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LEARNING UNIT 6

Capital allowances

CONTENTS
6.1 Background
6.2 Repairs and improvements
6.3 Capital allowances – Movable assets
6.4 Building allowances – Immovable assets
6.5 Disposal of assets that were subject to an allowance
6.6 Leased assets

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INTRODUCTION ___________________________________________________________

In terms of the general deduction formula, which you studied in learning unit 5, expenditure of a capital
nature is not deductible. However, the Act makes specific provision for allowable deductions in respect of
specific capital assets, which are used by a taxpayer in the production of income. This deduction is
commonly referred to as a capital allowance for tax purposes (in accounting, it is called depreciation). A
capital allowance involves the write-off of the cost of the relevant capital asset over a period of time. The
period over which an asset can be written off is determined by the Income Tax Act and by SARS. These
periods depend on whether an asset is movable or immovable, and they are listed in the different sections
of the Act or binding General Ruling No. 7 (BGR 7). We will give you an extract from BGR 7 in a question
and do not expect you to know the write-off periods.

For taxation purposes, we refer to and calculate capital allowances or wear and tear. For
accounting purposes, you will refer to and calculate depreciation.
Depreciation is calculated in accordance with accounting principles, but capital allowances
are calculated in accordance with the Income Tax Act. As a result, these calculations differ,
and accounting depreciation is not an allowable deduction for income tax purposes. The
difference in the calculation will result in a difference between accounting profit and taxable
income.

Capital allowances will be studied in this learning unit. This learning unit also considers the tax implications
if a depreciable asset (an asset on which a capital allowance was previously granted) is destroyed or
disposed of, in which case a possible recoupment or a section 11(o) scrapping allowance must be brought
into account in calculating the taxable income of the taxpayer. For purposes of this module, we only cover
assets that are owned by the taxpayer. The tax implications of leased assets will be covered on third year
level.

By now, you should know that the Income Tax Act has a specific structure or framework that must be
applied to determine the normal income tax liability of a taxpayer.

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Definition
Gross
income Specific
inclusions
Income Less:
exempt
income
Less:
General
deductions
Deductions Specific
deductions
Gives:
Capital This learning
allowances unit
Taxable income
before capital gains
Plus:

Capital gain

Gives:

Taxable income

Figure 6.1: Taxable income framework

In this learning unit, the third category of allowable deductions – capital allowances – will be discussed.
You will learn how to calculate these allowances for a taxpayer for a year of assessment.

STUDY PROGRAMME_______________________________________________________

You should complete this learning unit in weeks 9 – 11 and 13 of the programme.

You should spend a minimum of 27 hours on this learning unit.

LEARNING OUTCOMES ___________________________________________________

After you have completed this learning unit, you should be able to

• distinguish between a repair of, and an improvement to, a capital asset

• distinguish between the different types of capital assets and the capital allowance applicable to them
• calculate the various capital allowances and/or wear and tear
• calculate a section 11(o) scrapping allowance, a recoupment or a deferral of a recoupment on the
disposal of a capital asset

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PRESCRIBED STUDY MATERIAL FOR THIS LEARNING UNIT _____________________

Chapter 5 in the prescribed textbook.

CONTENTS

6.1 Background

Textbook: section 5.1 Introduction

The Act makes provision for capital allowances in respect of capital assets that are used in the business
of the taxpayer. Section 11(e) of the Act makes provision for wear-and-tear allowances in respect of
moveable assets in general. Special capital allowances also exist for assets used in the manufacturing
process (manufacturing assets (s 12C) as well as manufacturing buildings (s 13)) and assets used by a
small business corporation (s 12E). Various other types of allowances are applicable to buildings. These
special capital allowances are often referred to as accelerated allowances because they are more
favourable for the taxpayer than the general capital allowances under section 11(e) and are aimed at
advancing the manufacturing or other sectors, which create job opportunities.

Read section 5.1.

In this learning unit, we will consider how to treat the cost of purchasing an asset, the allowances when
holding an asset and, lastly, the implications of selling or disposing of an asset. As you know, the purchase
price of an asset is not deductible for income tax purposes. Instead, the cost is spread over the estimated
life of the asset and deducted as a capital allowance.

6.2 Repairs and improvements

Textbook: section 5.2 Repairs – section 11(d)

Part of the cost of holding an asset is to keep it in good working order. Capital assets include the cost of
improvements made to the capital asset but exclude the cost of repairs to restore the asset to its original
state.

Repairs are concerned mainly with restoring damage or deterioration to capital assets, and the intention
of the taxpayer is to restore the assets to its original condition, whereas an improvement is the creation of
a better asset.

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Study section 5.2 and work through the example on repairs and improvements.

Note the guidelines laid down by the courts regarding the explanation of what constitutes repairs
versus what constitutes improvements.

After completing the example on repairs and improvements, you should be able to differentiate between
costs of repairs of an asset and improvements to an asset, as well as the corresponding tax implications
of each.

Capital allowances depend on the type of asset, the purpose for which it is used and the type of enterprise
in which it is used. This learning unit will focus on the following capital allowances available to taxpayers:

Allowances on capital assets

Movable assets Immovable assets (building allowances)

Small business corporation assets – Manufacturing building and improvements –

section 12E section 13(1)

Manufacturing assets – section 12C Commercial building – section 13quin

Non-manufacturing assets: Residential units – section 13sex

Wear-and-tear allowance – section 11(e) Low-cost residential units – section 13sept

Urban development zones – section 13quat

Figure 6.2: Capital allowances for movable and immovable assets

6.3 Capital allowances – movable assets

Textbook: sections 5.3 to 5.5

6.3.1 Special capital allowance – section 12C

Textbook: section 5.4 Special depreciation allowance

Section 12C provides for special wear-and-tear allowances in respect of new or used plant and machinery
used directly in the process of manufacturing or in a similar process by a taxpayer and brought into use
for the first time by the taxpayer in his trade. However, a process must meet certain criteria before it
qualifies as a process for income tax purposes. These favourable allowances are aimed at stimulating the
manufacturing sector to create job opportunities. Please note that any moving or installation costs relating
to manufacturing machines are added to the cost of the machine. If moving costs are incurred on an asset

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still being written off, such costs will be written off over the remainder of the write-off period. If the asset
has been written off fully, the moving costs incurred will be fully deductible in the year it was incurred.

Study section 5.4.

The write-off period can be either four or five years, depending on the nature of the manufacturing asset
acquired. The following table sets out the specifications:

DESCRIPTION FOUR YEARS FIVE YEARS

Nature of machinery New or unused Used
Brought into use for the first time On/after 1 March 2003 Any date
Write-off 40%, 20%, 20%, 20% 20% per annum
Apportionment None None
Table 6.1: Capital allowance specifications for manufacturing assets

Remember that a section 12C allowance should never be apportioned.

Work through the examples on the section 12C allowance in sections 5.4 and 5.4.3 in
the prescribed textbook and note that there is no apportionment of the allowance,
even when the asset is used for part of the tax year only or brought into use during
the tax year.

6.3.2 Movable assets purchased by small business corporations – section 12E

Textbook: section 5.5 Small business corporations

In addition to boosting the manufacturing sector, the government is also attempting to promote small
business enterprises in South Africa. Small businesses create job opportunities and many economists
view this sector as one of the key sectors that could contribute meaningfully to the reduction of
unemployment in our country in future. For this reason, tax incentives were announced for so-called small
business corporations (SBC). In learning unit 3, you learnt how to identify an SBC. The tax benefit for this
category of taxpayer comprises a favourable capital allowance in respect of manufacturing assets (100%
deduction) and non-manufacturing movable assets (50% in year one, 30% in year two and 20% in year
three), as well as a favourable income tax rate (as discussed in learning unit 3). Moving costs are written
off over the remaining useful life of the asset. When the asset has been fully written off, the moving costs
will be fully deductible when incurred.

Study section 5.5.

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Note that both new and used (second-hand) assets may qualify for the section 12E capital
allowance.

Work through the example on the section 12E allowance in section 5.5.

Note that the allowance is not apportioned, even when the asset is used for part of the tax
year only or brought into use during the tax year. You will note that the depreciation of R5
000 is added back to the net profit and that the section 12E allowance of R13 500 is
deducted for tax purposes. Depreciation is calculated for accounting purposes, while the
section 12E allowance is deductible for tax purposes. For this reason, the depreciation has
to be added back to cancel its effect on net profit.

6.3.3 General wear-and-tear allowance – section 11(e)

Textbook: section 5.3 Wear and tear allowance – section 11(e)

All movable assets other than those that qualify for section 12C or 12E allowances (as above) can still
qualify for a wear-and-tear allowance in terms of the general wear-and-tear provisions contained in section
11(e). Binding General Ruling No 7 (BGR 7) forms the basis for the application of section 11(e) and
contains the acceptable write-off periods, in years, for a wide range of capital assets.

Visit the following link for BGR 7 (Issue 4 of 9 February 2021) and refer to the
annexure from page 13 onwards, which indicates the write-off periods acceptable to
SARS: https://www.sars.gov.za/wp-content/uploads/Legal/Rulings/BGR/LAPD-IntR-
R-BGR-2012-07-Wear-And-Tear-Depreciation-Allowance.pdf

Study section 5.3.

We do not expect you to memorise BGR 7 and we will always give you an extract in
a question with the applicable write-off periods.

You should be able to determine the wear-and-tear allowance in respect of a specific asset that may be
claimed for a specific year of assessment, using the write-off periods set out in BGR 7. The allowance is
apportioned for the period during which the asset was in use in the year of assessment – thus, it is only
allowed as a deduction for the number of months during which the asset was used during the year of
assessment.

Work through the examples on wear-and-tear allowances in section 5.3.1 of the textbook.
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Note the apportionment of the allowance when the asset is used for part of the tax year
only or brought into use during the tax year. When moving costs are incurred on an asset
subject to wear and tear, the moving cost will form part of the cost of the asset and will be
written off over the remainder of the write-off period of the asset. In the second example,
moving costs of R10 000 were incurred on 1 January for a mainframe computer purchased
in July of the previous year. Thus, from the date the moving cost was incurred, only 30
months remained to write off the computer.

Therefore, the wear and tear to be claimed regarding the moving costs will be 12/30 x
R10 000 = R4 000.

After completing this activity, you should be able to calculate a wear-and-tear allowance for a qualifying
asset.

Note that wear-and-tear allowances apply to movable assets and do not apply to structures and works of
a permanent nature such as buildings.

As we do not cover VAT in this module, we will ignore all VAT implications on
transactions relating to assets.

Complete the following table containing the capital allowances applicable to assets
qualifying for wear-and-tear allowances:
Section 12E Section 12C Section 11(e)
Which taxpayers may use this
section?
To which assets can each of
these sections be applied?
At what rate is the allowance
applied?

You can find the solution at the end of the learning unit.

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Below, a summary of capital allowances relating to movable assets is given in the form of a flow chart,
which encompasses sections 11(e), 12C and 12E.

Capital allowances of
movable assets

Small business Manufacturing Other (s 11(e))

corporation (s 12E) (s 12C)
BGR No. 7
Manufacturing = New: 40%, 20%,
100% 20%, 20% Apportioned

Other = 50%, 30%, Used: 20% for 5

20% years

Not apportioned Not apportioned

Figure 6.3: Calculating capital allowances on movable assets

6.4 Building allowances – immovable assets

Textbook: section 5.6 Building allowances

In addition to the plant, machinery and equipment (movable assets) that are used directly in a
manufacturing process, the buildings used in a manufacturing process can also qualify for a capital
allowance. Furthermore, buildings (commercial or residential) in predetermined urban areas may qualify
for specific allowances in certain circumstances. There is also an allowance for commercial buildings.
These provisions are set out in section 13, 13quat and 13quin of the Act.

6.4.1 Buildings used in a process of manufacture – section 13(1)

Textbook: section 5.6.1 Building annual allowance – Industrial/factory buildings

Study section 5.6.1.

The cost (excluding the cost of the land, but it may include capitalised finance costs) of erecting or
purchasing a manufacturing building by a taxpayer may qualify for an annual allowance of 5%, provided it
was erected on/after 1 January 1989 and it is used “wholly or mainly” (more than 50%) for carrying on of
a process of manufacturing.

This allowance is also claimable for improvements made by the taxpayer to the existing manufacturing
building.

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Work through the examples on the manufacturing allowance in section 5.6.1 of the
textbook.

Note that the allowance is not apportioned, even when the asset is used for part of the
tax year only or brought into use during the tax year.

6.4.2 Commercial buildings – section 13quin

Textbook: section 5.6.2 Commercial buildings

Section 13quin was introduced on 1 April 2007 and applies only to new or unused commercial buildings
owned by the taxpayer, or improvements to existing buildings contracted for on or after 1 April 2007, the
construction of which only commenced on or after that date. It does not apply to residential buildings or to
commercial buildings erected before 1 April 2007.

Study section 5.6.2.

The allowance is 5% per annum, straight line, based on the cost of the building or improvements. Where
the building is brought into use during the tax year, the allowance is not apportioned. The building should
be used wholly or mainly by the taxpayer during the year of assessment for the purposes of producing
income in the course of the taxpayer’s trade.

Please note that when part of a building was acquired by a taxpayer without the taxpayer erecting or
constructing it, the cost must be adjusted as follows:

• 55% of the acquisition cost price if only a part is acquired

• 30% of the cost of improvement, if an improvement is made

Work through the examples on the commercial building allowance in section 5.6.2 of the
textbook.

Note that the allowance is not apportioned, even when the asset is used for part of the
tax year only or brought into use during the tax year.

The section clearly states that no deduction will be allowed if another deduction can be
claimed. This allowance may only be claimed if the building is owned by the taxpayer and
in respect of buildings that are new or unused.

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6.4.3 Residential and low cost residential units (s 13sex and s 13sept)

Textbook: sections 5.6.4 Deduction in respect of certain residential units

A residential unit is defined as a building or self-contained apartment mainly used for residential
accommodation, excluding buildings or apartments used in carrying on a trade as a hotelkeeper.

Study sections 5.6.4.

6.4.4 Urban development zones – section 13quat

Textbook: section 5.6.3 Urban development zone (UDZ) allowance

Urban decay of established cities and the corresponding tendency to establish businesses in newer areas
outside these cities are an international phenomenon, which are also found in South African cities. Section
13quat was thus introduced into the Act to encourage businesses to invest in these urban areas (city
centres) by erecting new buildings and renovating existing buildings situated in decayed urban areas.
Accordingly, businesses are given an incentive to relocate to these areas, resulting in existing
infrastructure (i.e. public transport systems) being better utilised.

On 30 June 2021, Easy (Pty) Ltd completed the erection of a new building in an urban
development zone at a total cost of R5 000 000 and brought it into use immediately.
Calculate the section 13quat allowance for the years of assessment ended
28 February 2023 and 28 February 2024.
Solution

2023: R5 000 000 x 20% = R1 000 000

2024: R5 000 000 x 8% = R400 000

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The following is a summary of capital allowances relating to immovable assets (i.e. building allowances):

Manufacturing Capital allowances of Low-cost residential

building (s 13(1)) immovable assets units (s 13sept)
(building allowances)
On or after 1 Jan 10% of amount owing to
1989 5% p.a. taxpayer (i.e. employer)

Not apportioned On or after 21 Oct 2008

Not apportioned

Commercial Residential units Urban development

(administrative) (s 13sex) zones (s 13quat)
building (s 13quin)
On or after Refurbishment: 20%
21 October 2008 p.a.
On or after 1 April 5% p.a.
2007 5% p.a. New or extension of
Not apportioned building: 20% in first
Not apportioned year and thereafter,
8% for 10 years

Not apportioned

Figure 6.4: Calculating capital allowances on movable assets

6.5 Disposal of assets that were subject to an allowance

Textbook: section 5.7 Disposal of allowance assets

During the carrying on of a business, a taxpayer may decide to sell or stop using an asset in respect of
which a capital allowance was previously claimed. Such assets could also have been damaged beyond
repair. These events have tax implications, as they could result in a recoupment or a section 11(o)
scrapping allowance. A recoupment is a recovery of the allowances previously claimed. Note that if an
asset is sold for an amount that exceeds the original cost, a taxable capital gain may arise. This taxable
capital gain is calculated in accordance with the provisions of the Eighth Schedule to the Act (learning
unit 7).

6.5.1 Scrapping allowance – section 11(o)

Textbook: section 5.7.1 Allowances in respect of disposal of assets – section 11(o)

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A scrapping allowance occurs when the cost of an asset exceeds the sum of the tax allowances or
deductions in respect of that asset and the proceeds on disposal. This means that a loss has been made.
The cost of the asset less the sum of the capital allowances is called the tax value of the asset. Thus, if
the proceeds (selling price of the asset) are less than the tax value of the asset, the net result is a loss and
the taxpayer may claim the loss as a scrapping allowance, provided that the asset was subject to a section
11(e), 12C or 12E allowance.

Study section 5.7.1.

When an asset is disposed of, the capital allowances that have been deducted each year need to be
considered. We do this by calculating a tax value – see the figure below.

(Depending on which section

Cost/value of asset applies for capital allowance)
Less: Capital allowances
Gives: Tax value

Proceeds (selling price) Each year, these have been

Less: Tax value deducted from taxable income
Recoupment/scrapping allowance (see above).

When proceeds are greater than (>) When tax value is greater than proceeds;
tax value; limited to allowances and deducted from taxable income calculation
added to taxable income calculation

Figure 6.5: Calculation of the tax value

Work through the example on the scrapping allowance in section 5.7.1 of the textbook.

6.5.2 Recoupments – section 8(4)(a)

Textbook: section 5.7.2 General recoupment provision – section 8(4)(a)

If an asset is sold for an amount exceeding (more than) the tax value (original cost price less capital
allowances), the net result represents a recoupment of the capital allowances previously claimed. The
recoupment is limited to capital allowances previously claimed on the asset being sold. As noted in learning
unit 4, such a recoupment should be included in gross income as a special inclusion.

Study section 5.7.2.

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Work through the examples on recoupment in terms of section 8(4)(a) in section 5.7.2 in
the textbook.

6.5.3 Deferral of recoupment of building allowances – section 13(3)

Textbook: section 5.7.3 Deferral of recoupment of building allowances – section 13(3)

If a taxpayer uses the proceeds from the disposal of building A to purchase a new building B, for example,
the taxpayer has the option to set off any recoupment from the disposal of building A against the cost of
the new building B, instead of including the recoupment in taxable income. The net result would be that
the future capital allowances on the new building B will be calculated on the reduced amount (cost of
building B less the amount of the recoupment from building A over the life of building B). The new building
B must be purchased or erected within 12 months from the date of disposal of building A and must qualify
for the annual building allowance of 5%.

Work through the example on the building recoupment in section 5.7.3 of the textbook.

Please note that in this example, the taxpayer elected to set off the recoupment of
R500 000 that was realised on the disposal of the first manufacturing building against the
cost of the new building. The cost of the new building is reduced by the R500 000
recoupment and the annual allowance of 5% is calculated on the reduced cost. If the
taxpayer did not elect to set off the recoupment of R500 000 against the cost of the new
building, the recoupment would have been included in gross income and the 5% annual
allowance would have been calculated on the actual cost of the new building.

6.6 Leased assets

No prescribed text

A taxpayer may decide to rent the assets (or some of them) he or she needs for his or her business
activities, rather than purchase them. If this is the case, the taxpayer will be the lessee. There are three
main types of expenses that relate to leased assets:

• rent paid (normally deductible according to the general deduction formula in s 11(a))
• lease premium (deductible in terms of s 11(f))
• leasehold improvements (deductible in terms of s 11(g))

Lease premium and leasehold improvements will be dealt with on third year level and need not be studied
for the purpose of this course.

POINTS TO PONDER

• Should manufacturing companies and small business corporations be subject to relatively favourable
tax regimes?

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• Why should a taxpayer receive deductions for assets that are of a capital nature and are used by the
taxpayer in the production of income?

• Why should a taxpayer include a recoupment on the disposal of a capital asset in income?

WRAP-UP

In this learning unit, we studied the different capital allowances that are applicable to capital assets. We
also discussed the wear-and-tear allowances in section 11(e), the special allowances available for assets
that are used in a manufacturing process and the allowances that relate to certain buildings. Note that you
are not required to memorise the section numbers mentioned in the study guide and the prescribed
textbook, but you should be able to indicate which assets are referred to (e.g. manufacturing building
allowances).

The learning unit also focused on the tax consequences of the disposal or cessation of use of an asset on
which capital allowances had previously been claimed. In learning unit 7, we will look at the application of
capital gains tax following the sale of a capital asset by a taxpayer.

Now that you have completed this learning unit, please revise the learning
objectives to make sure that you have attained all of them.

This learning unit is very important for this module. It is essential that you understand the principles we
have discussed here, especially with regard to capital allowances. Having completed this learning unit,
you should now be able to discuss or describe the following concepts and calculate all the allowances,
scrapping allowances and recoupments that were covered in the study material:

• repairs and improvements

• cost of an asset
• process of manufacture
• assets used by manufacturers
• assets used by small business corporations
• wear-and-tear allowances
• allowances for buildings
• disposal of assets
• recoupment
• section 11(o) allowance (scrapping allowance)

Complete the online self-assessment “Capital allowances” in Learning unit 6 on

myUnisa.

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Self-assessment questions – learning unit 6

Below are two questions you can attempt. More questions will be provided on myUnisa or by your e-
tutor.

The solution to question 6.1 is provided at the end of this learning unit to show you how your layout and
approach to a written assignment question should be. The other solution will be provided online on
myUnisa at a later stage (to give you an opportunity to attempt answering the questions first).

QUESTION 6.1 (20 marks)

Notes CC (“Notes”) carries on the business of manufacturing music instruments. It is not regarded as a
small business corporation as defined in the Income Tax Act.

The taxable income of the close corporation for the year of assessment ending 31 March 2023, before
taking into account the items mentioned below, amounted to R5 800 000.

Additional information

Fixed assets obtained in prior years and still in use on 31 March 2023

(1) Vehicles – purchased new and brought into use on 1 June 2017 for R120 000

(2) Building DD is located in an urban development zone. Notes purchased a new building completed by
a developer on 1 November 2021 for R2 181 819. All the requirements to claim an urban development
zone building allowance were met.

Fixed assets obtained during the year

(3) Two small item assets with a collective cost of R4 500 were purchased on 30 November 2022. These
items qualify for the section 11(e) wear-and-tear allowance.

(4) Manufacturing machine MM was purchased second hand on 1 June 2022 for R300 000 and brought
into use at the same date.

(5) A new manufacturing machine LL was purchased on 1 February 2023 for R450 000 and brought into
use on 1 March 2023.

(6) Manufacturing building AA was sold on 1 January 2022 for R5 000 000 and Notes had a recoupment
of R800 000. It purchased a new manufacturing building ZZ for R9 000 000 on 1 April 2022 and
brought it into use on the same date.

The cost was made up as follows:

Land R 1 000 000

Building R 9 000 000
Total R10 000 000

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QUESTION 6.1 (continued)

Repair of and extension to assets

(7) The roof of manufacturing building ZZ was badly damaged during a storm and needed to be replaced
on 1 April 2022 at a cost of R220 000. Notes decided to extend the roof to allow for an undercover
parking area for its employees. This undercover parking area qualified as carports as listed in BGR
No. 7 and the cost of this extension amounted to R300 000.

Fixed assets sold during the year

(8) On 31 March 2023, furniture, costing R30 000 and originally purchased on 1 October 2021, was sold
for R10 000. The furniture was sold to a pawnshop because it was damaged and was no longer
useable. No transactions regarding this asset have been included in the taxable income calculation of
R5 800 000 above.

(9) On 30 November 2022, manufacturing machine PP costing R290 000 was sold for R310 000. This
machine was purchased new on 30 June 2015. No transactions regarding this asset have been
included in the taxable income calculation of R5 800 000 above.

Other information

(10) Binding General Ruling No. 7 makes provision for the following write-off periods:

• vehicles – 5 years
• undercover parking (carports) – 5 years
• furniture – 6 years

REQUIRED: MARKS
Calculate the income tax liability of Notes CC for the year of assessment ending
31 March 2023. 20

Note: The close corporation has elected to claim the section 11(o) allowance of the
Income Tax Act, and to make use of the building recoupment set-off, where
applicable.

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QUESTION 6.2 (28 marks)

Lazy Age CC is a small business corporation as defined and carries on a business as a cosmetics
product manufacturer. The close corporation operates mainly in Johannesburg and sells most of its
cosmetics products on credit to retailers in South Africa. It has only one member, Jenny Levin.

The following information is provided to you for the close corporation’s year of assessment ended
28 February 2023:
R
(1) Sales – cash 450 000
Sales – credit 5 025 000
(2) Purchases – cash and credit 3 587 150
(3) Inventory at cost – 1 March 2022 290 000
(4) Inventory at cost – 28 February 2023 330 000
(5) Bad debts written off 119 000
(6) Doubtful debts allowance, allowed by SARS for the 2023 year of assessment 12 500
(7) List of doubtful debts on 28 February 2023 (Older than 60 days, but none older 93 800
than 120 days)
(8) Personnel costs:
̶ salaries and wages 650 000
̶ contributions to pension fund on behalf of employees 65 000
(9) On 1 February 2023, Lazy Age CC received a letter from Quick Attorneys re-
garding alleged facial damages caused by one of its night creams to the upper
cheek of Amy Kumalo, a super model for Paris on the Vaal. She is claiming R1 500
000 for a loss of income from Lazy Age CC. The case went to court and on 31
March 2023 the court ordered Lazy Age CC to pay Amy R1 000 000 for her loss
of income.
(10) Legal expenses incurred:
̶ legal cost relating to the Amy Kumalo case (refer to note 9) 6 000
̶ legal cost paid on behalf of Jenny Levin 1 275
(11) Advertising cost:
̶ cost of advertising a vacant post in the Daily Informer 3 750
̶ cost of erecting a billboard close to the local airport 25 850
(12) Lazy Age CC owns the following capital assets:
̶ a new cosmetics manufacturing machine D – which was purchased on
31 January 2023 at a total cost of R300 000 and was brought into use on the
same date
̶ a second-hand delivery vehicle – which was purchased on 31 July 2021 at a
total cost of R85 000 to deliver the cosmetics products of Lazy Age CC to its
clients
(The delivery vehicle was only brought into use on 1 September 2021.)
̶ a manufacturing building – which was erected on 30 June 2019 and brought
into use on 31 August 2019 at a total cost of R1 250 000
(The building houses the whole cosmetics manufacturing process of Lazy Age
CC.)

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QUESTION 6.2 (continued)

(13) Lazy Age CC sold technologically outdated manufacturing machinery Z on

1 February 2023 for R20 000. It was originally purchased second hand on
30 April 2019 for R100 000 and brought into use on the same day.
(14) The following costs were incurred relating to trademarks:
̶ renewal fee paid in 15 April 2022 8 500
̶ new trademark “Red” purchased on 31 January 2023 55 000
̶ registration of trademark “Blue” on 15 February 2023 78 000
(15) Lazy Age CC donated R15 000 on 15 December 2022 to an AIDS association, a
public benefit organisation uplifting men and women that suffer from this disease.
The necessary section 18A income tax receipt was received on 17 January 2023.
(16) In terms of Binding General Rule No. 7, an acceptable write-off period for the bill-
board would be five (5) years.

REQUIRED: MARKS

Calculate the taxable income of Lazy Age CC for the year of assessment ended
28 February 2023. 28

This learning unit is very important with regard to capital allowances on qualifying capital
assets. Please note that the contents of this learning unit will be tested in more than one assignment.

We could assess this learning unit in assignments by asking you to

• discuss the difference between a “repair” and an “improvement” and to apply the rules in a practical
scenario
• explain whether a taxpayer must own an asset for him or her to be able to claim a capital allowance
• calculate the cost of an asset
• calculate the relevant capital allowances applicable to the various capital assets
• calculate a recoupment in relation to any capital asset that has been disposed of
• calculate a scrapping allowance in relation to any movable asset that has been disposed of

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Solutions to some self-assessment questions in learning unit 6

Complete the following table regarding the capital allowances applicable to assets qualifying for wear-
and-tear allowances.
Section 12E Section 12C Section 11(e)
Which taxpayers Small business Manufacturers or similar Any taxpayer
may make use of corporations processes
this section?
To which assets Manufacturing plant and Assets used in a Assets not used in a
can each of these machinery or any non- process of manufacture process of manufacture
sections be manufacturing assets or a similar process or a similar process
applied?
At what rate is the 100% for manufacturing New: Various rates as
allowance applied? plant and machinery and 40%/20%/20%/20% determined by Binding
50%/30%/20% for all Used: 20% per annum General Ruling No. 7
other assets for five years

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 TAX2601/2023/LU6 Content

SOLUTION 6.1

Calculation of Notes CC’s tax liability for the year of assessment ending 31 March 2023

R R
Taxable income given 5 800 000

Existing assets
Vehicles (s 11(e)) (R120 000/5 x 2/12) (4 000) (2)
Building DD – urban development zone (s 13quat)
(R2 181 819 x 55% x 8%) (96 000) (1)

New assets
Section 11(e) small items (cost less than R7 000) (4 500) (1)
Manufacturing machine MM – second hand (s 12C) (R300 000 x 20%) (60 000) (1)
Manufacturing machine LL – new (s 12C) (R450 000 x 40%) (180 000) (1)
Land (no allowance claimable) Nil (1)
Manufacturing building ZZ
Cost 9 000 000
Less: Recoupment on previous building (s 13(3)) (800 000) (1)
Cost on which allowance is based 8 200 000
Section 13(1) building allowance (R8 200 000 x 5%) (410 000) (1)

Repair and extend

Repair of roof (s 11(d)) (220 000) (1)
Extend roof for undercover parking – capital nature Nil (1)
Capital allowance (s 11(e)) – undercover parking
(R300 000/5) (60 000) (1)

Assets sold
Furniture sold
Cost 30 000
Less: Wear and tear (s 11(e))
2022: R30 000/6 x 6/12 (2 500) (2)
2023: R30 000/6 (5 000) (5 000) (1)
Tax value 22 500
Less: Proceeds (10 000) (1)
Scrapping allowance (s 11(o)) 12 500 (12 500) (1)

Manufacturing machine PP sold

Proceeds 310 000
Less: Tax value Nil (1)
Recoupment (section 8(4)(a)) 310 000
Limited to previous allowances claimed (R290 000 - RNil) 290 000 290 000 (1)
Taxable income 5 038 000
Tax liability @ 27% 1 360 260 (1)

© Unisa

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