Taxation 2

First Semester
Capital Allowances
 TEXT BOOK REFERNCES
• Hotels
• 13.5.2 Hotels: Movable assets (s 12C)
•  
• Owners and charterers of aircraft or ships (s
33)
• 13.6.1 Movable assets: Aircraft and ships ( ss
12C, 8(4)(a), 8(4)(e), 11(0), 12E and 24P
 Objective
Capital Allowances Example

• Be able to calculate the

following allowances • Repairs
• Know when to apply the • Truck Wear and Tear
correct capital allowance • New and Second hand
• Section 12 (d)
• Section 11 (e)
• Section 12 (c)
 Terminology
Accounting TAX
• Depreciation • Wear and Tear or Capital
Allowances
• Carrying Amount (Cost less • Tax Value (Cost less all
all accumulated capital allowances or wear
depreciation) and Wear

• Profit or Loss on Disposal of • Recoupments/Capital Gains

Asset
 SECTION 12 C
• New or Used
• Process of Manufacture or Similar Process
• Acquired(Instalment sale)
• By Taxpayer(lessor) first time
• Four Year w/o 40/20/20/20 after1/3/2002
• Five Year New and Unused
• Five Year w/o 20/20/20/20/20
• Can Be Second Hand
 Section 12 C Special Allowances
1. Industrial Machinery and Plant
2. Agricultural Co=Op
3. Hotelkeeper
4. Aircrafts
5. Ships
6. Research and Develop
7. Improvements
• 1. Process of Manufacture
(Not mining and farming)
• 2. storing and primary
processing
• 3. Hotel trade excludes cars
office equipment staff rooms
• 4. Exclude 12 b 14 bis before
1/4/95
• 5. Exclude 12 b 14 bis before
1/4/95
• 6.after1 /4/2012
• 7.Exclude aircrafts and ships
 Section 12 C

• Depends on the nature of the asset

• 4 or 5 year write off
• Not prorated
 Special Allowances Section 12 (C)
• Acquired(Instalment sale)
• New or Unused
• By Taxpayer(lessor) first time
• Four Year w/o 40/20/20/20 after1/3/2002
• Secondhand or Unused
• Five Year w/o 20/20/20/20/20
 4 Year Write Off
 New or Unused
 After 1 March 2002
 Process of manufacture or Similar
 Exclude Banking, Financial Services, Insurance
and Rental business
 40%/20%/20%/20%
 12 C Five Year Write Off
• Used machinery and plant
• Used in a manufacturing process
• Assets let
• Plant agricultural Co-op
• Hotel keeper
• Ships and Aircraft
 Process of Manufacture
• Complete, Continuous Process,
• Essential change in material introduced inthe
Process
• Change in nature and form
• Contributes to the finished product
• Eg cooking of chicken
• Eg Transport of wine tankers
 Similar Process
• Construction
• Shoe Repairing
• Processing of Films and Photographs
• Dry Cleaning
• Washing Milk Bottles
• Panel Beating
• Dyeing
• Reconditioning Motor Vehicles
 Example 3 (a) and (b)

• ABC Manufacturers (Pty)Ltd (a Vat Vendor) year end is 31 March 2020.

The company purchases a second hand machine A on 15 June 2018
for R115 000 VAT inclusive.
• A second new machine B is bought at a cash price VAT exclusive for R
2000 000 the machine is delivered on the 28 February 2019 and used
for the first time on the 1 April 2019. . The company uses both
machines in a process of manufacture. Both machines were brought
into use on date of acquisition. Take all VAT implications into account.
(SARS allows a 6 year write off period for similar machines in terms of
11 (e))
• (a) Calculate the special allowances for 2020 and Tax Value of machine
A as 31 March 2020.
• (b) Calculate the special allowances for 2020 and Tax Value of machine
B as 31 March 2020.
 Memo 3 (a)
12 C Second Hand
Used The process of manufacture
Secodhand
Therefore use 12 C 5 years 20%/20%/20%/20%/20%
Section 12 C is not pro-rated for a portion of the year

Year Calculation
Cost 115 000 x 100/115= 1000000
2019 Capital Allowance '(1000000 x 20% ) 200000 Section 12 C is not pro-rated for a portion of the year
2020 Capital Allowance (1000000 x 20% ) 200000
Tax Value Tax Value (Cost less all previous capital allowances) 600000 (Similar as the carry amount of accounting purposes).
Machine B
 Memo 3 (b)
NEW 12 C
Cost Excluding Finance Costs and VAT 2000000

New The process of manufacture

Therefore use 12 C 4 years 40%/20%/20%/20%

Section 12 C is not prorated for a portion of the year

Year Calculation Allowance

Cost 2000000 (already vat inclusive do not tae out VAT).
2020 (2000000 x 40% ) 800000 Section 12 C is not pro-rated for a portion of the year
2020 Tax Value (Cost less all previous capital allowances) 1200000
 Example 3 (c) and (d)

• Use the same information as in 3 (a) and (b) above

• The Machine A was sold for R575000 VAT inclusive
on 30 June 2020.
• The Machine B was sold for R200 000 VAT exclusive
on 1 June 2020.
(a) Calculate the recoupment or scrapping allowance
for machine A for the year ending 31 March 2021.
(b) Calculate the recoupment or scrapping allowance
for machine B for the year ending 31 March 2021.
 Memo 3 (c)
Machine A

Used The process of manufacture

Secodhand
Therefore use 12 C 5 years 20%/20%/20%/20%/20%
Section 12 C is not pro-rated for a portion of the year

Year Calculation
Cost 115 000 x 100/115= 1000000
2019 Capital Allowance '(1000000 x 20% ) 200000 Section 12 C is not pro-rated for a portion of the year
2020 Capital Allowance (1000000 x 20% ) 200000
2021 Capital Allowance (1000000 x 20% ) 200000 Section 12 C is not pro-rated for a portion of the year
Tax Value Tax Value (Cost less all previous capital allowances) 400000

Proceeds ( R575000 x 100/115) 500000

Less Tax Value 400000
Recoupment 100000 (Proceeds less tax value)
 Memo 3 (d)
Machine B

Cost Excluding Finance Costs and VAT 2000000

New The process of manufacture

Therefore use 12 C 4 years 40%/20%/20%/20%

Section 12 C is not prorated for a portion of the year

Year Calculation
Cost 2000000 (already vat inclusive do not tae out VAT).
2020 (2000000 x 40% ) 800000 Section 12 C is not pro-rated for a portion of the year
2021 (2000000 x 40% ) 400000 Section 12 C is not pro-rated for a portion of the year
2021 Tax Value (Cost less all previous capital allowances) 800000

Proceeds already VAT Exclusive 200000 Correction

Less Tax Value 800000
Scrapping Loss -600000 Proceeds less tax value)
 Example 4
• ABC Printer (Pty) Ltd purchases a second hand
Machine D for R 200 000 on the 30 June2019.
Only Machine D is not used in a process of
manufacture. SARS allows a 6 year write off in
terms of section 11(e ). Ignore VAT

• Calculate the tax allowance for the company’s

28 February 2020 tax year.
 Memo 4
Machine D

Cost Ignore VAT 200000

Used Not used in the process of manufacture

New or Second Hand
Therefore use 11(e ) Stright Line Method over 6 years
Section 11 ( e) is pro-rated for a portion of the year

Year Calculation Allowance

2020 (200000 x (1/6) x (8/12)) 22222.22 Section 11 (e) is pro-rated for a portion of the year
Only used the machine for 8 months in the crrent year.
Therefore use multilpy by 8/12