Page 497 - SAIT Compendium 2016 Volume2

IN 53 (2) Income Tax acT: InTeRPReTaTIon noTes IN 53 (2) • any amount derived from the disposal of any affected asset.*
The term ‘rental income’ must be read with section 23A(2), which refers to –
‘taxable income (as determined before making the said deductions) derived by him during such year from rental
income’.(Emphasis added.)
A taxable capital gain is included in paragraph (b) of the de nition of ‘taxable income’ by section 26A. It is not the
amount received or accrued on disposal of an affected asset that is included in taxable income, but the ‘taxable capital gain’. The amount received or accrued undergoes a reduction process under the Eighth Schedule, being reduced by the base cost of the asset, any recoupment under section 8(4), offsetting capital losses and the inclusion rate. For more information regarding capital gains tax, see the Draft Comprehensive Guide to Capital Gains Tax (Issue 5).
Since an assessed capital loss cannot reduce taxable income, it will not reduce the taxable income derived from rental income. It is unlikely that capital losses will arise on the disposal of affected assets, since any loss is more likely to qualify for a deduction under section 11(o).† See Example 3 in the Annexure.
A lease premium received from the letting of assets described above will be regarded as rental income. In C: SARS v BP South Africa (Pty) Ltd Streicher JA stated the following:‡
‘However, whether a payment is made for the use of property or whether it is made for the right to use property the payment is a rental payment. In this regard I agree with the following statement by Lord Reid in Regent (supra):§
‘It was argued that a rent and a premium paid under a lease are paid for different things – that the premium is paid for the right but that the rent is for the use of the subjects during the year. I must confess that I have been unable to understand that argument. Payment of a premium gives just as much right to use the subjects as payment of a rent and an obligation to pay rent gives just as much right to the whole term of years as payment of a premium.’ ‘
A foreign exchange gain does not comprise rental income because it is not derived by way of rent. However, a foreign exchange loss will be allowed in the determination of net rental income from the letting of affected assets before allowing the capital allowances that are subjected to limitation under section 23A.
4.2 Limitation
Section 23A(2) limits the speci ed capital allowances on affected assets to a lessor’s net rental income from those assets. The limitation is applied on an aggregate basis, and not on an asset-by-asset basis. Thus the sum of the speci ed capital allowances on all affected assets is limited to the sum of the net rental income derived from all such assets.
If the rental-related deductions (other than the speci ed capital allowances) exceed the rental income resulting in a net rental loss, no speci ed capital allowances on affected assets will be deductible. Should the rental income from affected assets exceed the deductions, the speci ed capital allowances on affected assets will be allowed to the extent of the excess. See Example 2 in the Annexure.
4.3 Appropriate apportionment
Section 23A(3) applies when a lessor has incurred deductible expenditure relating to both rental income from affected assets and other income. In these circumstances an appropriate apportionment must be made to determine the portion of the deductions relating to the rental income from affected assets. The Act does not provide a speci c formula for determining an appropriate allocation of expenditure. An appropriate apportionment depends on the facts of each case and any fair and reasonable apportionment based on the merits of the case will be accepted. Apportionment will, for example, be required, for general administrative overheads. Meyerowitz correctly makes the following further observation:¶
‘Where the affected asset itself is used to produce both rental and other income, then even the direct expenditure will have to be apportioned, eg in the ratio the respective incomes bear to one another, or in the ratio that the rental periods bear to the periods during which the affected asset is used to produce other income.’
4.4 Carry-forward of disallowed capital allowances
The speci ed capital allowances that have been disallowed under section 23A(2) are carried forward to the succeeding year of assessment under section 23A(4). The amount so carried forward is deemed to be a deduction to which the taxpayer is entitled in that succeeding year, subject once again to any limitation imposed by section 23A(2).
In other words, the capital allowances carried forward will be allowed only when there is suf cient net rental income from the letting of affected assets. Disallowed capital allowances are carried forward inde nitely until absorbed by any future net rental income except when the affected asset is sold. See Examples 2 and 3 in the Annexure.
4.5 Sale of an affected asset
Section 23A is not a deduction provision, but an anti-avoidance provision. Although the deduction of the speci ed capital allowances is limited under section 23A(2) and carried forward under section 23A(4), the deduction of the speci ed allowances remains determinable under the sections conferring those allowances.
* Paragraph (b) of the de nition of ‘rental income’.
† For more information on section 11(o), see Interpretation Note No. 60 dated 10 January 2011 ‘Loss on Disposal of Depreciable Assets’.
‡ 2006 (5) SA 559 (SCA), 68 SATC 229 at 238.
§ Regent Oil Co Ltd v Strick (Inspector of Taxes) [1965] 3 All ER 174 (HL). ¶ See Meyerowitz on Income Tax 2007-2008 in 12.160.
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