CAPITAL ALLOWANCES PRACTICE EXAMPLE 1

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Ezra Tyler
6 years ago
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1 1 A Ltd has a 31 August 2010 year end. Sales was R10,000,000 and cost of sales was R3,000,000. They own the following assets. For each of the assets mentioned, calculate the amount of the deduction that may be claimed for the year ended 31 August Assume all amounts exclude VAT unless otherwise stated. MACHINERY USED IN A PROCESS OF MANUFACTURE 1. Manufacturing Machine A acquired new on 1 September 2005 for R300, Machine A was moved on 1 March 2010 at a cost of R23, Manufacturing Machine B acquired new on 1 October 2008 for R400, Manufacturing Machine C acquired new on 1 June 2010 for R500, Manufacturing Machine D acquired 2 nd hand from a non vendor on 1 May The non vendor was paid R250,000 by cheque. 6. Manufacturing machine DD was acquired from a vendor 2 nd hand on 1 January 2009 for R600,000. It was moved on 30 June 2010 at a cost of R40, Machine EE was acquired new from a supplier in the USA. The machine cost R300,000. Freight charges of R20,000, insurance costs of R10,000 and railage cost to bring the machine to the factory was R8,000. Vat of R34,000 was paid at customs. Installation costs of R22,000 was incurred on the machine. MANUFACTURING BUILDINGS (FACTORIES) 8. Factory building E acquired on 1 May 2005 for R400,000. The building was erected on 1 September A new wing to factory building E was erected this year at a cost of R600, Factory building F acquired on 1 August 2007 for R500,000. The building was erected on 17 July Factory building G acquired on 1 February 2009 for R600,000. The building was erected on 1 January Factory building H erected by the company on 1 February 1997 at a cost of R550, Factory building I acquired on 1 December 2009 for R750,000. The building was erected on 17 July Factory J was donated to the company on 15 December Its market value was R1,000,000. 1

2 2 15. Factory L was erected at a cost of R4,000,000 to replace factory D. Factory D was sold in the previous year. The company had deferred the recoupment (profit) on factory D after the company had been paid out R900,000 for the factory and the factory had a tax value of R500,000. The original cost of factory D was R1,500, A building, Building YY that was 60% factory and 40% warehouse was erected and brought into use by the company in 2005 at a cost of R900, A building, Building ZZ that was 49% factory and 51% warehouse was erected and brought into use by the company in 2005 at a cost of R900,000. LAND 18. Land acquired by the company on 1 February 2006 at a cost of R170,000. OFFICE OR COMMERCIAL BUILDINGS 19. Office building J erected on 1 January 2003 at a cost of R230, Office building K erected on 1 July 2007 at a cost of R400, % of office building Z bought new by the company for R450,000 in the current tax year. 22. Office building L erected on 1 February 2009 and bought new by the company on 1 April 2009 for R1,100, Office building M acquired second hand on 1 December 2009 for R1,200,000. An amount of R1,300,000 was spent improving the building. 24. Office building N was acquired for R2,400,000. The previous owner had acquired the building in The building had been substantially renovated and was bought unused since it was improved. RESIDENTIAL BUILDINGS 25. Two residential units were bought on 1 September 2009 in The Birches complex at a cost of R400,000 each. They were let out at R3,500 per month. 26. Eight new residential units were bought on 1 November 2009 in The Willows complex at a total cost of R1,500,000. They were let out at R1,800 a month. The Willows complex has 120 units. 27. The company erected a block of flats on 1 March 2010 at a cost of R2,600,000. There were 20 units in the block of flats and each flat was rented out for R1,500 per month. 28. Bought 10 units in townhouse complex (The Palms) 2 nd hand for R3,000,000. Improved the units at a cost of R600, Bought 7 units in a 20 unit complex (The Oaks) for R1,400,000. The units were 8 years old and had been substantially renovated and improved. The units were 2

3 3 unused since the renovation took place. They were rented out for R3,000 a month. 3

4 4 URBAN DEVELOPMENT BUILDING 30. Erected building AA in an urban development area at a cost of R2,000, Bought building BB in urban development area 2 nd hand for R1,000,000 in January Spent R1,300,000 improving the building in the current year. 32. Bought building CC in urban development area 2 nd hand for R1,000,000 in January Spent R600,000 improving the building in the previous financial year. 33. Bought new building DD in 2008 tax year for R2,000,000. The building is in an urban development area. WEAR AND TEAR 34. A computer was bought for R30,000 on 1 January Computers are written off over 3 years for tax purposes. 35. Furniture was bought on 1 February 2010 for R4,560 including vat. Furniture is written off over 6 years for tax purposes. 36. An X ray machine was acquired for R300,000 on 1 March The machine was only used from 1 June X ray machines are written off over 5 years for tax purposes. 37. Motor car bought for R114,000 including VAT on 1 June Motor cars are written off over 5 years for tax purchases. 38. Delivery vehicle bought on 1 December 2005 for R200,000. Delivery vehicles are written off over 4 years for tax purposes. 39. A photocopier was bought on 1 September 2008 for R200,000. On 1 March 2010, the photocopier was improved by adding a sorter to the machine at a cost of R42,000. Photocopiers are written off over 5 years for tax purposes. 40. A machine was donated to the company when it worth R120,000 on 1 March Machines are written off over 6 years for tax purposes. ENVIRONMENTAL ASSETS 41. The company is involved in the recycling of nuclear material. The government requires that all water used in this process is recycled and all dangerous toxins are removed. In the current year, a new water recycling plant was purchased at a cost of R1,000, In addition, a storage plant for the dangerous toxins was bought at a cost of R200,000. 4

5 5 BIO FRIENDLY ASSETS 43. A new windmill farm was set up by the company to provide power to a remote factory. The windmill farm cost R1,000,000 on 15 August ASSETS ACQUIRED FROM A CONNECTED PERSON 44. The company bought a machine from its holding company. The machine was acquired by the company for R330,000. Original cost of the machine was R200,000, and R120,000 had been claimed as machinery allowances. Assume the capital gain on sale by the holding company is 130,000. INTANGIBLES ACQUIRED 45. The company bought patent N at a cost of R300,000 on 1 January The company bought patent O on 1 April 2010 at a cost of R5,500 including VAT 47. The company bought design P for R230,000 on 1 July The company acquired trademark Q on 15 February 2010 for R7,000, The company renewed another trademark, trademark R at a cost of R13,000 on 1 June RESEARCH AND DEVELOPMENT The company incurred the following costs on Research Project S 50. Salaries of R90, Consumable cost of R120, Research machine bought 1 February 2009 at a cost of R400,000. The company incurred the following costs on Research Project T, which was subsidized by the government to the amount of R200, Salaries of R500, Building bought new on 1 January 2010 at a cost of R1,000, % of the building was used as a factory and 30% was used for research. The company incurred the following costs on Research Project U 55. Salaries of R120, Research machine bought 1 February 2008 at a cost of R500, The company was re-imbursed for the salaries on each year of this project by Aurora Ltd, a company that they were sharing the research with The company incurred the following costs on Research Project UU 58. The company erected a new building in May of this year at a cost of R2,000,000. The building was used 20% for research and 80% for administration. 5

6 6 59. The company bought a building in July of this year for R3,000,000.The building was erected in The building was used 30% for research and 70% for administration. LESSEE S DEDUCTIONS 60. On 1 June, the company entered into a rental agreement whereby a supplier offered to provide cars with a cost of R1,500,000 for 2 years on a full maintenance basis. After 2 years, the cars are taken back by the lessor and new cars will be provided. Instalment payments are R30,000 a month excluding VAT. Motor cars are written off over 5 years. 61. At the same time, on 1 June, the company entered into a rental agreement whereby a supplier offered to provide office equipment with a cost of R600,000 for 3 years on a full maintenance basis. After 3 years, the office equipment is taken back by the lessor and new equipment will be provided. Instalment payments are R10,000 a month excluding VAT. 62. The company entered into a finance lease for a motor car on 1 January 2010 that would normally cost R200,000. Lease payments of R5,000 a month were payable for 60 months. 63. The company entered into a finance lease for a machine on 1 January 2010 that would normally cost R285,000 including vat. Lease payments of R7,000 a month were payable for 60 months. 64. The company entered into a 60 month instalment credit agreement for a machine that cost R350,000 excluding vat on 1 August Interest on the instalment credit was R4,000 and one lease payment of R4,900 had been paid at year end. 65. The company entered into lease V on 1 June 2005 for a 5 year period. The rental was R10,000 per month. 66. The company entered into lease W on 1 February 2010 Rent of 12,000 a month was payable for vacant land. The company had to erect a factory at a cost of R2,000,000 in terms of the lease and a lease premium of R100,000 was payable The factory was completed on 1 May 2010 and was used from 1 June The new factory cost 2,100,000. The lease was for an initial period of 5 years, extendable to 10 years at the option of the lessee. SARS considers the probable duration to be 10 years. LOW COST HOUSING INTEREST FREE LOANS 67. The company had a 5 unit complex that was erected at a cost of R500,000 and brought into use on 1 November Each unit cost R100,000 and was sold to 5 separate employees at a cost of R100,000, financed by an interest free loan 6

7 7 given by the company to the employee. A deduction of R10,000 was claimed on each of the 5 units in terms of section 13 sept in the last financial year. Annual repayments on the loan account are determined in accordance with the grade of an employee. One employee repaid R5,000. One employee repaid R15,000 and another repaid R20,000. The other 2 employees did not repay any amounts. LEARNERSHIP ALLOWANCES 68. The company entered into a learnership agreement for Mr XX. The Learnership was a 3 year Learnership that commenced on 1 January The company entered into a learnership agreement for Mr YY (a disabled person). The learnership was a 6 month learnership that commenced on 1 January 2010 and was completed on 30 June The company entered into a learnership with Mr ZZ on 1 March Mr ZZ had been in a learnership with ABCD Limited for the past 34 months. His learnership had 2 months to run. The company took over the existing learnership from 1 March The learnership was completed successfully. CARBON EMISSION CREDITS 71. The company earned carbon emission reduction credits from the windmill farm. These were sold to an American company for R98,000. AMOUNTS PAID FOR USE OF INTELLECTUAL PROPERTY 72. The company paid R60,000 in respect of use of a patent to a foreign patent holder. 12% X 60,000 = R7,200 withholding tax was paid to SARS and R52,800 was paid to the foreigner. 73. The company paid R71,000 to a SA company for use of a patent. ENVIRONMENTAL CONSERVATION AND MAINTENANCE 74. A bio diversity agreement was signed by the company whereby the company undertook to conserve a nature reserve near a factory. Capital assets costing R34,000 were acquired to do this and revenue costs of R53,000 were also incurred. 7

Capital allowances and Leases

Capital allowances and Leases Content of the session Movable assets Immovable assets Leases 2 Movable assets Section 11(e) Write-off period, straight-line basis Only if no other allowance is available