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CHAPTER 7 – CAPITAL ALLOWANCES & RECOUPMENTS - Coggle Diagram
CHAPTER 7 – CAPITAL ALLOWANCES & RECOUPMENTS
7.3 Wear & Tear Allowance – s 11(e)
Who / When?
Taxpayer owns or acquires qualifying assets
Machinery, plant, implements, utensils and articles
Asset used for trade purposes
Value diminishes due to wear & tear
Key Points
Straight-line method
Diminishing-value method
Apportion if used for part of the year
Generally only once brought into use
Small items < R7,000 may be written off immediately
Calculation Methods
Diminishing Value
Percentage × tax value
Year 1 example: R100,000 × 20% × 6/12 = R10,000
Year 2 example: R90,000 × 20% = R18,000
Straight Line
Equal instalments over useful life
R100,000 ÷ 5 years = R20,000 p.a.
Mid-year: R20,000 × 6/12 = R10,000
Rates / Examples
20% p.a. – machinery, vehicles, equipment
25% p.a. – front-end loaders
15% p.a. – movable site huts
16.67% p.a. – demountable partitions
Value Includes
Cost at acquisition
Shipping / delivery
Installation / erection
Foundation / supporting structure if integrated
Moving costs
Excludes interest and finance charges
Used Assets
Write off over expected remaining useful life
No Allowance
Buildings / permanent structures
Assets acquired with s 12P government grants
Assets held in reserve / not yet brought into use
Private-use portion
Exam Tip
Check qualification
Identify correct rate
Determine tax value
Apportion for part-year / private use
7.4 Disposal / Scrapping of Assets – s 11(o)
Who / When?
Depreciable assets with useful life ≤ 10 years
Asset sold
Asset given away
Asset destroyed / scrapped
Disposal Deduction
Tax value – disposal proceeds
Example: R200,000 – R25,000 = R175,000
Moving costs included in cost
Scrapping Deduction
Tax value – proceeds
Example: R100,000 – R10,000 = R90,000
Exceptions
Useful life > 10 years
Asset never used in trade
Asset merely removed from production
Asset not yet disposed of
Important Rule
Disposal and claim must occur in same year
Exam Tip
Check useful life ≤ 10 years
Check asset was used in trade
Compare tax value with proceeds
7.5 Special Depreciation Allowance – s 12C
Renewable Energy & Farming
Who / When?
Specific qualifying industries
Manufacturing
Renewable energy
Farming and similar activities
Qualifying Assets Must Be
Owned by taxpayer
Brought into use for first time
New or second-hand
Used for trade purposes
Need not be movable
No allowance if leased to lessee
Value of Asset
Lesser of actual cost or arm's-length cash cost
Direct installation / erection costs included
Qualifying foundation / supporting structure may be included
Finance charges excluded
Reduce where s 8(4)(e) recovery applies
Acquired for no consideration → no allowance
Allowance Based on Cost
50% – 1st year
30% – 2nd year
20% – 3rd year
Photovoltaic solar energy ≤ 1 MW → 100% in year brought into use
Foundation / supporting structure may be treated as integrated
Important Note
Unlike normal wear & tear, allowance is not apportioned if brought into use during the year
7.6 Process of Manufacture
What Is It?
Complete and continuous process
Causes an essential change between original material and product
Product must differ in form, nature or use
Does not necessarily need to produce final product itself
Qualification depends on facts of each situation
SBC assets do not qualify
Assets Must Be
Owned by taxpayer
Brought into use for first time
New or second-hand
For taxpayer's trade
Directly in process of manufacture or similar process
Value
Cost less the lesser of:
Actual cost to taxpayer
Arm's-length cash cost
Installation / erection costs
Qualifying foundation / supporting structure
Moving costs
Excludes finance charges
Depreciation Rates
New assets
40% / 20% / 20% / 20%
Second-hand assets
20% / 20% / 20% / 20% / 20%
7.7 Similar Process
What Is It?
Activity not necessarily manufacturing
Sufficiently similar to a manufacturing process
Examples
Construction
Shoe repairing
Dry cleaning
Panel beating
Dyeing
Reconditioning motor vehicle engines
Important
Taxpayer must determine whether activity qualifies
Practice Note 42 provides guidance
Exam Tip
Ask whether the activity is sufficiently similar to manufacturing
7.8 Plant
What Is Plant?
Machinery
Equipment
Implements
Assets used on a more permanent basis in carrying on a business
Two Important Tests
Functional Test
Is the asset used in carrying on business activities?
Durability Test
Can the asset be used repeatedly over a reasonable period?
Important Note
Assets used only once or twice are normally consumables
Consumables are not normally considered plant
Recoupments & Anti-Avoidance
When Does Recoupment Apply?
Allowances were previously claimed
Asset is disposed of
Proceeds exceed tax value
Formula
Recoupment = Proceeds – Tax Value
Added to taxable income
Example
Tax value = R50,000
Proceeds = R70,000
Recoupment = R20,000
When Does It Not Apply?
Asset never qualified for allowance
Asset never used in trade
Asset only produced exempt income
Exam Tip
Proceeds > tax value → recoupment
Tax value > proceeds → possible disposal / scrapping deduction
EXAM QUICK CHECK
Does the asset qualify?
Which section applies?
Is it wear & tear, special allowance, disposal or recoupment?
Determine cost / tax value
Apply the correct rate or formula
Apportion where required
Check exclusions and government grants
On disposal compare proceeds with tax value
Proceeds > tax value → Recoupment
Tax value > proceeds → Disposal / scrapping deduction