Page 495 - SAIT Compendium 2016 Volume2

IN 53 (2) Income Tax acT: InTeRPReTaTIon noTes IN 53 (2)
12B, 12C, 12DA or 37B(2)(a), whether in the current or a previous year of assessment. Any asset let under an agreement of lease formally and nally signed by every party to the agreement before 19 November 1988 is excluded.
The word ‘entitled’ is not de ned in the Act and in such event it becomes necessary to consider the ordinary dictionary meaning. ‘Entitled’ is de ned in the Business Dictionary* as –‘Having rights and privileges to something either by legal mandates or by policies set in place.’
An asset remains an affected asset even if a lessor failed to claim an allowance on it in a previous year of assessment, despite being entitled to do so. The key requirement is whether the lessor was entitled to the allowance. The relevant provisions provide for allowances on the following types ofassets:
• Section 11(e) – Machinery, plant, implements, utensils and articles [other than assets to which section 12B, 12C,
12DA, 12E(1) or 37B applies].
• Section 12B – Certain machinery, plant, implements, utensils and articles used in farming or production of renewable
energy.
• Section 12C – Assets used by manufacturers or hotelkeepers, aircraft and ships, and assets used for storage and
packing of agricultural products.
• Section 12DA – Rolling stock.
• Section 37B – Environmental expenditure.
Overall exclusion
Both categories (a) and (b) exclude –
• any asset let by the lessor under an operating lease; and
• any asset mainly used during the year of assessment by the lessor in the ordinary course of trade other than letting of
such asset.
An asset will thus fall outside section 23A if it –
• falls under category (a) and is let under a lease agreement formally and nally signed by every party before 15 March
1984;
• falls under category (b) and is let under a lease agreement formally and nally signed by every party before 19
November 1988;
• is let under an operating lease by a lessor in the ordinary course of a business of letting (but not a banking, nancial
services or insurance business); or
• is used mainly in a non-letting trade (that is, an asset used more than 50% in a non-letting trade).
The facts and circumstances will determine whether a particular asset is used mainly in a non-letting trade. In SBI v Lourens Erasmus (Eiendoms) Bpk† Botha JA held that the word ‘mainly’ prescribed a purely quantitative standard of more than 50%.
In determining whether an asset has been used mainly in a non-letting trade, a comparison must be made between the period that the asset formed part of the trade of letting and the period it formed part of another trade. An asset will form part of a trade of letting as long as it was made available for letting. The fact that it was not actually let while made available for letting will not exclude it from the tradeof letting.
The reference to allowances ‘in the current or a previous year of assessment’ in the de nition of ‘affected asset’ has the effect that an asset, once classi ed as an ‘affected asset’, will always remain an ‘affected asset’. An asset written off in, say, three years, will still be an affected asset in year four even if no allowance is claimed in the fourth year. The implication is that allowances previously disallowed will continue to be ring-fenced against taxable income derived from the letting of fully- depreciated affected assets. At the same time, capital allowances on other affected assets may be set off against the rental income from a fully-depreciated affected asset.
4.1.2 Operating lease
An operating lease relates to a lease of movable property concluded by a lessor in the ordinary course of a business of letting, provided certain requirements are met. Any letting of assets in the business of banking, nancial services or insurance is speci cally excluded from the de nition of ‘operating lease’ and will be subject to potential limitation. The words ‘a banking, nancial services or insurance business’ are not de ned in the Act.
Collins English Dictionary‡ de nes ‘banking’ as – ‘the business engaged in by a bank’.
The word ‘bank’ is de ned by the same dictionary§ as –‘an institution offering certain nancial services, such as the safekeeping of money, conversion of domestic into and from foreign currencies, lending of money at interest, and acceptance of bills of exchange’.
The term ‘ nancial services business’ is wide and refers to the nance industry.
Collins English Dictionary (above)¶ de nes the word ‘ nancial’ as–
‘adj 1 of or relating to nance or nances. 2 of or relating to persons who manage money, capital, or credit’.
* www.businessdictionary.com/de nition/entitled [Accessed 9 October2015].
† 1966 (4) SA 444 (A), 28 SATC 233 at 245.
‡ www.collinsdictionary.com/dictionary/english/banking [Accessed 9 October 2015]. § www.collinsdictionary.com/dictionary/english/bank [Accessed 9 October 2015].
¶ www.collinsdictionary.com/dictionary/english/ nancial [Accessed 9 October 2015].
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