Page 721 - SAIT Compendium 2016 Volume2

BGR 7 INCOME Tax aCT: BINdINg gENERaL RuLINgS BGR 7 Section 23J
23J. Limitation of allowances granted in respect of assets previously held by connected persons.—
(1) Where a depreciable asset acquired by a taxpayer was held within a period of two years preceding the acquisition by a person who was a connected person in relation to that taxpayer at any time during that period, the cost or value of the depreciable asset for the purposes of this section and any deduction or allowance claimed by the taxpayer in respect
of that asset shall not exceed an amount determined in accordance with subsection (2). (2) e amount to be determined for purposes of subsection (1) is the sum of—
(a) the cost of the depreciable asset for purposes of any deductions allowable in respect of that asset to the most recent person contemplated in subsection (1) that previously held that asset (hereinafter referred to as the ‘connected person’), less the sum of—
(i) all deductions which have been allowed to the connected person in respect of the asset; and
(ii) all deductions that are deemed to have been allowed to the connected person in respect of the asset in terms of section 11(e)(ix), 12B(4B), 12C(4A), 12D(3A), 12DA(4), 12F(3A), 13(1A), 13bis(3A), 13ter(6A), 13quin(3)
or 37B(4);
(b) any amount contemplated in paragraph (n) of the de nition of ‘gross income’ in section 1 that is required to be
included in the income of the connected person that arises as a result of the disposal of the asset by the connected
person; and
(c) the applicable percentage in paragraph 10 of the Eighth Schedule, of the capital gain of the connected person that
arises as a result of the disposal of the asset by the connected person.
Section 23J brought the various depreciable-asset-connected-person provisions in the Act under a single section. While the ‘connected person’ rule in section 11(e) limited the cost to the purchaser to the lower of the cost to the connected person (seller) or the market value at the time of the disposal by the connected person, section 23J gives credit to intervening taxation arising from the disposal by the connected person. More speci cally, under section 23J(2) the cost for the purchaser equals the sum of—
• •
•
the cost (taking into account any subsequent tax adjustments) of the depreciable asset to the connected person (seller); all inclusions in gross income by way of the recoupment of amounts allowed as a deduction upon the disposal by the connected person; and
any inclusion stemming from any capital gain triggered on the disposal by the connected person.
Example 1 – Determination of the value on which the allowance is to be based when a qualifying asset is acquired from a connected person
Facts:
Company X owns 60% of the shares in Company Y and Company Z. e nancial years of both companies end on the last day of February.
On 1 March 2012 Company Y sells a motor vehicle to Company Z for R110 000. Company Y initially purchased the vehicle for R100 000 and claimed allowances on it of R30 000. e following are triggered on disposal of the vehicle:
• First, a recoupment is triggered under section 8(4)(a) of R30 000 which results in an inclusion in the gross income of Company Y under paragraph (n) of the de nition of the term ‘gross income’.
• Secondly, a taxable capital gain of R5 000 is triggered and should be included in the taxable income of Company
Y under section 26A, determined as follows:
Amount received on disposal Less: Recoupment
Proceeds
Less: Base cost
Cost of asset
Less: All amounts previously allowed under section 11(e) Capital gain
Inclusion rate
Taxable capital gain [66,6% x R10 000]
Result:
RR 110 000
(30 000)
80 000
(70 000) 100 000
(30 000)
10 000
66,6% 6 660
Company Z will base the future allowances on the motor vehicle on the cost of R105 000, determined under section 23J as follows:
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