Page 475 - SAIT Compendium 2016 Volume2

IN 50 Income Tax acT: InTeRPReTaTIon noTes IN 50
Example 6 — Building brought into use
Facts:
Company A erected a building in 2005. On completion it was occupied by senior management and fully used as their operational headquarters for the next two years. In 2007 management relocated to another building and the research and technical division moved into it.
Can Company A depreciate the building under section 11D (2)?
Result:
The building cannot be depreciated under section 11D (2) as it was not rst brought into use by the company for R&D purposes.
• Solely and directly for the purposes contemplated in section 11D (1)
The words ‘solely and directly’ are used to qualify the relationship between the expenditure and its purpose. The asset must be used exclusively and directly for the purposes contemplated in section 11D (1) in order to qualify for a deduction. • Prior to rst being brought into use by the taxpayer was not used by any person for any purpose
A used asset cannot qualify for the depreciation deduction under section 11D (2).
• In the year of assessment
The term ‘year of assessment’ is de ned in section 1 as—
‘any year or other period in respect of which any tax or duty leviable under this Act is chargeable, and any reference in this Act to any year of assessment ending the last or the twenty-eighth or the twenty-ninth day of February shall, unless the context otherwise indicates, in the case of a company be construed as reference to any nancial year of that company ending during the calendar year in question’.
Example 7 — Second-hand asset
Facts:
An individual uses a machine in his business to conduct normal manufacturing. He started an R&D division and transferred the machine to that division.
Will the machine qualify for an allowance?
Result:
The machine will not qualify for an allowance under section 11D (2). The individual will have to seek an allowance under the normal allowance provisions such as section 11 (e) or 12C.
Example 8 — Use of building
Facts:
A new building is acquired at a cost of R10 million. Determine the section 11D (2) allowances for the next three years, assuming that 100% or 35% of the building is used for an R&D purpose.
Result:
R&D building use
Allowances
50% R
30% R
20% R
100%
5 000 000
3 000 000
2 000 000
35%
1 750 000
1 050 000
700 000
5.2 Meaning of ‘cost to the taxpayer’ — section 11D (3)
The depreciable cost to the taxpayer of an eligible asset is determined under section 11D (3) and is the lesser of—
• the actual cost to the taxpayer for the acquisition, installation and erection of the eligible asset;
• the cost which a person would have incurred under a cash transaction concluded at arm’s length; or
• where an asset has been acquired to replace an eligible asset which has been damaged or destroyed, such cost
less any amount which has been recovered or recouped in respect of the damaged or destroyed asset and has been excluded from the taxpayer’s income under section 8 (4) (e), whether in the current or any previous year of assessment.
In Hicklin v SIR* Trollip JA said the following regarding the phrase ‘dealing at arm’s length’:
‘For ’dealing at arm’s length’ is a useful and often easily determinable premise from which to start the enquiry. It connotes that each party is independent of the other and, in so dealing, will strive to get the utmost possible advantage out of the transaction for himself. Indeed, in the Afrikaans text the corresponding phase is ‘die uiterste voorwaardes beding’.’
Finance charges incurred on the acquisition of eligible assets are deductible under section 11 (bB) (for nance charges incurred during the period before an asset is brought into use) or section 24J (for nance charges incurred during the period after an asset is brought into use). These charges are consequently not included in the cost of the assets concerned for the purposes of section 11D(3). ‘Cost’ means the cost price of the asset excluding nance charges.
* 1980 (1) SA 481 (A), 41 SATC 179.
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