Page 722 - SAIT Compendium 2016 Volume2

BGR 7 INCOME Tax aCT: BINdINg gENERaL RuLINgS
BGR 7
Cost to Company Y [section 23J(2)]
Less: Allowances claimed by Company Y [section 23J(2)(a)] Income tax value of asset to Company Y
Recoupment in Company Y [section 23J(2)(b)]
Taxable capital gain in Company Y [section 23J(2)(c)] Deemed cost to Company Z for purposes of the allowance
R 100 000 (30 000)
70 000 30 000 6 660 106 660
us, under section 23J the actual cost of R110 000 for the motor vehicle to Company Z is limited to R106 660 for Company Z for purposes of calculating the allowance.
A special rule in section 23J(1) applies to prevent taxpayers from arti cially breaking the ‘connected person’ chain. Under this rule an asset acquired from a non-connected person will be treated as having been acquired from a connected person if the asset was held by a connected person at any time during the two years before the date of acquisition.
4.2.6 Leased assets
e allowance granted to a lessor must be based on the cost of the asset less any residual value, as speci ed in the lease agreement. Many lease agreements, particularly those involving vehicles, provide for a residual value. is residual value is what the lessor expects the asset to be worth at the end of the lease. At the end of the lease the lessor will usually sell the asset to recover the residual. A lessee who has not returned an asset to the lessor in good condition or who has exceeded the agreed usage criteria (for example, a restriction of 100 000 kilometres over 54 months in the case of a vehicle), must reimburse the lessor. In this way the value of the asset at the end of the lease is assured. Section 11(e) permits a deduction for the amount by which the value of an asset has been diminished by reason of wear and tear or depreciation during the year of assessment. Since the portion of the cost of the asset representing the residual value is guaranteed (that is, it is not subject to diminution in value), there is no justi cation for granting the allowance on that portion of the cost.
An asset with a cost of R100 leased with an agreed residual of R20, means that the value by which the asset is expected to depreciate over the period of the lease is R80. It is for this reason that lessors are required to reduce the cost of their leased assets by the residual value for the purposes of determining the allowance.
Should any initial amount paid by the lessee not form part of the income of the lessor for income tax purposes, it must be excluded from the lessor’s cost of acquisition of the asset.
At the termination of the lease agreement the residual value is the value of the asset for income tax purposes and any further write-o or recoupment will depend on how the asset is dealt with. As far as the lessee is concerned, the recoupment provisions of section 8(5) will apply.
See also 4.3.3(a) on the relationship between the write-o periods under Annexure A and the lease period.
4.2.7 Qualifying assets acquired in a foreign currency
Section 25D provides that if any expenditure is incurred by a taxpayer in any currency other than the currency of the Republic of South Africa, it must be translated to rand by applying the spot rate on the date on which the expenditure was so incurred.
A natural person or trust (other than a trust which carries on a trade) may, however, elect that all amounts of expenditure incurred in a foreign currency be translated into rand by applying the average exchange rate for the relevant year of assessment [section 25D(3)].
Refer to Interpretation Note 63 ‘Rules for the Translation of Amounts Measured in Foreign Currencies’ (19 September 2011) for a detailed discussion on this topic.
4.3 Policies on the determination of the amount of the allowance
4.3.1 Withdrawal of permission to use the debtor accounting system
Previously it was SARS’s policy to allow a qualifying lessor to adopt the ‘debtor accounting system’ for income tax purposes. e lessor was required to satisfy the Commissioner that, for purposes of claiming the allowance, the volume of the lessor’s leasing business rendered it impracticable to maintain a separate asset account for each article let.
Under the ‘debtor accounting system’, only the nance charges earned by the lessor during a year of assessment are to be re ected as ‘gross income’. It follows that in such a case a lessor will not be allowed the allowances for leased assets.
is policy is, however, withdrawn for any asset let under an agreement entered into during any year of assessment commencing on or a er 1 March 2010.
4.3.2 Methods for determining the allowance
In determining the allowance, taxpayers may elect between—
• the diminishing-value method (under this method the allowance for a year of assessment is calculated on the remaining
value (also known as the income tax value), that is, the cost of the qualifying asset less an allowance for the previous
years of assessment); or
• the straight-line method (under this method the allowance is claimed in equal instalments over the expected useful life
of the asset).
It is unnecessary for a taxpayer to notify the Commissioner when changing the method for determining the allowance. Taxpayers must ensure that they have the necessary records supporting the write-o of all assets readily available, should these be requested by the Commissioner.
714 SAIT CompendIum oF TAx LegISLATIon VoLume 2