1757. New guidance on wear and tear allowances
August 2009 – Issue 120
SARS has issued a new interpretation note dealing with wear and tear allowances. The new interpretation note has replaced the practice notes 15 (leased assets), 19 and 39 (owned assets). The interpretation note has two purposes.
Providing guidanceThe first purpose is to provide guidance on the application and interpretation of section 11(e) of the Income Tax Act 58 of 1962, specifically in the determination of:
· the value of an asset on which the allowance is based; and· acceptable write-off periods.Section 11(e) permits a deduction in respect of the amount by which the value of an asset has been diminished by reason of wear and tear or depreciation during the year of assessment.
Withdrawing redundant practicesThe second purpose of the draft interpretation note is to withdraw redundant practices of claiming wear and tear allowances, specifically the permission that SARS had previously granted to lessors to use the 'debtor accounting system'.
Under the 'debtor accounting system', only the finance charges earned by the lessor during a year of assessment are to be reflected as 'gross income' and the lessor will not be allowed the allowances in respect of leased assets. The reason for allowing this practice in the past is that for certain lessors, the volume of their leasing business rendered it impracticable to maintain separate asset accounts for each article let.
The interpretation note intends to withdraw the policy in respect of any asset let under an agreement entered into during any year of assessment commencing on or after 1 March 2010.
This will require all lessors who currently make use of the 'debtor accounting system' to determine their income tax liability, to have systems in place to maintain tax asset registers for all the new asset leases commencing on or after 1 March 2010.
The interpretation note also has a bearing on the value on which the wear and tear allowance for leased assets is based. Many leased assets have a residual value and the interpretation note dictates that the residual value must be excluded from the value on which the allowance is based. This will result in lower wear and tear allowances over the period of a lease.
The interpretation note is very detailed it consists of 22 pages, which is more than double the combined number of pages of the 3 outgoing practice notes. The interpretation note lists some new assets and has expanded on previous generic and broad classifications.
Leased assetsOf particular interest is that the write-off period for the following leased assets has changed:
|
Asset |
New proposed period | Practice note 15 |
|
Excavators, front-end loaders and graders |
4 | 3 |
|
Fishing vessels |
12 | 10 |
|
Fork-lift trucks and mobile cranes |
4 | 3 |
|
Medical theatre equipment |
6 | 5 |
|
Furniture and fittings |
6 | 5 |
|
Lift installations (passenger and goods) |
12 | 10 |
|
Kitchen and refrigeration equipment |
6 | 5 |
|
Shop fittings |
6 | 5 |
For the benefit of taxpayers who use gymnasium equipment in their trade (health clubs, hospitals, medical practitioners, etc.), the previous broad classification of gymnasium equipment with a 10 year write-off period has been broken down into the following categories with substantially accelerated write-off periods:
|
Asset |
New proposed period |
|
Cardiovascular equipment |
2 |
|
Health testing equipment |
5 |
|
Weights and strength equipment |
4 |
|
Spinning equipment |
1 |
|
Other |
10 |
Where a taxpayer wishes to write an asset off over a shorter period of time than that suggested by the interpretation note, a fully motivated application must be made to the SARS office where the taxpayer is registered. This application must be made before the submission of the tax return in which the allowance is being claimed.
Assets which are leased for a period longer than the prescribed write off period must be written off over the period of the lease. The interpretation note is effective for any asset brought into use during any year of assessment commencing on or after 1 March 2009 and the treatment of wear and tear on existing assets will presumably therefore still fall under the old practice notes.
Grant Thornton
Editorial comment: Small items costing R7 000 or less on or after 1 March 2009 may be written off in full in the year of purchase.
SARS Interpretation Note No. 47
SARS Practice Notes No. 15, 19 and 39.
