2021/04/16

Capital allowances
and recoupments
1

Lesson 2:
Allowances on moveable assets

1
 2021/04/16

Overview
• Allowances apply to assets consumed in trade
• Accelerated allowances incentivise taxpayers
• Important definitions (s1)
• Connected persons
• Depreciable assets
• Tax base = Remaining tax allowances
• Cost less capital allowances already claimed
• Deferred tax – difference between FR CV and Tax base
• Considerations:
• Does the asset qualify?
• What is the tax useful life?
• Is the allowance apportioned?
• When can the allowance be claimed?
3

s11(e)
• Allowance for reduction in value
• Direct cost of the asset as if acquired under a cash transaction
concluded at arms length
• Includes: installation costs & costs of any supporting
structure
• Excludes: finance/interest costs
• If acquired for no cost – use market value
• Write-off periods stipulated in Interpretation Note 47 (‘IN47’)
• Leased assets:
• Lessor claims on cost less residual value stipulated in the
lease (IN47 4.2.6)
• Write-off period = greater of IN47 write-off vs duration of lease
(IN47 4.3.3)
• Allowance is apportioned by months
4

2
 2021/04/16

s11(e)
• Does not apply to manufacturing assets which qualify for any of
the s12 allowances
• No allowance for buildings or other structures of a permanent
nature –s11(e)(ii), however
• Foundations & supporting structures deductible on same basis
as asset – s11(e)(iiA)
• regarded as integrated with the machinery, and
• Write-off period linked to the remaining life useful life of the
asset
• Small assets (<R7 000) – write-off in full in year 1
• Not available to lessors
• Moving costs – write off linked to the useful life of the asset (IN47
4.2.3)
5

s12C
• Allowance on plant or machinery used for trade purposes directly
in a process of manufacture
• Process of manufacture
• s12C/E allowances available for machinery/plant used in a
manufacturing process or in a process which is similar to
manufacture..
• Case law
• The term “process of manufacture” denotes an
action/series of actions directed to the production of an
object or thing which is essentially different from the
materials or components which went into its making.

3
 2021/04/16

s12C
• “Cost” is the lesser of actual cost vs market value
• Excludes finance charges and VAT
• Includes installation costs
• Rate
• Usually 20% pa straight-line (5 years), however
• 40% + 20% x 3 years if the following is satisfied:
• It is new or unused plant or machinery brought into use for
the first time by the taxpayer for the purpose of trade and
is used directly in the process of manufacture
• Accelerated allowance does not apply to leased assets
• Moving costs – same principle as s11(e)
• Allowance is not apportioned

Allowances on movable assets

• 12E (Small business corporations)
• Manufacturing assets
• 100% in the year a new asset is brought into use
• Non-manufacturing assets
• 50%/30%/20%
• Cost rules are same as 12C

4
 2021/04/16

Lesson 3:
Allowances on immoveable assets

s13(1)
• Applicable when the building is:
• Erected by the taxpayer; or
• purchased from another person who was allowed a s13
deduction; or
• purchased from a person where the building has not been
used before; and
• Wholly or mainly (>50%) used for the purpose of trade/
manufacture
• 13(1)(b) allowance is 5% (not apportioned) and is based on:
• Cost to the taxpayer of qualifying buildings; OR
• improvements
• excludes leveling/ excavations/external fencing and paving

10

10

5
 2021/04/16

s13(1)
• Allowance claimed from the date the building is brought into use
• Improvements
• Extension, addition or improvement other than repair which
increase or improve the industrial capacity
• Can claim allowances even though improvements have not yet
been brought into use.
• Apportion where lump sum paid for land & buildings
• Lessees can claim an allowance on improvements not deductible
under s11(g)

11

11

s13quin
• Commercial buildings and improvements contracted for > 01/04/2007
• Applicable if a taxpayer owns a new/unused building:
• Used mainly for producing income in the course of trade
• Excluding residential accommodation
• Allowance is 5% pa not apportioned
• Cost
• Lower of actual cost versus market value
• Actual cost excluding finance charges and VAT
• Where the taxpayer acquires a ‘part of a building’ without erecting
or constructing that part:
• If the part of the building is acquired the annual allowance is
• Cost x 55% x 5%
• If an improvement is acquired the annual allowance on the
cost of the improvements is:
• Cost x 30% x 5%
12

12

6
 2021/04/16

Repairs
• Issue at stake:
• Repair (expense) versus improvement (capital)
• Not deductible in terms of s11(a) as repairs are capital in nature.
• Repair (s11(d))
• Restoration by renewal or replacement of a subsidiary part of
the whole
• Materials used need not be the same as the original
• Must be damage/ deterioration to original asset/structure and
intention must be to restore asset to original condition
• Renewal/improvement
• Result of expenditure is a better asset
• Increased income earning capacity

13

13

Lesson 4:
Leases

14

7
 2021/04/16

Leases
• Periodic lease expenses (s11(a))
• Lease premiums (s11(f))
• Premiums paid by the taxpayer, in the production of income
• Lessor must have included receipt in Gross Income
• Allowance = total consideration ÷ lease term
• Apportioned where applicable (but limited to 25 years)
• Premature termination
• Remaining deductions fall away (capital loss)

15

15

Leases
• Leasehold improvements (s11(g))
• Expenditure actually incurred if the TP was contractually
obliged to effect improvements once improvements complete
• Improvements must constitute income of the lessor (para h)
• Allowance = improvement value ÷ lease term
• Apportioned where applicable (but limited to 25 years).
• Value is amount stipulated in lease, or fair and reasonable
amount if not stipulated or amount incurred if lower than these
two
• Excess may result in s13(1) allowance if criteria met

16

16

8
 2021/04/16

Lesson 2:
Asset disposal

17

Overview
• SARS assumption at purchase date:
• Taxpayer will recover benefit of the asset through use
• Reality is that actual consumption can only be determined at
disposal date
• If selling price > tax value,
• Allowances have overcompensated
• Excess allowances must be recouped
• If selling price < tax value,
• Allowances have not adequately compensated
• Unclaimed allowances must be deducted
• Considerations
• Gross income vs capital gains
• When are allowances claimed until?
18

18

9
 2021/04/16

Recoupments
• s 8(4)(a)
• General recoupment provision
• Recovery of previous allowances granted
• Gross income (para n)
• Special circumstances:
• Asset acquired for no consideration:
• Recoupment of allowances claimed.
• Proceeds less recoupment is subject to CGT
• Asset originally used for non-trade purposes and
subsequently for trade purposes:
• Any recoupments must be calculated with reference to
original cost

19

19

Recoupments
• s 8(4)(e)
• A recoupment on the disposal of an asset will not be included
in income:
• Where a taxpayer has made an election in terms of
Paragraph 65 and 66 of the 8thSchedule to defer the
Capital Gain
• Recoupment realised relative to the write-off period of the
replacement asset
• s 8(4)(k)
• Applicable to:
• Donations of assets; or
• Disposal to connected persons (deemed to be at OMV)

20

20

10
 2021/04/16

Recoupments
• s8(5) Acquisition of hired assets
• applicable where an amount has been paid for the right to use
an asset which was allowed as a deduction and has
subsequently resulted in a reduction of the settlement price for
that TP when acquired (E.g. Lessor agrees to sell property to
lessee at an agreed price less what has been paid in rent)
• Amount applied as a reduction must be included in GI
• If sold asset for inadequate consideration, then OMV –
purchase price = deemed reduction (limited to rentals paid)

21

21

Recoupments
• s11(o) scrapping allowance
• available for qualifying depreciable assets used for trade
purposes which have been alienated, lost or destroyed
• Applicable if:
• Useful life less than 10 years
• Not available where asset sold to a CP
• Not available if asset never used
• Allowance = tax base - proceeds

22

22

11