Capital expenditure incurred in the production of income and in carrying on of a trade does not qualify for a deduction under the so-called general deduction formula in section 11(a) of the Income Tax Act No 58 of 1962 (the Act). The Act does, however, grant deductions or allowances for specific types of capital expenditure that a taxpayer incurs in carrying on its trade. These deductions or allowances are generally spread over several years, whereas section 11(a) provides for a full deduction in a single year.
The most-commonly-used section of the Act that allows for capital allowances is section 11(e). The assets covered by section 11(e) typically include machinery, plant, implements, and utensils.
Section 11(e) does not define the “value” of an asset for purposes of calculating the allowance. However, the policy employed by SARS seems to be that the value of an asset for calculating the taxpayer’s allowance is the acquisition cost thereof.
The cost of acquisition is specifically deemed to be the cost at which the qualifying asset would have been acquired had it been acquired in an arm’s length transaction, including the cost of erection and/or installation. In calculating the allowance, the value of the qualifying assets must be increased by the value of the expenditure that the taxpayer incurs in moving the asset from one location to another. All moving costs must be written off over the asset’s remaining useful life. Where an asset is written off over a period of four years, and the moving costs are incurred in year 3, those costs will qualify for a deduction in years 3 and 4. Moving costs will be fully deductible in the year of assessment in which it is incurred, provided that the asset that qualifies for the allowance has been written off in full.
The allowance granted is the amount the Commissioner regards as just and reasonable and is limited to the extent that the taxpayer uses the qualifying asset for purposes of trade. An asset that a taxpayer holds but which has not been deployed in its trade does not satisfy the use requirement for purposes of section 11(e) and cannot qualify for an allowance under this section. For purposes of the depreciation allowance, the asset will generally be written off over its useful life.
Where a qualifying asset has not been used by a taxpayer for the entire year of assessment, the qualifying allowance must be apportioned. The apportionment in terms of section 11(e) is limited to assets brought into use during the year of assessment or assets disposed of during the year of assessment. Accordingly, a taxpayer is only entitled to a reduced allowance in a year of assessment in which an asset is brought into use or in a year in which an asset is disposed of as the taxpayer only uses the asset for a portion of the specified year.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).