In an Interpretation Note (no 60) published by SARS on 10 January 2011, information is given regarding the so-called scrapping allowance referred to in section 11(o) of the Income Tax Act. This allowance is claimed when an asset is disposed of and where the consideration received or accrual is less than its tax value.
The tax value of the asset is its actual cost (as opposed to the value of the asset) less the qualifying capital allowances.
Here are some highlights from the Interpretation Note:
- It is important that a taxpayer elects to claim the allowance as a revenue loss (vis-à-vis a capital loss). SARS submits that a taxpayer will have made an election under section 11(o) if the allowance is claimed in the return of income reflecting the disposal. If no election is made, a capital loss must be determined under the Eighth Schedule.
- SARS points out that an apportionment must take place where an asset previously used for private purposes is introduced into the business. This adjustment can be made by determining the value of the asset at the time of its introduction into the business.
- In order to qualify for the section 11(o) deduction, the expected useful life of the asset for tax purposes must not exceed 10 years as determined on the date of original acquisition. This means that assets such as air-conditioning components (20 years), cooling towers (15 years) and stand-by generators (12 years) do not qualify for the scrapping allowance. A capital loss will have to be sought for these assets under the Eighth Schedule.
- SARS again confirms that the consigning of an asset to a scrap heap is not sufficient to qualify for this allowance. It must be consigned to a scrap heap situated on the land of another person (e.g. a municipal scrap heap) before it would comprise an alienation. The tax payer must prove that he parted with ownership of the asset. Here SARS gives the example of computer software: the tax payer has to ensure that he parts with ownership of the software by deleting it from his computer systems and physically disposing of the CDs or DVDs on which the software is stored.
- SARS also warns that the mere withdrawal of an asset from production (e.g. for the purpose of mothballing the asset) does not qualify because the tax payer retains ownership of the asset. In order to qualify for the allowance, the asset must be alienated from its owner.
- In the final instance it must be noted that a tax payer may not claim the section 11(o) allowance where the amount received or accrual from the alienation, loss and/or destruction of the asset was received or accrued from a person connected to the tax payer.
For more information contact Sonja Frank at Exceed Trust, tel. 021 882 8140 or e-mail firstname.lastname@example.org.