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 Write-off to R1 New / second-hand, used for the first time by that taxpayer / not, used by owner / lessee Second-hand assets? R7 000 principle? Only for ordinary wear-and-tear 4

Section 12C USED FOR THE 1ST TIME BY THAT TAXPAYER!!! New / second-hand Accelerated : 40/20/20/20 New and unused Acquired on/after 1 March 2002 Used by the lessee? 5

Requirements of s12e 1. Close corporation, co-operative or any company registered as a private company; 2. All the shareholders or members were natural persons at all times during the year of assessment; 3. Gross income does not exceed R20 million; Not trading for the whole year? 4. None of the shareholders or members at any time during the year of assessment held any interest, other than in A company listed on an exchange; or A portfolio in a collective investment scheme; or Any body corporate, share block company or other association of persons Any company, close corporation or co-operative that has not traded during any year of assessment 5. Investment income and income from the rendering of a personal service does not exceed 20% of the total receipts and all the capital gains of the company or close corporation; 6. The company is not a personal service provider. 6

Example of gross income limitation SARS Draft IN A qualifying entity with a year of assessment ending 28 February started trading activities on 15 August 2014. Gross income for the period 15 August 2014 to 28 February 2015 amounted to R15 million. The qualifying entity acquired a machine contemplated in section 12E(1A) on 1 August 2014 and commenced using it on 15 August 2014. The period of trade from 15 August 2014 to 28 February 2015 < 12 months Therefore reduce the gross income limitation Entity has traded for 6½ months, however under section 12E(4)(a)(i) part of a month must be treated as a full month Therefore, deemed to be 7 months R20 million number of full months traded 12 months = R20 million 7 / 12 = R11,67 million Therefore, gross income > apportioned limit Therefore, cannot register as SBC 7

Example of investment income Draft SARS IN A close corporation conducts two trades, namely, selling imported kitchen equipment and operating a small guesthouse. The guesthouse offers accommodation on a bed-and-breakfast basis. Guests can, however, request dinner at an additional cost. Gross income consisted of the sale of kitchen equipment of R10 million, accommodation at the guesthouse of R4 million and supply of dinner meals of R400 000. 8

Solution Gross income for the year of assessment is R14 400 000 which means it has not exceeded the gross income limitation of R20 million. Total receipts and accruals (other than those of a capital nature) and capital gains = R14 400 000 + Rnil = R14 400 000. The provision of serviced accommodation at the guesthouse gives rise to rental income from immoveable property which is investment income as defined. The gross income from the sale of kitchen equipment and the provision of dinner meals is not investment income. Therefore, investment income = R4 million. Investment Income / Total receipts and accruals (other than those of a capital nature) and capital gains = R4 000 000 / 14 400 000 100 = 27,8%. The 20% limitation has been exceeded. The business cannot qualify as a SBC. 9

What is a personal service? any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if (i) that service is performed personally by any person who holds an interest in that entity; and (ii) that entity does not throughout the year of assessment employ three or more full-time employees (other than any employee who is a holder of a share in the entity, as the case may be, or who is a connected person in relation to a holder of a share in the company or a member), who are on a full-time basis engaged in the business of that company, cooperative or close corporation of rendering that service 10

How can a business be exempted from the personal service rule An entity must employ at least 3 full time employees who are engaged on a full-time basis in the qualifying entity s business of performing the relevant service; AND not holders of shares in or members of the qualifying entity; AND not connected persons in relation to a holder of shares in or a member of the qualifying entity. Must these employees be directly involved in the service rendering the income? 11

Section 12E IDENTIFICATION!!! Cost in arm s length transaction Deduct full cost in the year that the asset was brought into use, if Plant / machinery used in process of manufacturing; AND Used for the first time by that taxpayer; AND Brought into use on / after 1 April 2001 50/30/20, if Acquired under agreement signed by every part on / after 1 April 2005; AND Would have qualified for s11(e), 12B or 12C Taxed at a lower rate Lower of: Actual cost Could you elect to rather apply another write-off? What if an asset is acquired for no consideration? E.g. donation? 12

SBC tax rates Taxable income Tax rates R0 R75 750 0% R75 751 R365 000 7% of taxable income above R75 750 R365 001 R550 000 R20 248 + 21% of taxable income above R365 000 R550 001 and above R59 098 + 28% of taxable income above R550 000 Taxable income Tax rates R0 R75 000 0% R75 000 R365 000 7% of taxable income above R75 000 R365 001 R550 000 R20 300 + 21% of taxable income above R365 000 R550 001 and above R59 150 + 28% of taxable income above R550 000 13

S12E and moving costs A manufacturing asset qualifying for the 100% allowance is moved: In year 1 of use? In year 2 of use? A non-manufacturing asset qualifying for the 50/30/20 allowance is moved: In year 1 of use? In year 2 of use? In year 3 of use? 14

Example SARS Draft I/N 9 Company X is an SBC with a year of assessment that ends on the last day of February. Company X moved the location of its business operations. The following information is relevant: Asset A was acquired on 1 May 2011 at a cost of R100 000 and was brought into use during May 2011. The asset qualified for an allowance under section 12E(1A)(b) and 50/30/20 % of the cost was allowed as a deduction in the 2012, 2013 and 2014 years of assessment respectively. The cost to move asset A was R6 000. Asset B was acquired on 1 April 2010 at a cost of R50 000 and was brought into use during that month. The asset qualified for an allowance under section 12E(1) and 100 % of the cost was allowed as a deduction in the 2011 year of assessment. The cost to move asset B was R4 000. Assume the assets were moved on the following alternative dates (A) 1 July 2011; (B) 1 July 2012; (C) 1 January 2015

Solution (A) Asset A 2012 year of assessment: R6 000 / 3 = R2 000 2013 year of assessment: R6 000 / 3 = R2 000 2014 year of assessment: R6 000 / 3 = R2 000 2015 year of assessment: Nil Moving costs were incurred during the year of assessment in which the asset was brought into use. Therefore, the write-off period for the moving costs is the same as the write-off period for the cost of the asset under section 12E(1A)(b), that is, three years. The moving costs must be deducted in three equal instalments over three years. Asset B The full cost of asset B was allowed as a deduction under section 12E(1) in the 2011 year of assessment. Irrespective of whether asset B is moved in the 2012, 2013 or 2015 year of assessment, the full amount of the moving costs (R4 000) must be allowed as a deduction in the year of assessment in which the moving costs were incurred.

Solution (B) Asset A 2013 year of assessment: R6 000 / 2 = R3 000 2014 year of assessment: R6 000 / 2 = R3 000 2015 year of assessment: Nil Two years (the current year of assessment and the 2014 year of assessment) remain in which the cost of the asset may be deducted under section 12E(1A)(b). Therefore, the moving costs must be claimed over two years of assessment in equal instalments. Asset B The full cost of asset B was allowed as a deduction under section 12E(1) in the 2011 year of assessment. Irrespective of whether asset B is moved in the 2012, 2013 or 2015 year of assessment, the full amount of the moving costs (R4 000) must be allowed as a deduction in the year of assessment in which the moving costs were incurred.

Solution (C) Asset A 2015 year of assessment: R6 000 / 1 = R6 000 The asset was fully written off under section 12E(1A) by the end of the 2014 year of assessment. Therefore, the moving costs are claimed in full in the 2015 year of assessment. Asset B The full cost of asset B was allowed as a deduction under section 12E(1) in the 2011 year of assessment. Irrespective of whether asset B is moved in the 2012, 2013 or 2015 year of assessment, the full amount of the moving costs (R4 000) must be allowed as a deduction in the year of assessment in which the moving costs were incurred.

Immovable assets

Section 13 manufacturing building If purchased, only claim s13 if: The building is new and unused; or If the seller previously claimed a s13 allowance Used wholly / mainly in a process of manufacturing Building includes offices / cafeteria Erected at the same time; AND Erected on the same site; AND >50% manufacturing Subsequent improvements? Land Any other allowance? Buys land and buildings together? section 11(o) S13(3) recoupment - Election of a taxpayer if: Purchases / erects a replacement building within 12 months; and The replacement building qualifies for a s13 allowance THEN: Set off against cost price of replacement building What if recoupment > cost price of replacement building? 20

Section 13quat Tax incentive in specified urban development zones Not available: taxpayer ceased to use building solely for trade purposes during any previous year of assessment; or disposed of by the taxpayer; or brought into use by the taxpayer after 31 March 2014. finance charges New building / extension of existing building 20%, 5% for succeeding 16 years Improvement to an existing building 20%, 20%, 20%, 20%, 20% Purchased from a developer New building : Cost = 55% of purchase price Improvement : Cost = 30% of purchase price If low cost New Existing Year 1 25% 25% Thereafter 13% x 5, 10% 25% x 3 21

What is low cost? low-cost residential unit means (a) an apartment in a building located within the Republic, where (i) the cost of the apartment does not exceed R350 000; and (ii) the owner of the apartment does not charge a monthly rental in respect of that apartment that exceeds one per cent of the cost; or (b) a building qualifying as a residential unit located within the Republic, where (i) the cost of the building does not exceed R300 000; and (ii) the owner of the building does not charge a monthly rental in respect of that building that exceeds one per cent of the cost contemplated in subparagraph (i) plus a proportionate share of the cost of the land and the bulk infrastructure: Provided that for the purposes of paragraphs (a) (ii) and (b) (ii), the cost is deemed to be increased by 10 per cent in each year succeeding the year in which the apartment or building is first brought into use; Construction commences on or after 21 October 2008 22

Section 13quin 5% allowance per year based on the lesser of: Actual cost; or Market value for: New and unused Purchase from a seller that previously used the building? Commercial buildings / improvements Used by the owner or acquirer in terms of a suspensive sale agreement Contracted for on / after 1 April 2007 Construction commenced on / after 1 April 2007 NOT APPLICABLE TO RESIDENTIAL PROPERTY! 23

Section 13sept Employer sells a low-cost residential unit to an employee Via an interest-free loan account; Price Cost to the employer; Not subject to any conditions, except that the employee must sell the unit back to the employer When employment is terminated; or When failing to make payments for 3 months continuously Allowance = 10% of outstanding capital Maximum of 10 years Recoupment when any capital is repaid Lesser of: Reduction in capital; or Allowance claimed in current and any previous year of assessment 24

Section 13sex Replaces section 13ter Construction commenced on/after 21 October 2008 Only if the units are New and unused; Used solely by the taxpayer for trade purposes; Which is located in SA Only if a taxpayer owns 5 residential units in SA Allowance Residential units : 5% allowance Low-cost residential units :10% allowance Excludes the mining industry Only applicable to the owner Purchased from a developer: New building : 55% of the cost Existing building : 30% of the cost 25

Example An employer sells a low-cost residential unit to an employee at R100 000 on an interest-free loan on 1 July 2009. The employee repaid R2 000 per month, from 31 July 2009. All payments were made when they became due. The employer has a 31 December year-end. 2009 year of assessment Outstanding capital 31/12/2009 R88 000 (R100 000 (R2 000 x 6)) Therefore, s13sept allowance (R8 800) 2010 year of assessment Outstanding capital 31/12/2010 R64 000 (R100 000 (R2 000 x 6) (R2 000 x 12)) Therefore, s13sept allowance (R6 400) Therefore, s13sept recoupment R15 200 Lower of R24 000; or (R8 800 + R6 400) =R15 200 26

Leases

Operating leases basics = Accounting term Mostly a rental agreement (VAT) Lessor: = Legal owner Therefore, claims w&t (on CP excl VAT) Instalments excluding VAT are included in gross income Lessee: Legal owner Therefore, no w&t Instalments deducted from gross income = instalment x 100/114 28

Finance lease basics = Accounting term Mostly an ICA (VAT) Part (b) Lessor: = Legal owner Therefore, claims w&t Instalments excluding VAT are included in gross income Lessee: Legal owner Therefore, no w&t Instalments deducted from gross income = Instalment (incl VAT) (Total VAT) Total instalments 29 x instalment

Lease premium Definition Consideration with a determinable monetary value From lessee to lessor In cash or otherwise Separate from, on top of or in stead of lease payments 30

Lease premium Lessor Include in full in Gross income earlier of receipt / accrual Relief i.t.o. s11(h) Lessee Premium Lease period Excludes renewal options Limited to 25 years Apportion for period used Lease period = not determined? Only deductible if included in the gross income of the lessor 31

Leasehold improvements Lessor Inclusion in gross income Theory When it accrues to him (contract concluded) Practice When improvements are completed Excludes voluntary improvements S11(h) relief Lessee Amount included in gross income of lessor Lease period from completion of improvements Excludes renewal options Limited to 25 years Apportionment from bringing the improvements into use 32

Example Spends > Stipulated in contract Actual : R1 500 000 Contract : R1 000 000 11(g) on R1 000 000 13 on R500 000 Spends = Stipulated in contract Actual : R1 000 000 Contract : R1 000 000 11(g) on R1 000 000 Spends < Stipulated in contract Actual : R800 000 Contract : R1 000 000 11(g) on R800 000 33

Section 11(h) relief for lessor Lessor / lessee = company and other has an interest of >50%; or Lessor and lessee = company, 3rd party has an interest of >50% in both entities Deduction = Amount included in gross income LESS PV of that amount (6%, = improvement period) 34