Page 539 - SAIT Compendium 2016 Volume2

IN 60 Income Tax acT: InTeRPReTaTIon noTes IN 60
Cost of vehicle
500 000
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.
For the purposes of the Eighth Schedule, the proceeds on disposal of the asset will be R80 000 under paragraph 40. The expenditure on the asset under paragraph 20 will be reduced as follows under paragraph 20 (3) (a):
Cost of asset [paragraph 20 (1) (a)]
Less: Amounts allowed against income [paragraph 20 (3) (a)]
Wear-and-tear allowances
Base cost
Proceeds (paragraph 40)
Less: Base cost (as above) Capital loss
(400 000)
100 000
R 500 000
(400 000)
100 000 R 80 000 (100 000) (20 000)
4.6 Interaction between section 11 (o) and the Eighth Schedule
A taxpayer that makes an election under section 11 (o) will be prevented from claiming the section 11 (o) loss under
the Eighth Schedule by paragraph 20 (3) (a) of that Schedule. Similarly, any recoupment included in a taxpayer’s income under section 8 (4) (a) is excluded from the proceeds for CGT purposes by paragraph 35 (3) (a) of the Eighth Schedule.
Example 9 – Interaction with Eighth Schedule – Taxpayer making an election under section 11 (o)
Facts:
A taxpayer acquired an asset at a cost of R100. The asset has an expected useful life for the purposes of section 11 (e) of ve years. At the beginning of year 3 the taxpayer sold the asset for an amount received or accrued of R40 and made an election under section 11 (o). Determine the section 11 (o) allowance and any capital gain or loss on disposal of the asset.
Result:
Cost of asset
Less: Wear-and-tear allowances
Tax value
Less: Consideration received
Loss – section 11 (o)
Determination of capital gain or loss
Base cost (paragraph 20 of Eighth schedule)
Cost of asset (paragraph 20 (1) (a) of Eighth Schedule) Less: Amounts allowed against income (paragraph 20 (3) (a)
of Eighth Schedule): Wear-and-tear allowances Section 11 (o) allowance
Base cost
Capital gain or loss
(40) (20)
R 100 (40) 60 (40) 20
100 (60)
40
40 (40) Nil
Proceeds on disposal of asset
Less: Base cost (as above)
Capital gain or loss
Paragraph 20 (3) (a) of the Eighth Schedule thus prevents a double deduction.
Example 10 – Interaction with Eighth Schedule – Taxpayer not making an election under section 11 (o) Facts:
The facts are the same as in Example 9, except that the taxpayer does not make an election under section 11 (o). Result:
Since no election has been made there is no deduction under section 11 (o). A capital loss will accordingly arise, calculated as follows:
The base cost of the asset is equal to its acquisition cost of R100 less the wear-and-tear allowances allowed under section 11 (e) of R40, that is, R60.
R Proceeds 40 Less: Base cost (R100 – R40) (60) Capital loss (20)
As a result of the section 11 (o) allowance not being allowed the taxpayer becomes entitled to a capital loss.
4.7 Limitation imposed on the lessor under section 23A
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