Page 532 - SAIT Compendium 2016 Volume2

IN 60 Income Tax acT: InTeRPReTaTIon noTes IN 60
No election may be made to claim a deduction under section 11(o) if the amount received or accrued from the alienation, loss and destruction of the asset was received or accrued from a connected person in relation to the taxpayer [second proviso to section 11(o)].
4.1.2 The trade requirement
Cessation of trade
The deduction under section 11(o) forms part of the determination of a taxpayer’s taxable income from carrying on
any trade (opening words of section 11). The allowance will thus not be available to a taxpayer that has ceased to carry on trade.
Apportionment between business and private usage
The section 11(o) allowance must be apportioned under section 23(g) when an asset has been used for both business and private purposes.* The allowance is determined with reference to the original cost and total wear-and-tear allowances ignoring any private element. Once the section 11(o) allowance has been established, it is apportioned in order to disallow the portion relating to private use.
Example 1 – Apportionment of section 11(o) allowance between business and private usage Facts:
D, a sole trader, acquired a passenger vehicle at the beginning of year 1 at a cost of R500 000. The vehicle has an expected useful life for income tax purposes of ve years. D claims a wear-and-tear allowance under section 11 (e) on the straight-line basis. At the end of year 3 D sells the vehicle for R150 000. D’s log book re ected the following odometer readings for the vehicle each year:
Year 1 Year 2 Year 3
Result:
Opening 0
30 000 55 000
Closing 30 000 55 000 90 000
Distance for year 30 000
25 000
35 000
Business 24 000 15 000 15 000 54 000
Private 6 000 10 000 20 000 36 000
The tax value of the vehicle immediately before it was sold was as follows:
Cost
Less: Section 11 (e) allowances R500 000/5 x 3
Tax value
Consideration received
Section 11 (o) allowance before adjustment for private use Less: Private use 36 000/90 000 x R50 000
R 500 000
(300 000) 200 000 (150 000) 50 000 (20 000) 30 000
Section 11 (o) allowance
Note: The following portions of the section 11 (e) wear-and-tear allowances would have been disallowed in each year of assessment under section 23 (g):
Year 1 R100 000 x 6 000/30 000 Year 2 R100 000 x 10 000/25 000 Year 3 R100 000 x 20 000/35 000 Total amount disallowed
Total amounts allowed R300 000 – R117 143
R 20 000 40 000 57 143 117 143 182 857 300 000
R 182 857 30 000 137 143 350 000
R 500 000 (212 857)
(30 000)
(150 000)
137 1436
Total wear-and-tear
The section 11 (o) allowance is determined with reference to the original cost and total wear-and-tear allowances ignoring any private element. Once the section 11 (o) allowance has been established it is apportioned to disallow the portion relating to private use. In this example there is an overall economic loss of R350 000 comprising the cost of the vehicle of R500 000 less the proceeds of R150 000. This amount is accounted for as follows:
Section 11 (e) allowances allowed
Section 11 (o) allowance allowed
Capital loss (see below)
Total amount claimed for income tax and CGT purposes The capital loss is determined as follows:
Cost of acquiring asset (paragraph 20 (1) (a) of Eighth Schedule) Less: Amounts allowed against income (paragraph 20 (3) (a)
of Eighth Schedule)
– Allowed under section 11 (e)
– Allowed under section 11 (o)
Base cost
Proceeds (paragraph 35 of Eighth Schedule) Capital loss
* ITC 322 (1935) 8 SATC 243 (U).
(182 857)
287 143
524
saIT comPendIum oF Tax LegIsLaTIon VoLume 2