Capital Allowances (2)

Capital Allowances (2) B.Com (Accounting) 2008 TAXATION 318/328

Capital AllowancesDisposal of Capital Assets Implications when capital assets are disposed of : • s8(4) – Recoupments - s8(4)(a) General recoupment Provision - s8(4)(e), (eA), (eB), (eC), (eD) & (eE) • s11(o) – Scrapping Allowance – previous lect. • Leasing • CGT - 8th Schedule - para 65 - para 66

General Provision – s8(4)(a) • Sale of asset result in capital receipt/accrual • Allowances previously allowed & s/p more than tax value , difference betw. tax value & receipt = recoupment • Such recoupments included in income of taxpayer • Example page 183 • Case Law Page • S8(4)(e) to s8(4)(eE) – Example Page 184 - 185

Leasing • One person (lessor) lets to another person (lessee) an asset at an agreed rental & period of time • Operating lease vs finance lease for tax purposes no difference. • Lessor may claim s11(e) or s12C where applicable, rent included in G/I • Lessee may claim payment to lessor ito s11(a) • Lease premiums special rules for lessee and lessor • Commencement, lease period, termination of lease

Commencement of Lease • No Income Tax implications unless a lease premium. - - Lessor includes full premium in G/I & - lessee deduct premium over period of lease [s11(f)] • VAT implications different for operating and finance leases. - Finance lease similar to ISA (page 187). - Operating lease on a month to month basis.

Duration of Lease • Finance lease - Lessor includes full amount of rentals in G/I - Lessee deduct rental over period of lease adjusted for input tax claimed at commencement of lease ito s23C • Lessor allowed to include output VAT to cost of asset for s11(e) or s12C allowances as full included as rental in G/I. implications • See Example Page 187 • Operating lease - Output Tax excluded by lessor from G/I & lessee may claim input tax & s11(a) deduction

Termination of Lease (1) • Lessor may reclaim asset • Income tax effect • no Vat or Income Tax effect • Asset acquired by lessee for no consideration or agreed amount (residual value) Income tax effect No consideration - no Vat or Income Tax effect for lessor - no Vat effect for lessee but income tax effect a recoupment • Reduced rental - no Vat or Income Tax effect for lessor - no Vat effect for lessee but income tax effect a recoupment • Operating lease - Output Tax excluded by lessor from G/I & lessee may claim input tax & s11(a) deduction

Termination of Lease (2) • Lease recoupment - s8(5) deems a recoupment by person who acquires asset in two situations namely acquisition of leased property or continued use of asset • Asset acquired by lessee no or reduced consideration, s8(5)(a) or (b) provide a recoupment = to the differnce between the consideration & market value • Continued use of leased asset s8(5)(bA) Example page 190

Lease Premiums • Lease Premium an ascertainable money value paid by lessee to lessor over and above rental • Lessor to include such amount in G/I ito para(g) • Lessee may deduct such amount ito s11(f) Example page 192

Lease Improvements • Lease Improvements - lessee effect certain improvements as part of its obligation i.t.o lease agreement • Lessor to include such amount in G/I i.t.o para(h) • Relief for lessor ito of s11(h) –pg 194 • Lessee may deduct such amount i.t.o s11(g) Example page 194 - 195

CGT • Base Cost = Tax Value • Original cost MINUS Allowances • Proceeds = Selling price MINUS Recoupments • Capital gain ONLY if : Selling price > Original cost • No capital gain if : Selling price < original cost • Capital Loss ONLY if : Selling price < Tax Value • No capital loss if : Selling price > Tax Value • If Selling Price is between Tax Value and Original cost • Always no-gain-no-loss

CGT – Gain or Loss? Sellingprice Capital Gain (PLUSRecoupment) Cost • No-gain-no-loss • Recoupment Tax Value • Capital Loss OR • Scrapping Allowance

CGTExample • December year-end taxpayer • Manufacturing machine • Purchased 1 January 2008 – brought into use immediately • Cost = R600,000 • Disposed of on 1 February 2009 for • R450,000 (MV); or • R730,000 (MV); or • R190,000. (MV).

Roll-over Relief (pg 820) RECOGNITION OF CAPITAL GAIN DEFERED TILL FUTURE DATE!!! Roll-over relief : Disposal & Replacement of assets • Voluntary disposal of moveable depreciableasset para 66 • Involuntary disposal of any assets para65 • AND : Proceeds > Base Cost, i.e. either • Recoupment ONLY (& no-gain-no-loss); or • Recoupment + CG • AND : Proceeds from Old Asset to be used to purchase Replacement Asset • THEN • Defer capital gain on old asset (pp 65 & 66 8th Sch.); • & Defer recoupment on old asset (s8(4)(e)-(eE)) • (Different rules for Industrial Buildings)

Roll-over Relief (pg 820) para 65 – Involuntary disposals • all assets – except financial instruments • Gain defered till repl asset disp OR life of repl asset ( if depreciable). REQUIREMENTS • Full proceeds invested to purchase repl asset • Must be immovable prop in Rep or moveable of SA res. • Contract – acquisition of repl asset – within 12 months of disp. • Repl asset brought into use within 3 yrs of disp. • Replaced by more than one asset – apportion base cost CG = Tot Disre gain x Allow and ded in current year Total allow and ded allow in all yrs Eg page 822

Roll-over Relief (pg 820) para 66 – Reinvestment in Replacement asset • all assets – taxpayer allowed to claim capital allowances. • If gain – deferred and made in annual installments starting year replacement asset brought into use. • TAX GAIN = Tax allow for year on repl asset Total tax allow that may be claimed on repl asset Eg page 823

Roll-over ReliefExample • December year-end taxpayer • Manufacturing machine; Cost = R600,000 • Purchased 1 January 2007 – brought into use immediately • Disposed of on 1 October 2008 for R720,000 • Disposal Proceeds (R720,000) used for : • Replacement (2nd-hand) – Cost R800,000 – In use 1 Dec 08 • Replacement (New) – Cost R800,000 – In use 1 Feb 09 • TWO replacements (New) • Cost R540,000 – Used from 1 Dec 2008 • Cost R260,000 – Used from 1 Feb 2009

Roll-over ReliefDeferral Calculation • CG/Recoupment ‘allocated’ to replacement(s) • Inclusion of CG/recpmnt depends on replacement asset • Replacement assets subject to normal rules • If Replacement is Depreciable • CG/Recpmnt included in same proportion as new CA’s • Include when replcmnt asset brought into use • Balance upon disposal (etc.) • If Replacement is Non-depreciable • CG/Recoupment included upon disposal (etc.) • More than one replacement asset • Allocate CG/Recoupment in same proportion as how selling price utilised on replacements

Roll-over ReliefFull inclusion of CG/Recoupmnt • Relief is Elective • Choice between deferral or immediate full inclusion • one election applies to recpmnt & CG together • If replacement asset disposed of : • Immediate inclusion of balance of CG/Recoupm. • If moveable replacement asset no longer used for trade :Immediate inclusion of balance of CG/Recoupment • If replacement assets not acquired / in use by deadline dates • Immediate inclusion of CG/Recpmnt • plus include interest @ ‘prescribed rate’ • (calc. from disposal date to deadline)

Roll-over ReliefIndustrial Buildings CG Roll-over (8th Schedule) • No roll-over relief for voluntaryreplcnt of bldg (p66) • Relief only if involuntary (p65), e.g. destruction, etc. Recoupment relief (s13(3) • If building replaced (voluntary or involuntary) THEN • Recoupment on old building NOT included in income BUT INSTEAD • Recoupment deducted from Cost of replacement bdg; • s13 annual allowance taken on lower ‘cost’ of new building • Elective • 12-month deadline to start construct. replacement

Roll-over Relief (Industrial Buildings)Example • December year-end taxpayer • Factory building • Built in Jan - Mar 2004 • brought into use immediately • Cost = R6m • Sold 1 April 2008 for R8.5m • Proceeds (R8.5m) used for : • Build replacement factory at cost of R10m

Capital Allowances (2)