Capital allowances are a valuable financial savings tool as they are inherent in most property transactions or property developments, and are a key tax benefit within a company’s real estate or project expenditure.
Recognising the availability and potential value of capital allowances within capital expenditure planning can significantly affect the complexion of real estate or project decisions. By way of an example, implementing capital allowances systems may improve the post tax investment yields, make marginal schemes viable or influence the design specification of a new build project.
Capital allowances are the means of giving significant tax relief for capital expenditure incurred on certain types of commercial property assets. Taxpayers can offset their eligible capital allowances against their taxable profits, thereby reducing the amount of tax that they have to pay.
Taxpayers who are in a tax loss position may still claim capital allowances, which will effectively increase their tax losses. At such time as the taxpayer returns to a tax paying position, he may then use these increased tax losses to offset against taxable profits.
The increased tax losses could also be used to shield against possible capital gains tax when the relevant assets are disposed (this tax planning technique is outside the scope of this article).
The legislation dealing with capital allowances is a crucial part of the South African tax system, and is directly relevant to the whole range of businesses operating in South Africa, from the largest company to the smallest business consisting of perhaps a rented apartment. There are significant amounts of money are at stake.
The capital allowances rules can be complex. For example, there are relatively few tax topics that have generated more tax case law. The legal arguments have stretched over many decades and have not shown any signs of coming to an end.
The South African Revenue Service (“SARS”) has tried hard to assist taxpayers by way of their interpretation notes, most notably their Interpretation Note No.47 (issue 2). However, a practical problem with this is that a simple list of assets is potentially misleading and also somewhat unhelpful. To illustrate this point, electronic building management systems may qualify for plant and machinery allowances (by way of falling within the definition of plant for tax purposes), but these do not appear on SARS’ relevant list.
As a contrasting example, carports appear to qualify by way of appearing on SARS’ list, however, its qualifying status for tax purposes actually depends on how it is attached to the ground (no mention of this in the Interpretation Note). For example, if it is simply bolted to the ground then it will qualify for plant and machinery allowances. However, if it is cast within a concrete foundation then it may be considered to be a structure or works of a permanent nature for tax purposes, and therefore, not be eligible for plant and machinery allowances.
Therefore, it is vital for taxpayers to claim their capital allowances correctly. Doing so will enable taxpayers to optimise their claims and to mitigate making errors which could jeopardise their whole tax return.
Different types of expenditure will attract different types of capital allowances, which attract different rates of tax relief. Some of the more common forms of capital allowances include plant and machinery allowances (also known as wear and tear allowances), commercial building allowances, manufacturing assets allowances and manufacturing building allowances.
There are a variety of methods available to taxpayers to correctly identify and claim the allowances that they are entitled to. These could include detailed reports for each of the property transactions or projects involved, to the development of asset coding systems and manuals either by in-house or external consultants. The final approach will depend on the circumstances of the taxpayer, the nature of the expenditure, the amount of allowances and the tax risks involved. In addition, the chosen approach must be sufficiently detailed and robust to meet the taxpayers’ disclosure requirements under self assessment and withstand SARS’ scrutiny.
Source: Capital Allowances Specialists / Eprop
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