LEASES

U2S6
Annelize Oosthuizen

www.ufs.ac.za

By Annelize Oosthuizen (UFS) 1

 LEASES
1. Introduction
U2S6

By Annelize Oosthuizen (UFS) 2

 Outcomes
1. The student must understand the tax consequences of
the two options to acquire an asset
2. The student must be able to determine all the tax
consequences of leased assets during the lease period,
both the VAT and the IT consequences (as well as the
integration of VAT and IT)
3. The student must be able to calculate and discuss all
the tax consequences of leased assets at the end of the
lease period.
4. The student must be able to calculate and discuss the
tax consequences of sale and leaseback agreements

By Annelize Oosthuizen (UFS) 3

 Main sections
• Refer to the following
– Gross income par (g)
– Gross income par (h) LESSOR

– S 11(h)
– 11(f)
– 11(g) LESSEE
– 12N
– 8(5)
– Eighth Schedule
– VAT Act
• Rental agreement
• Instalment credit agreement (ICA)

The following main sections will be covered in the subunit of leases.

By Annelize Oosthuizen (UFS) 4

 Outcome #1
The student must understand the tax
consequences of the two options to acquire an
asset

By Annelize Oosthuizen (UFS) 5

 Want to acquire an asset?
Purchase
agreement
Acquire
PURCHASE asset
Instalment credit
agreement
Par (a) of
ICA (VAT)

Operating lease
Acquire
LEASE right to use
asset
Finance lease

You will remember that, when we did capital allowances, we referred to the
following slide.
If you need an asset in your business/trade you can either
• buy it
• If it is indicated as a “purchase” then you (the owner/purchaser) can claim
capital allowances (refer to the “who can claim?” when we did capital
allowances and looked at the wording of the Act).
or

• lease it
• You pay for the right to use the asset. The lessor is taxed on rental
income and the lessee deduct the lease payments under s 11(a).

By Annelize Oosthuizen (UFS) 6

 Want to acquire an asset? Rental
agreement
Operating lease (VAT)

LEASE Acquire
right to use
asset
Finance lease

Par (b) of
Section 11(a) for lease ICA (VAT)
payments!
BUT s 12N!!!
NO capital allowances in
general!
BUT s 13(1)!!!
Other allowances
S 11(f), 11(g)

If it is a lease (regardless of whether it is an operating or finance lease), then the

• Lessee claims the rental payments as a deduction and
• the lessor continues to claim capital allowances and is taxed on the lease
payments received/accrued.

By Annelize Oosthuizen (UFS) 7

 Leases

Commencement During Termination

Classification
of lease

S 12 N +
Lease Leasehold
leasehold
premium improvements
improvements

S 8(5)
Rent Rent recoupment

The following diagram indicates the different stages in a typical lease agreement.

By Annelize Oosthuizen (UFS) 8

 LESSOR
GROSS INCOME
Gross income: Taxed on lease income (excl VAT) xxx
Gross income (par (g): Lease premium (excl VAT) ) xxx
Gross income (par (h): Lease improvements
(excl VAT)) xxx

MINUS
Relief (s 11(h)) (xx)
Cap allowances: s 12B/12C/11(e)/13
(excl VAT – s 23C) (xx)

The following summarises most common sections used in the calculation of the
taxable income of the lessor that will be discussed.

By Annelize Oosthuizen (UFS) 9

 LESSEE
GROSS INCOME
MINUS
– Lease payments: s 11(a) (excl VAT) (xx)
– Only if used in the production of income
– Lease premium paid: s 11(f) (excl VAT) (xx)
– Lease improvement: s 11(g) (excl VAT) (xx)
– S 13(1) building allowance (excl VAT) (xx)
– Remember s 12N
• Deemed to be owner:
– S 12B
– S 12C
– S 13
– S 13quin
– S 13sex

10

The following summarises most common sections used in the calculation of the
taxable income of the lessee that will be discussed.

By Annelize Oosthuizen (UFS) 10

 LEASES
2. Instalment credit agreement (ICA)
U2S6

11

By Annelize Oosthuizen (UFS) 11

 Main sections
• Refer to the following
– Gross income par (g)
– Gross income par (h) LESSOR

– S 11(h)
– 11(f)
– 11(g) LESSEE
– 12N
– 8(5)
– Eighth Schedule
– VAT Act
• Rental agreement
• Instalment credit agreement (ICA)

12

In this lesson, we will focus on the Income Tax and VAT treatment of the different
types of lease agreements. Specific attention will be given to the definition of
installment credit agreement of the VAT Act.

By Annelize Oosthuizen (UFS) 12

 Outcome #2
The student must be able to determine all the tax
consequences of leased assets during the lease
period, both the VAT and the IT consequences (as
well as the integration of VAT and IT)

13

By Annelize Oosthuizen (UFS) 13

 VAT consequences of leases

14

By Annelize Oosthuizen (UFS) 14

 VAT

1. Operating lease
(= ordinary rental)
Silke par 31.15.3

15

By Annelize Oosthuizen (UFS) 15

 1. Operating lease
• VAT Act refers to Finance lease
• =“rental agreement” which means—
(a) any agreement entered into before, on or after the
commencement date for the letting of goods,
other than a lease referred to in paragraph (b) of the
definition of “instalment credit agreement”
in this section or a financial lease as defined in the Sales
Tax Act, 1978 (Act No. 103 of 1978), prior to its repeal;
and
(b) any rental agreement, as defined in the said Act
where such agreement is in force on or after the
commencement date;“rental agreement” according to
the VAT Act means

16

By Annelize Oosthuizen (UFS) 16

 1. Operating lease
• Rental payments (s 9(3)(a))
– Time of supply:
• where goods are supplied under any rental agreement or
where services are supplied under any agreement or law
which provides for periodic payments, they shall be deemed
to be successively supplied for successive parts of the period
of the agreement or as determined by such law, and each of
the successive supplies shall be deemed to take place when
a payment becomes due or is received, whichever is the
earlier;
– This means VAT is levied on each rental
payment

17

By Annelize Oosthuizen (UFS) 17

 VAT

2. Finance lease
(= par (b) of the def if ”instalment credit
agreement” (ICA))

Silke par 31.23

18

By Annelize Oosthuizen (UFS) 18

 Want to acquire an asset?
Purchase
agreement

PURCHASE Acquire
asset
Suspensive sale
agreement
ICA par (a)
(VAT Act)

Operating lease
Acquire
LEASE right to use
asset
Finance lease
ICA par (b)
(VAT Act)

19

You will remember these slides that we used when we did capital allowances.
For Income Tax purposes:
- If it is a PURCHASE, the owner claims capital allowances
- If it is a LEASE, the lessor claims capital allowances and are taxed on the rental
income received. The lessee claims the rental payments as a deduction.

You will see that the VAT definition of ICA applies to a suspensive sale agreement
as well as to a finance lease. The VAT treatment of a suspensive sale and a finance
lease is therefore the same even though the income tax treatment differs (as stated
above because the one (suspensive sale) is a “purchase” and the other one (finance
lease) is a “lease”).

By Annelize Oosthuizen (UFS) 19

 Please note
• Although the definitions summarised in the diagram in Silke
par 31.23.1 are similar to a large extent, it seems that the
major difference between a suspensive sale and finance
lease lies in
– the person carrying the risk of ownership of the goods
supplied.
• In terms of a suspensive sale the risk of ownership will pass
to the purchaser on the date that the suspensive sale condition
is complied with,
• where in terms of a finance lease the risk of ownership will
pass to the lessee on the date that the lease agreement is
concluded.

20

By Annelize Oosthuizen (UFS) 20

 VAT Act

INSTALMENT
CREDIT
AGREEMENT (ICA)

Par (a) Par (b)

Suspensive sale Finance lease
agreement agreement

This is a This is a
PURCHASE LEASE for
for Income Income Tax
Tax purposes purposes

SAME VAT TREATMENT- claim/pay upfront on the cash value

21

For VAT purposes an installment credit agreement (ICA), as defined in the VAT Act,
consists of two paragraphs: par (a) and par (b).
- Par (a) refers to a suspensive sale agreement and
- par (b) refers to a finance lease.
It is important to remember that, both par (a) and par (b) agreements falls under ICA
as indicated with the umbrella.

The VAT treatment of an ICA is to claim the VAT upfront (input for the lessee) or
the pay the VAT upfront (output for lessor).
If you are therefore for example the lessee and have to pay R11 500 (incl VAT) per
month for 24 months (R276 000), you will be able to claim the full input on all
payments (on the 24 pmts) upfront (at the earlier of date of any payment or date of
delivery).
You will therefore NOT claim the VAT per payment. The same rule applies for the
output.

By Annelize Oosthuizen (UFS) 21

 2. Finance lease

22

Please ensure that you work through the definition of installment credit agreement.

The scanned underlined pdf extract from your SAICA Student Handbook was also
uploaded.

By Annelize Oosthuizen (UFS) 22

 2. Finance lease
• Definition of ‘instalment credit agreement’ par (b)
– Goods are supplied under a lease and the rent consists of
– A sum of money payable at future date or
– Periodically / in whole / in instalments over a period in the future
– such sum of money includes finance charges stipulated in the lease;
– the aggregate of amounts payable under such lease as well as any
residual value on termination of the lease exceeds the cash value of the
supply;
– the lessee is entitled to the possession, use or enjoyment of those
goods for at least 12 months;
– and
– the lessee accepts the full risk of destruction, loss, or disadvantage to
those goods and assumes all obligations in connection with the
insurance, maintenance and repair of those goods

23

By Annelize Oosthuizen (UFS) 23

 Time of supply of ICA
• Silke par 31.23.3
• Time of supply (s 9(3)(c))
(c) where goods are supplied under an instalment credit agreement,
that supply shall, subject to the provisions of subsection (2) (b), be
deemed to take place at the time the goods are delivered or the time any
payment of consideration is received by the supplier in respect of that
supply, whichever time is earlier;
• Claim VAT therefore once-off! and not per payment
at the earliest of:
– Time of delivery
– OR
– Time of any payment
• Rule also applies to vendors registered on payments
basis
24

By Annelize Oosthuizen (UFS) 24

 Value of supply ICA
• Silke par 31.23.2
• Value of the supply (s 10(6))
– 10(6) For the purposes of this Act, where goods are
supplied under an instalment credit agreement, the
consideration in money for the supply shall be
deemed to be the cash value of that supply.
• “Cash Value” as defined in section 1
– Read through the definition of “Cash Value”
• It excludes interest
– Finance charges are not subject to VAT

25

By Annelize Oosthuizen (UFS) 25

 Want to acquire an asset?
Operating lease
Acquire
LEASE right to use
asset
Finance lease

Par (b) of
Section 11(a) for lease def (VAT)
payments!
BUT s 12N!!!
NO capital allowances in
general!
BUT s 13(1)!!!
Other allowances
S 11(f), 11(g)

26

So, the lessee can lease an asset either in terms of an operating lease or a finance
lease.
Both types of leases are treated as LEASES for Income Tax purposes.
- the lessee can in general NOT claim capital allowances but can only claim the
rental payments (excluding VAT as per s 23C of the Income Tax Act) as a
deductions.
- the lessor will continue to claim capital allowances

The VAT treatment of the two lease types differs:

- For an operating lease, the VAT is claimed per payment on the actual payment.
- For a finance lease, the VAT is claimed upfront (NOT per payment) on the cash
value.

By Annelize Oosthuizen (UFS) 26

 27

S 23C of the Income Tax Act states that, if VAT was claimed from SARS, the
amount of the expense deductible in terms of the Income Tax Act, must exclude that
input VAT that was claimed.

The proviso to s 23C (as underlined in blue) tells use how to take out the VAT from
a lease payment if the VAT was claimed upfront (as required by the VAT Act for an
ICA). The next few slides will explain this treatment.

By Annelize Oosthuizen (UFS) 27

 Rental vs ICA

28

Refer to this Example that was handed out (also uploaded) of ICA as part of your
notes already

By Annelize Oosthuizen (UFS) 28

 Example of finance lease
Cost R100 000
VAT R15 000
Finance charges R35 089
TOTAL PAYABLE R150 089

Monthly payment R6 253.73

29

From that example you will see that, with a finance lease (and suspensive sale
agreement) finance charges is payable and is included in the monthly payment.

So, if it is a finance lease, instead of paying only R115 000 (R100 000 + R15 000
VAT), the lessee will pay R150 089 since it includes R35 089 finance charges
(interest) payable over the term of the agreement.

This gives you a monthly payment of R6 253.73 over 24 months (R6 253.73 x 24
months = R150 089 (rounding differences will be noted))

So the monthly payment of R6 253.73 includes capital, VAT and finance charges.

If you claim the VAT per payment (on the R6 253.73), you will claim the VAT also
on finance charges! Can you claim VAT on finance charges? No, since it is an
exempt supply (financial service).
That is why the VAT can’t be claimed per payment like we do with a normal rental
agreement (an operating lease).
We can’t claim the VAT per payment and have to claim the VAT upfront on the cash
value which excludes finance charges (therefore on the R115 000).

By Annelize Oosthuizen (UFS) 29

 The VAT of R15 000 will then be claimed upfront (once-off) by the lessee and not per
payment.

Remember the same principle as discussed here applies to the output that must be paid over to
SARS by the lessor.

By Annelize Oosthuizen (UFS) 29

 Extract: Class example

30

For a normal operating lease (a rental agreement as defined for VAT), note how
the VAT is excluded per payment using the VAT fraction of 15/115 and payments
deductible for Income Tax purposes merely exclude VAT per payment using
100/115.

However, for a finance lease (which is an ICA for VAT purposes), note how the
VAT is claimed upfront in total for VAT purposes.

For Income Tax purposes, a finance lease is still a lease. The lessee will therefore
claim the rental payment as a deduction.
The VAT can’t be per payment since the payment includes finance charges. The
VAT that was claimed upfront on the cash value (i.e. the R15 000 VAT claimed)
therefore needs to be apportioned to each of the 24 payments. So of the R15 0000
VAT claimed upfront, R15 0000 x 12/24 (current period in yoa / total lease period)
relates to the payments deductible in the current year.

The deduction for the rental payments under s 11(a) for the current year is therefore
R6 254 x 12 months = R75 048. But this includes VAT so the VAT relating to these
payments must be taken out. The VAT relating to these payments are R15 000 x
12/24 = R7 500.

By Annelize Oosthuizen (UFS) 30

 The s 11(a) deduction is therefore R75 038 – R7 500 = R67 538 (rounded)

By Annelize Oosthuizen (UFS) 30

 VAT
Summary of FINANCE LEASE
• VAT Act acknowledge the substance over form i.e. this
is a financing transaction (payments includes finance
charges)
• Par (b) of definition of instalment credit agreement
– Lessee: claims input-VAT upfront on cash value
– Lessor: pays output-VAT upfront on cash value
INCOME TAX
• For Income Tax purposes treated as bona fide lease
transaction
– Lessee: claim rental payments for the year as a deduction
(excluding VAT)
– Lessor: include rental payments as gross income for the year as
a deduction (excluding VAT)

31

This slide summarises the VAT and Income Tax treatment of a finance lease

By Annelize Oosthuizen (UFS) 31

 Summary of OPERATING LEASE

VAT
• Payment for the usage of the asset
– Lessee: Claims input-VAT on each lease payment
– Lessor: Levies output-VAT on each lease payment
INCOME TAX
• For Income Tax purposes treated as bona fide lease
transaction
– Lessee: claim rental payments for the year as a deduction
(excluding VAT)
– Lessor: include rental payments as gross income for the year as
a deduction (excluding VAT)

32

This slide summarises the VAT and Income Tax treatment of an operating lease

By Annelize Oosthuizen (UFS) 32

 Income tax consequences of
leases
• BOTH ARE TREATED AS ORDINARY
LEASE AGREEMENTS!!!!!!!
– Claim s 11(a) on lease payments paid
– Gross income if lease payments received

33

Remember!

By Annelize Oosthuizen (UFS) 33

 Instalment credit
agreement:Par (a)
Suspensive sale agreement

34

By Annelize Oosthuizen (UFS) 34

 Want to acquire an asset?
Purchase
agreement
Acquire
PURCHASE asset
Suspensive sale
agreement
ICA par (a)
(VAT Act)

Operating lease
Acquire
LEASE right to use
asset
Finance lease
ICA par (b)
(VAT Act)

35

You will remember these slides that we used when we did capital allowances.
For Income Tax purposes:
- If it is a PURCHASE, the owner claims capital allowances
- If it is a LEASE, the lessor claims capital allowances and are taxed on the rental
income received. The lessee claims the rental payments as a deduction.

You will see that the VAT definition of ICA applies to a suspensive sale agreement
as well as to a finance lease. The VAT treatment of a suspensive sale and a finance
lease is therefore the same even though the income tax treatment differs (as stated
above because the one (suspensive sale) is a “purchase” and the other one (finance
lease) is a “lease”).

By Annelize Oosthuizen (UFS) 35

 VAT Act

INSTALMENT
CREDIT
AGREEMENT (ICA)

Par (a) Par (b)

Suspensive sale Finance lease
agreement agreement

This is a This is a
PURCHASE LEASE for
for Income Income Tax
Tax purposes purposes

SAME VAT TREATMENT- claim/pay upfront on the cash value

36

For VAT purposes an installment credit agreement (ICA), as defined in the VAT Act,
consists of two paragraphs: par (a) and par (b).
- Par (a) refers to a suspensive sale agreement and
- par (b) refers to a finance lease.
It is important to remember that, both par (a) and par (b) agreements falls under ICA
as indicated with the umbrella.

The VAT treatment of an ICA is to claim the VAT upfront (input for the lessee) or
the pay the VAT upfront (output for lessor).
If you are therefore for example the lessee and have to pay R11 500 (incl VAT) per
month for 24 months (R276 000), you will be able to claim the full input on all
payments (on the 24 pmts) upfront (at the earlier of date of any payment or date of
delivery).
You will therefore NOT claim the VAT per payment. The same rule applies for the
output.

By Annelize Oosthuizen (UFS) 36

 TURN TO THIS DEFINITION IN THE VAT ACT

37

Please ensure that you work through the definition of installment credit agreement.

The scanned underlined pdf extract from your SAICA Student Handbook was also
uploaded.

By Annelize Oosthuizen (UFS) 37

 Time of supply of ICA
• Silke par 31.23.3
• Time of supply (s 9(3)(c))
(c) where goods are supplied under an instalment credit agreement,
that supply shall, subject to the provisions of subsection (2) (b), be
deemed to take place at the time the goods are delivered or the time any
payment of consideration is received by the supplier in respect of that
supply, whichever time is earlier;
• Claim VAT therefore once-off! and not per payment
at the earliest of:
– Time of delivery
– OR
– Time of any payment
• Rule also applies to vendors registered on payments
basis
38

By Annelize Oosthuizen (UFS) 38

 Value of supply ICA
• Silke par 31.23.2
• Value of the supply (s 10(6))
– 10(6) For the purposes of this Act, where goods are supplied
under an instalment credit agreement, the consideration in
money for the supply shall be deemed to be the cash value of
that supply.
• “Cash Value” as defined in section 1
– Read through the definition of “Cash Value”
• It excludes interest
– Finance charges are not subject to VAT

39

By Annelize Oosthuizen (UFS) 39

 What about a suspensive sale
agreement? For the buyer…
• It is an “Instalment credit agreement” for VAT
– Claim therefore input-VAT upfront from
SARS
• It is a “Purchase” for purposes of the Income
Tax Act
– Claim capital allowances on the cost
excluding finance charges
– Claim interest ito s 24J
40

This slide summarises the effect for the buyer if it is a suspensive sale

By Annelize Oosthuizen (UFS) 40

 What about a suspensive sale
agreement? For the seller…
• It is an “Instalment credit agreement” for
VAT
– Pay therefore output VAT upfront to SARS
• It is a “Sale” for purposes of the Income
Tax Act
– Calculate recoupment
– Calculate capital gains
– Taxed on interest ito s 24J

41

This slide summarises the effect for the seller if it is a suspensive sale

By Annelize Oosthuizen (UFS) 41

 Different types of questions
This indicates a
finance lease
agreement

• XYZ Ltd leased a delivery vehicle in terms of

an instalment credit agreement

This indicates a
suspensive sale
agreement

• XYZ Ltd purchased a delivery vehicle in

terms of an instalment credit agreement

42

This is how you will be able to identify between a finance lease and a suspensive
sale agreement.

Remember, the VAT treatment of both are the same (claim/pay the VAT upfront
once-off) as discussed above.

The Income Tax implications differ:

- Finance lease is a lease (claim rental payments)
- Suspensive sale is a purchase (claim capital allowances and not rental payments)

By Annelize Oosthuizen (UFS) 42

 XYZ Ltd leased a delivery vehicle in terms of an instalment credit
agreement for R30 600 per month (VAT inclusive) for a period of
36 months of which 8 months are in the current yoa. The cash
price of the delivery vehicle is R517 500 (including VAT). The
VAT implications are?

A. Input VAT R30 063

B. Input VAT R67 500
C. Input VAT R135 284
0% 0% 0% 0%
D. Input VAT R77 284

63

00

84
28
 0

 0

 2
5 
30

63

77
13
 R

 R

 R
 R
AT

AT

AT
AT
t V

t V

t V
t V
pu

pu

pu
pu
In

In
In

In
43

See if you can do the following example before continuing to the suggested
solution.

By Annelize Oosthuizen (UFS) 43

 Solution
• R30 600 x 36 = R1 101 600
• Cash price incl. VAT = R517 500
• Finance charges = R584 100
Since it is an instalment credit agreement –
claim VAT upfront on cash price:
R517 500 x 15/115 = R67 500

B. Input VAT R67 500

44

APPROACH:
√ Lessee
√ ICA identified = VAT upfront,
√ VAT Based on? s10(6) VAT Act say on the cash value if an installment credit
agreement.

By Annelize Oosthuizen (UFS) 44

 XYZ Ltd leased a delivery vehicle in terms of an instalment credit
agreement for R30 600 per month (VAT inclusive) for a period of
36 months of which 8 months are in the current yoa. The cash
price of the delivery vehicle is R517 500 (including VAT). The
income tax implications are?

A. No s11(a) deduction
B. Claim capital
allowances ito s11(e)
0% 0% 0% 0%
C. s11(a) deduction of
R212 870

0
37
n

80
o.
tio

 7
 it

0 
14
uc

es

23
R2
ed

nc

 R
 
D. s11(a) deduction of

)  d

of
of
a
w

n 
n 
(a

llo

t io
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1
 1

l a

uc
uc
No

ta

ed
ed
R229 800

pi

) d
 d
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m

1(

11
ai

S 1
Cl
45

So what are the income tax implications then? See if you can do the following
example before continuing to the suggested solution.

By Annelize Oosthuizen (UFS) 45

 Solution
• Claim section 11(a) deduction for rental
payments made:
• R30 600 x 8 months – (R67 500 x 8/36)
• =R229 800

D. 11(a) deduction of R229 800

46

APPROACH:
(As per previous example)
√ Lessee
√ ICA identified = VAT upfront,
√ VAT Based on? s10(6) VAT Act say on the cash value if an installment credit
agreement.
VAT = R67 500

√ Required asked for income tax implications- Therefore what is my s11(a)

deduction, excluding VAT. ( WHY? VAT is a separate tax so not included in taxable
income)
√ We only paid for 8 months x R30 600 (incl. VAT) less VAT of R67 500 for 8
months/ 36 month lease period
√ s11(a) deduction of R229 800

By Annelize Oosthuizen (UFS) 46