SARS recently issued Interpretation Note No. 47 (Issue 4) – Wear-and-tear or Depreciation Allowance (“SARS IN47”).
SARS IN47 provides guidance on the application and interpretation of the provisions of section 11(e) of the Income Tax Act, and applies to assets brought into use on / after 24 March 2020.
OVERVIEW OF CHANGES
The Annexure to SARS IN47 has been amended to alter the write-off period for certain assets, and also to include some new assets. Furthermore, the following additional guidance has been included:
- Buildings and structures of a permanent nature (paragraph 4.1.2);
- Improvements to existing assets (paragraph 4.1.3);
- Limitations of allowances to lessors of certain assets (paragraph 4.2.7); and
- Personal-use assets commencing to be used for trade purposes (paragraph 4.3.10).
BUILDINGS AND STRUCTURES OF A PERMANENT NATURE
Paragraph 4.1.2 provides a list of assets that do not qualify for a section 11(e) allowance. Included as non-qualifying assets, are buildings or other structures or works of a permanent nature. SARS IN47 has now been expanded to include more comprehensive guidance regarding which assets are considered to be buildings or other structures or works of a permanent nature. The guidance also includes the following examples of non-qualifying assets included as part of this category:
- Partitions erected to protect a taxpayer’s stock of manufactured goods; and
- Buildings on leased land required to be removed by lessee on termination of lease.
IMPROVEMENTS TO EXISTING ASSETS
SARS IN47 now also emphasises the importance of determining the difference between an improvement of an existing asset, and expenditure incurred to repair or maintain an existing asset. An improvement will qualify for a deduction over a period under section 11(e), while repairs and maintenance expenditure can be claimed in full within the relevant year of assessment in terms of section 11(d).
LIMITATION OF ALLOWANCES TO LESSORS OF CERTAIN ASSETS
SARS IN47 now also includes a brief overview of the interaction between section 23A, section 23G and section 11(e) of the Income Tax Act. Section 23A limits the section 11(e) allowance claimable with respect to affected assets, while section 23G prohibits a lessor of an asset in terms of a sale and leaseback agreement to claim a section 11(e) allowance.
CHANGE IN USE OF PERSONAL-USE ASSETS
Where a taxpayer commences to use a personal-use asset for trade purposes, SARS IN47 now highlights that the value on which the section 11(e) allowance should be based, is required to reflect the fact that the value of the asset has been diminished as a result of personal use (i.e. prior to being used for trade purposes). For purposes of section 11(e), the value of the asset should be determined on the date on which the taxpayer brought the asset into use for purposes of the taxpayer’s trade.
WRITE-OFF PERIODS ACCEPTABLE TO SARS
The Annexure to SARS IN47 contains a list of write-off periods that are acceptable to SARS for assets that are written off by applying the straight-line method. Where an asset has been listed in the Annexure, a taxpayer still has to apply to the SARS Branch office where the taxpayer is registered for income tax purposes, if the taxpayer wants to write off an asset over a shorter period than the period listed in the Annexure.
The Annexure now also includes a write-off period of 2 years for Computer tablet and similar devices and 5 years for Magnetic resonance imaging scanners. Furthermore, the useful life of self-developed computer software has been extended from 1 year to 5 years.
Where an asset is not listed in the Annexure, the write-off period should be determined with reference to the expected life of the asset. Any request by a taxpayer for the specific inclusion of a write-off period of an asset in the Annexure, should forthwith be submitted to CITOpinions@sars.gov.za.
Where an asset is considered to be a small item, such asset may be written off in full in the year during which such asset was brought into use by the taxpayer. The threshold for determining whether or not an asset constitutes a small asset, has remained unchanged at R7 000. In other words, where an asset has a value of R7 000 or less, such asset may be written off in full in the relevant year of assessment.