This article (part 2) discusses the basics of policies on determining the allowance’s amount and methods for determining it. It refers to an Annexure; this is merely a list of assets and applicable proposed write-off periods suggested by SARS and can be obtained from the SARS website in INTERPRETATION NOTE 47 (Issue 5) dated 09 February 2021 – WEAR-AND-TEAR OR DEPRECIATION ALLOWANCE.
Article 1 discussed Wear-and-tear or Depreciation Allowance as defined in the Income Tax Act, Section 11(e), and a Binding General Ruling (Issue 4) dated 09 February 2021. This BGR applies to any asset used on or after 24 March 2020.
Methods for determining the allowance
In determining the allowance, taxpayers may elect between:
• the diminishing-value method (under this method the allowance for a year of assessment is calculated on the remaining value (also known as the income tax value), that is, the cost of the qualifying asset less an allowance for the previous years of assessment); or
• the straight-line method (under this method the allowance is claimed in equal instalments over the expected useful life of the asset).
It is unnecessary for a taxpayer to notify the Commissioner when changing the method for determining the allowance. Taxpayers must ensure that they have the necessary records supporting the write-off of all assets readily available, should these be
requested by the Commissioner.
Write-off periods
Under the diminishing-value method, the allowance must be determined on the income tax value of a qualifying asset during each year of assessment in which the asset is used for the purposes of trade. A taxpayer using the diminishing-value method that wishes to adopt the straight-line method must write off the income tax value of existing assets in equal instalments over their remaining estimated useful lives.
Under the straight-line method, the cost of an asset must be written off in equal annual instalments over its estimated useful life.
(a) Qualifying assets for which write-off periods have been listed in the Annexure
The Annexure contains a schedule of write-off periods that are acceptable to the Commissioner for assets that are written off on the straight-line method. These write-off periods are acceptable for assets that are used for purposes of trade, including trade of leasing, and apply to any asset brought into use during a year of assessment commencing on or after 24 March 2020. The assets listed in the Annexure are of general application and not intended for specific industries.
Any application to write off an asset over a useful life which is a shorter period than that reflected in the Annexure must be fully motivated and submitted to the SARS Branch office where the taxpayer is registered for income tax purposes. The application must be lodged before submission of the return of income in which the allowance is to be claimed. Factors which may result in an asset having a shorter useful life than the write-off period specified in the Annexure could, among others, include”
• the environment in which the asset operates; and
• the intensity with which the asset is used.
The factors which must be considered and proven when submitting the application to write off an asset earlier than the period provided in the Annexure are set out in paragraph (b) below. The facts and circumstances of each case will be considered to ascertain if the asset qualifies for a shorter write-off period than the period specified in the Annexure.
An asset which is let for a period exceeding that prescribed in the Annexure must be written off over the period of the lease. In contrast, an asset let for a period shorter than that reflected in the Annexure must be written off over the period reflected in the Annexure unless a shorter period can be motivated as described in the preceding paragraph.
(b) Qualifying assets for which write-off periods have not been listed in the Annexure
The period of write-off of any asset not included in the Annexure must be determined by its expected useful life.
The following factors must be taken into account in determining the expected life of an asset:
- How long the taxpayer expects the asset to last.
- How the taxpayer expects to use the asset.
- Whether the asset is likely to become obsolete.
- Whether the effective life of the asset is limited to the life of a particular project.
The kind of information that could be useful in determining the expected useful life of an asset includes:
- manufacturer’s specifications;
- independent engineering information;
- the taxpayer’s own experience with similar assets;
- the accounting write-off period; and
- the experience of other users of similar assets.
How the taxpayer expects to use the asset will take into consideration, for example, the specific environment in which the asset is used and the intensity with which the asset is used. For example, assume a machine is generally expected to have an estimated useful life of 5 years. It is possible that a particular taxpayer may use the machine in an environment and in a manner which impacts the machine’s useful life and reduces it to less than 5 years. The test is whether the asset is used in a manner that impacts the asset’s useful life (or in the case of an asset in the Annexure, reduces its useful life to less than that specified in the Annexure). Not all decisions taken with regard to assets used by a taxpayer impact the asset’s useful life. For example, a decision to sell an asset before the end of its useful life, or to transfer an asset to a lessee at the end of a lease period which is shorter than the asset’s useful life, does mean that the asset’s useful life is reduced, the asset still has a useful life under a different owner.
If an asset is not included in the Annexure, taxpayers must ensure that they have the necessary information or documentation pertaining to the period of write-off readily available when requested by the Commissioner upon assessment or audit of the case as evidence of a reasonable write-off period for the asset in question.
A request to include the write-off period of an asset which does not appear in the Annexure may be sent by e-mail to CITOpinions@sars.gov.za. In order to be included in the schedule, the asset must not be unique or be used in a unique manner.
Used qualifying assets
A used or second-hand asset must be written off over its expected useful life, taking into account its condition. Simply because a second-hand asset is older than the write-off periods in the Annexure does not mean that it can be written off in full in the year of acquisition.
“Small” item
The cost of “small” items such as loose tools may be written off in full in the year of assessment in which they are acquired and brought into use. A “small” item in this context is one which normally functions in its own right, does not form part of a set and is acquired at a cost of less than R7 000 per item. The amount of R7 000 applies to any qualifying asset acquired on or after 1 March 2009.
A table and six chairs which plainly form part of a set can, for example, not be divided into individual independent items costing less than the specified amount. The cost of such a set amounting to R7 000 or more cannot be written off in full during the year of assessment in which the set was acquired and brought into use.
Also, the “small items” write-off does not apply to assets acquired by lessors for the purpose of letting. Thus lessors that let small items such as DVDs, clothing, machinery, pallets or gas cylinders must depreciate these assets over their useful lives.
Qualifying assets previously used to produce amounts that were not included in the taxpayer’s income
Paragraph (ix) of the proviso to section 11(e) applies if:
- a qualifying asset was used by the taxpayer during any previous year of assessment or years of assessment for the purposes of any trade carried on by that taxpayer, and
- the receipts and accruals of that trade were not included in the taxpayer’s income during that year or years.
This situation could occur, for example, when:
- an asset was used by a public benefit organisation (PBO) in a previous year of assessment during which its receipts and accruals were fully exempt from income tax, and the PBO became taxable on its trading activities in the current
year of assessment because its income from such activities exceeded the threshold in section 10(1)(cN); - an asset was used before the introduction of the residence basis of taxation for purposes of foreign trade; or
- an asset was used in a “micro business” contemplated in the Sixth Schedule and the taxpayer became subject to normal tax because the turnover of the micro business exceeded the maximum threshold for such a business.
In these circumstances, the Commissioner must take into account the period of use of the relevant qualifying asset during that previous year or years in determining the amount by which its value has been diminished.
Qualifying assets used for both private and business purposes
The allowance must be apportioned if an asset is used for private and business purposes since the deduction is allowable only to the extent that the asset was used for the purposes of trade.
Qualifying assets not used for the whole year of assessment
The allowance must be apportioned for an asset that has not been used for the purposes of trade throughout the year of assessment. This situation could occur, for example, if the asset is:
- acquired and brought into use during a year of assessment;
- disposed of during the year of assessment; or
- used by a natural person in carrying on a trade in his or her own name and that person became insolvent or died during the year of assessment.
The allowance must be apportioned regardless of whether the straight-line method or diminishing-value method is used.
Sequestration
Before sequestration
Under section 25C the estate of a person before sequestration and that person’s insolvent estate are deemed to be one and the same person for purposes of determining the amount of any allowance or deduction to which the insolvent estate
may be entitled. The natural person before sequestration will therefore be entitled to only a pro-rata share of the allowance, that is, the allowance calculated from the commencement of the year of assessment or date of commencement during the year
of assessment up to and including the day before the date of sequestration.
On or after sequestration
An insolvent estate that continues to trade in the year of assessment in which sequestration commences will be entitled to a pro-rata share of the allowance, that is, the allowance calculated from the date of sequestration until the end of the year of assessment or until the date of disposal of the asset if earlier.
Death
The comments here apply to persons who have died on or after 1 March 2016.
A deceased person who used an asset for the purposes of trade is entitled to a pro-rata portion of the allowance calculated from the commencement of the year of assessment up to and including the date of death. Depending on the facts, a
deceased estate or an heir or legatee that continues to use the asset in an income-producing trade will be able to claim a pro-rata portion of the allowance from the date on which the asset was acquired.
The amount of expenditure deemed to be incurred by the deceased estate when it acquires an asset from the deceased person and the amount of expenditure that an heir or legatee is deemed to have incurred upon acquiring an asset from the deceased
estate is determined under section 9HA and section 25. Special rules within those sections apply if the disposal is to a surviving spouse.
Qualifying assets not yet brought into use for purposes of trade
A taxpayer that acquires an asset in one year of assessment and brings it into use for the purposes of trade in a subsequent year of assessment will be entitled to claim the wear-and-tear allowance only from the date on which the asset is brought into use in that subsequent year of assessment.
Personal-use assets commencing to be used for trade purposes
A person who acquires an asset for personal use and later deploys it in a trade will be entitled to an allowance based on the lower cost and market value determined at the time the asset is first used in the trade. While the section 11(e) allowance is generally based on cost, it is unacceptable to use the original cost when the asset has been diminished in value as a result of personal use. The expected useful life of the asset must be determined at the time it is brought into use in the trade having regard to its condition and it must be written off over that period.
If the asset was originally acquired for no consideration (for example, by donation or distribution in specie) or for a non-arms length price from a connected person, it must be depreciated based on the lower of the original market value at the date of acquisition and the market value at the time it is brought into use in the taxpayer’s trade.