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Summary A Student's Approach to Income Tax - Taxation of business activities and Individuals (tax3761)
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- University Of South Africa (Unisa)
Summary and notes of Chapter 9
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Learning Unit 7 – Chapter 9 Capital AllowancesExpenditure and allowances relating to capital assets
,Connected Persons (Section 1)
A ‘connected person’ is defined in section 1 of the Act.
In relation to a natural person, a connected person includes:
• a relative; and
• a trust (other than a portfolio of a collective investment scheme) of which such natural person or such
relative is a beneficiary.
In relation to a trust (other than a portfolio of a collective investment scheme), a connected person
includes:
• a beneficiary of the trust;
• a connected person in relation to a beneficiary; and
• another person who is a connected person in relation to the trust (other than a collective investment
scheme).
In the case of a partner of a partnership, a connected person is:
• another partner; and
• a connected person in relation to a partner.
It will also have an influence on the calculation of recoupments (section 8(4)(k), scrapping
allowances (section 11(o) and capital gains or losses
REPAIRS AND IMPROVEMENTS (section 11(d))
If it is classified as a repair, it may be deductible immediately in full during the current year of assessment.
However, if it is classified as an improvement, it would be an expenditure of a capital nature and the
special provisions regarding capital allowances may apply.
An analysis of the section indicates that repair expenses may be claimed if:
• the expense is actually incurred;
• it is incurred during the year of assessment;
• it relates to property used for the purposes of trade or income is derived from it; and
• it relates to other assets, for example, machinery, implements etc., used for the purposes of trade.
, The principles from various court cases can be summarized as follows:
• ‘Repair’ is restoration by renewal or replacement of subsidiary parts of a whole.
‘Renewal’ as distinguished from ‘repair’ is a reconstruction of the entirety (‘entirety’ does not necessarily
mean the whole, but substantially the whole).
• In the case of ‘repairs’ constituting ‘renewal’, it is not necessary that the materials used are identical to
the materials replaced.
• ‘Improvements’ increase income-earning capacity.
• ‘Repair’ restores the asset to its original condition.
• ‘Improvements’ lead to an improved or better asset.
• Repair of inherent faults in the asset, for example, inferior construction, does not constitute a ‘repair’.
Example 9.1:
Repairs to Roof (note 1) R6 000
Replacement of carpets (note 2) R12 000
Paving of the area (note 3) Nil
Painting the shop (note 4) R10 000
Total Expense R28 000
1. The repair to the roof is the restoration of a part of the shop
2. Cost of tiling exceeds the amount that would have been spent on replacing the carpet, it is not
necessary that the materials used be identical to the materials replaced.
3. The cost of paving is not deductible as it was not an improvement to the asset.
4. The cost of painting is deductible as it is the restoration of a part of the shop to its original
condition.
PROCESS OF MANUFACTURE:
Special rates apply in some sections such as Section 12C & 12E.
• The end-product must be essentially different from what it was before undergoing the process, in other
words, there must be a change in the form, nature or utility of the article and the process must be
continuous.
• The process need not produce the end-product as long as it contributes towards it
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