Page 538 - SAIT Compendium 2016 Volume2

IN 60 Income Tax acT: InTeRPReTaTIon noTes IN 60
4.4 Asset disposed of by donation
A depreciable asset that is donated is alienated by the donor and consequently falls within the expression ‘alienation, loss or destruction’. In determining whether a deduction under section 11 (o) is admissible, sections 8 (4) (k) and 23 (g) need to be considered. The outcome will have consequences for the determination of a capital gain or loss under the Eighth Schedule.
Under section 8 (4) (k) an asset that is donated is for the purposes of section 8 (4) (a) deemed to be disposed of for an amount received or accrued equal to its market value on the date of donation. This provision only applies if the market value of the asset exceeds its tax value, thereby resulting in a recoupment for the purposes of section 8 (4) (a). Should the market value of the asset be less than or equal to its tax value, section 8 (4) (k) will not apply and the section 11 (o) allowance must be calculated without taking into account any deemed consideration.
If the asset has been donated out of pure liberality without any expectation of a quid pro quo the loss under section 11 (o) will not have been incurred for the purposes of trade. The section 11 (o) allowance will accordingly be disallowed under section 23 (g).
Under paragraph 38 of the Eighth Schedule a taxpayer that donates an asset is deemed to have disposed of it for an amount received or accrued equal to its market value on the date of disposal. In the case of a depreciable asset that is not subject to recoupment under section 8 (4) (a), the market value of the asset will comprise the proceeds on disposal of the asset under paragraph 35. In determining the base cost of the asset, any expenditure referred to in paragraph 20 (1) (a) to (g) must be reduced under paragraph 20 (3) (a) to the extent that it has been allowed under the relevant capital allowance provisions [for example, section 11 (e) or 12C].
Example 7 – Donation of depreciable asset
Facts:
A taxpayer acquired a vehicle at the beginning of year 1 at a cost of R500 000 for the purposes of trade. The asset had an expected useful life under section 11 (e) of ve years. At the end of year 4 the taxpayer donated the vehicle to an approved public bene t organisation when the market value of the vehicle was R80 000. The donation fell under the 10% threshold referred to in section 18A (1).
Result:
The tax value of the asset at the time of donation was as follows:
Cost of vehicle
R 500 000 (400 000) 100 000
500 000
(400 000)
(80 000) 20 000 80 000
(20 000)
60 000
Less: Wear-and-tear allowances [section 11 (e)] R500 000 x 20% x 4
Tax value
Under section 23 (g) the amount of R100 000 will not be allowed as a deduction under section 11 (o), since it was not incurred for the purposes of trade.
Under section 18A (3) (b) the amount of the donation for the purposes of section 18A will be limited to the lower of R100 000 (cost less allowances allowed) and R80 000 (fair market value of the asset).
For the purposes of the Eighth Schedule, the proceeds on disposal of the asset will be R80 000 under paragraph 38. The expenditure on the asset under paragraph 20 will be reduced as follows under paragraph 20 (3) (a):
R
Cost of asset [paragraph 20 (1) (a)]
Less: Amounts allowed against income [paragraph 20 (3) (a)]
Wear-and-tear allowances
Section 18A deduction Base cost
Proceeds (paragraph 38 read with paragraph 35) Less: Base cost (as above)
Capital gain
4.5 Death of a taxpayer
When a taxpayer dies there is no deemed recoupment of capital allowances under section 8 (4) (k). However, section 23 (g) and paragraph 40 of the Eighth Schedule need to be considered.
The alienation of an asset as a result of the death of a taxpayer does not arise as a result of carrying on trade. Accordingly any loss under section 11 (o) arising on death will be disallowed under section 23 (g).
For the purposes of the Eighth Schedule a taxpayer’s assets are deemed to be disposed of at market value on date of death under paragraph 40, subject to some exceptions such as assets bequeathed to a surviving spouse. In determining the base cost of the asset in the hands of the deceased person, any expenditure referred to in paragraph 20 (1) (a) to (g) must be reduced by any capital allowances [paragraph 20 (3) (a)].
Example 8 – Death of taxpayer
Facts:
A taxpayer acquired a vehicle at the beginning of year 1 at a cost of R500 000 for the purposes of trade. The asset had an expected useful life for tax purposes of ve years. At the end of year 4 the taxpayer passed away when the market value of the vehicle was R80 000.
Result:
The tax value of the asset at the time of death was as follows:
R
530 saIT comPendIum oF Tax LegIsLaTIon VoLume 2