety
- In the case of repairs, it is not necessary that the materials used are identical to the materials replaced
- Improvements increase income earning capacity.
- Repair restores the asset to its original condition.
Expenditure and allowances relating to capital assets
How are removal costs treated in respect to capital assets?
Removal costs are written off over the remaining useful life of the asset if they are incurred after the asset was brought into use.
Expenditure and allowances relating to capital assets
What cost must be included in the cost of an asset?
- VAT to the extent which is not claimable as input tax
- Customs and excise duty
- improvements
- installation and erection costs; and
- the cost of foundations and supporting structures
excludes
- VAT claimed as input tax
- finance charges
How are moving costs treated in respect to moving assets form one location to another?
The costs incurred by the tax payer in moving the assets from one location to another also forms part of the cost of the asset.
Expenditure and allowances relating to capital assets
How do you treat expenditure incurred to improve assets not owned by the taxpayer?
If a lessee effects improvements in terms of a contractual obligation, he is entitled to claim an allowance in terms of section 11(g) on the cost of these leasehold improvements but only if the lessor of the asset includes the leasehold improvements in his taxable income
If a lessee effects improvements voluntarily or if the lessor is not a taxable entity, the cost of the improvements cannot be claimed.
In respect to a small business corporation (section 12E)
How are allowances of new or used plant or machinery used in the process of manufacture treated?
In terms of section 12E, the cost of new or used plant or machinery brought into use after 01 April 2001 for purpose of trade by a small business corporation may be claimed in full in the year it was brought into use.
In respect to a small business corporation (section 12E)
How are allowances of other new assets not used in the process of manufacture treated?
Where any other asset not used in a process of manufacture is acquired by a small business corporation on or after 01 April 2005 and that asset would have qualified for a deduction under section 11(e), the tax payer can elect to:
- deduct the amount allowable in terms of section 11 (e)
- deduct 50% of the cost of the asset in the year of assessment during which the asset was brought into use for the first time; or
- 30% in the second year, 20% in the third year of assessment.
Expenditure and allowances relating to capital assets
In the case where the tax payer is not a small business corporation, describe the section 12 C allowance for new and unused assets
Where a new or unused plant or machinery is acquired or improved by the tax payer and brought into use in a manufacturing process in the course of the taxpayers business, section 12C allowance may be claimed:
Allowance claimed on the cost of the asset:
- 40% in the year of assessment in which the plant or machinery is first brought into use
- 20% in each of the following three years of assessment.
What is the allowance claimable for used assets (not Small Business Corporation)
The allowance that can be claimable by the owner of the asset is calculated as 20% in the year of assessment in which the asset is brought into use and 20% in each of the following four years of assessment.
