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CAPITAL ALLOWANCES – CH 7 & 12 - Coggle Diagram
CAPITAL ALLOWANCES – CH 7 & 12
SECTION 12B – Special Depreciation Allowance
Who qualifies
Farmers – qualifying plant and equipment
Taxpayers generating electricity from renewable sources
Wind
Solar
Hydro ≤ 30MW
Biomass
Producers of bio-diesel or bio-ethanol
Requirements
Asset must be owned or acquired under instalment credit
Must be used in taxpayer's own trade
Generally not leased out
Qualifying operating leases may qualify
Improvements to foundations/supporting structures may qualify
Allowance
50% in Year 1
30% in Year 2
20% in Year 3
Photovoltaic solar ≤1MW
100% immediate deduction
Not apportioned for part-year
Cost
Includes installation and erection costs
Excludes finance charges
Exclusions
Generally no allowance for lessors
Exception – qualifying lease ≥5 years and lessee uses asset in trade
No allowance if previously used by connected company in same year
No allowance if disposed of in prior year
No double claim
s 12E
s 6C
s 12BA
No allowance if acquired for no consideration
Buildings excluded
Exam tips
New or second-hand assets can qualify
If trade was previously exempt
Only 30% + 20% allowed
Assume 50% already claimed
SECTION 12C – Plant & Machinery
What is it?
Special depreciation allowance for qualifying plant and machinery
Asset must be owned by taxpayer or lessor
May be acquired under instalment sale agreement
Must be brought into use for the first time by taxpayer
Qualifying assets
Industrial machinery or plant
Used directly in manufacturing or similar process
Functional test
Automotive manufacturing assets
APDP
AIS
Agricultural co-operative machinery or plant
Storing
Packing
Primary processing of members' products
Hotel keeper machinery, implements, utensils or articles
Excludes vehicles
Excludes office/staff-room equipment
Aircraft
Excludes aircraft qualifying under s 12B
Ships
Excludes ships with exempt income under s 12Q
Research and development machinery or plant
As defined in s 11D
Improvements to qualifying assets
Must be capital improvements
Not repairs
Allowance
20% per annum of cost
Certain energy-saving assets may qualify for 40% in Year 1
Claimable when brought into use for the first time
Not apportioned for part-year
Total allowance limited to cost
Cost rules
Lower of actual cost or market value
Exclude finance charges
Exclude VAT if input VAT can be claimed
s 23C
Include direct installation and erection costs
Certain allowances may reduce cost
e.g. s 12C(5)
Other important points
No allowance if asset qualifies for s 12B renewable-energy allowance
Must be used in taxpayer's trade
Exceptions may apply to mining or farming
Improvements must be capital in nature
SECTION 7.9 – BUILDING ALLOWANCES
General principles
Buildings are normally capital in nature
Not deductible under s 11(a)
Specific building allowance depends on type and use
Allowance calculated on cost
Not apportioned for part of a year
Always check
Ownership
Use
New or used
When acquired/erected
When brought into use
7.9.1 – Initial Allowance: Industrial Buildings
s 13(7)
Who qualifies
Taxpayers erecting manufacturing buildings
Applicable to buildings erected between 1 July 1985 and 31 December 1988
Requirements
Building wholly/mainly used for manufacturing trade
May be used by lessee
Allowance
17.5% initial allowance
Claimed in year building is first brought into use
Reduces base for annual allowance
Leased buildings
Generally not granted unless lessee's receipts were taxable
Exam tip
Recoupment if building sold for more than 82.5% of cost
7.9.2 – Annual Allowance: Manufacturing/R&D Buildings
s 13(1)
Who qualifies
Owners or lessors of qualifying buildings
Requirements
Used wholly or mainly for manufacturing or R&D
More than 50% of floor area
Can be erected or purchased
New or used buildings can qualify
Allowance
5% per annum – current rate
Historical rates
2% – 1959 to 1988
5% – 1989 to 1996
10% – 1996 to 1999
For buildings brought into use by 31 March 2000
5% thereafter
Exceptions
No deduction for s 12V qualifying buildings
Exam tip
Allowance based on qualifying cost
Consider initial allowances
Consider recoupments
Consider leasehold obligations
7.9.6 – Improvements
s 13(9)
Who qualifies
Taxpayers extending or adding to industrial buildings
Requirements
Improvement must increase capacity
Must be capital in nature
Repairs do not qualify
Allowance
Treated as part of building cost
Included in annual building allowance calculation
7.9.7 – Recoupments
s 13(3)
When does it arise?
Industrial building is disposed of
Sale proceeds exceed tax value
Treatment
Recoupment included in taxable income
Option
Recoupment may be set off against cost of a new building
New building must be acquired within 12 months
SECTION 13 – Industrial Buildings
Scope
Building erected by taxpayer
Purchased building may qualify if seller qualified under s 13
Purchased building that has never been used may qualify
Requirements
Used wholly or mainly
More than 50%
For manufacturing or similar process
Can qualify if let to a tenant for manufacturing
Allowance
5% per annum
Buildings/improvements commenced on/after 1 October 1999
Not apportioned for part-year
Total allowance cannot exceed cost
SECTION 13quin – Commercial Buildings
Scope
New and unused commercial buildings
Offices
Warehouses
Shopping malls
Retail premises
Requirements
Building commenced on or after 1 April 2007
Owned by taxpayer
Used wholly or mainly to produce income in trade
Can use or let to another person
Does not apply to residential accommodation
Allowance
5% per annum
55% of acquisition price – new building
30% of acquisition price – qualifying improvement
Not apportioned for part-year
SECTION 13sex – Residential Buildings
Scope
New and unused residential units and improvements
Requirements
Owned by taxpayer
Located in South Africa
Used solely for trade purposes
Taxpayer must own at least 5 residential units
Allowance
5% per annum – normal residential units
10% per annum – qualifying low-cost residential units
Additional 5%
55% of acquisition price – new building
30% of acquisition price – qualifying improvement
Not apportioned for part-year
OTHER BUILDING-RELATED SECTIONS
s 13quat
Urban Development Zones (UDZ) buildings
s 13sept
Special allowance for low-cost residential units
Applicable to qualifying buildings on/before 2022 year of assessment
Important
Buildings do not qualify for scrapping allowance under s 11(o)
Where sold for less than tax value
SECTION 12.1 – MEANING OF "PLANT"
Functional test
Asset must be used in the taxpayer's trade
Asset must perform a function in the income-producing process
Durability test
Asset must have sufficient useful life
Consumables generally fail the durability test
Key cases
Blue Circle Cement (1984)
Knives and lasts = plant
Passed functional test
Passed durability test
ITC 1469 (1989)
Lithographic plates and dies = consumables
Failed durability test
SECTION 12.1 – R&D ALLOWANCE
Section 11B – Historical provision
Allowed deduction for qualifying R&D expenditure
Applied to years of assessment commencing on/after 1 January 2004
Ceased to apply to expenditure incurred on/after 2 November 2006
Replaced by s 11D
Section 11D – Current R&D provision
Qualifying expenditure
Actually incurred
Directly and solely for R&D
Undertaken in South Africa
In production of income
In carrying on a trade
R&D approval
Must be approved by Minister of Higher Education
Application timing requirements apply
Scope
Revenue expenditure
Capital expenditure
Prototypes
Pilot plants
Not production thereafter
Allowance
150% of qualifying R&D expenditure
OVERALL EXAM APPROACH
Identify the type of asset
Plant
Machinery
Building
R&D expenditure
Identify the specific section
s 12B
s 12C
s 13
s 13quin
s 13sex
s 11D
Check qualifying requirements
Ownership
Use
Trade
New/used
Date brought into use
Location
Determine the cost
Check VAT treatment
Check installation/erection costs
Check finance charges
Check previous allowances
Apply the correct allowance rate
Check whether allowance is immediate
Check whether spread over years
Check whether part-year apportionment applies
Check exclusions and double claims
Check for recoupment on disposal
Calculate final capital allowance