Since 2015, section 11(e) (Wear and Tear Allowance) has been subject to several amendments. Some of these amendments have only recently taken effect and these amendments have led to the publication of new issues of SARS’ Interpretation Note 47 and Binding General Ruling 7 (BGR 7). These two SARS guidance documents contain the updated considerations and write-off periods for determining the useful life of a qualifying asset and therefore annual value of the allowance available to a taxpayer.
The amendments have removed the Commissioner’s discretion to determine the just and reasonable amount by which qualifying assets have depreciated in a given year and therefore the amount of the allowance. This amount is now to be determined on the basis of the periods of use listed for this purpose in a public notice issued by the Commissioner, or a shorter period of use approved by the Commissioner on application in the prescribed form and manner by the taxpayer.
A further notable consequence of the removal of the Commissioner’s discretion applies to the determination of the value of a qualifying asset acquired by way of donation, inheritance, or distribution in specie. With the removal of the discretion, qualifying assets acquired in these ways will be valued at an arm’s-length, market value price only.
The Previous Dispensation
Prior to the amendments coming into force, the general guardrails for the exercise of the Commissioner’s discretion to quantify the Wear and Tear Allowance were contained in the previous issues of Interpretation Note 47 and BGR 7.
BGR 7, which reproduces certain parts of Interpretation Note 47, contains SARS’ binding interpretation of how the Wear and Tear Allowance ought to apply. It deals with inter alia:
- The valuation of qualifying assets,
- The methods available to depreciate qualifying assets over time, and
- The ordinary useful lives of various types of assets over which the allowance will apply, also known as write-off periods.
BGR 7 previously bound SARS to the methods for calculating depreciation and the write-off periods it sets out. However, this was subject to alteration by exercise of the Commissioner’s discretion, in circumstances where applying BGR 7 would not result in a just and reasonable depreciation value. Similarly, the valuation of a qualifying asset received through a donation, inheritance or distribution in specie could be discretionarily altered by the Commissioner. These discretionary alterations would, according to BGR 7, be exercised upon audit or assessment by SARS.
The updated section 11(e) and new SARS guidance
Following the coming into effect of the amendments to section 11(e), the guidance issued by SARS was similarly amended to reflect the changes to the legislation. The SARS guidance takes the same form as it did previously with new issues of Interpretation Note 47 and BGR 7 being published on 9 February 2021.
As noted above, the amended section 11(e) does not contain a discretion for the Commissioner to determine a just and reasonable value for depreciation. Now, the value of the qualifying asset will be determined solely under the acquisition cost provision in 11(e)(vii). This provision deems the cost of the qualifying asset to be the market value in an arm’s length transaction.
Further, SARS is now bound to publish the lists of write-off periods for qualifying assets, as has been and is currently contained in BGR 7. These write-off periods are used for disaggregating the depreciation over the useful life of the qualifying asset. Another new aspect of the Wear and Tear allowance is a formalised process for applying to the Commissioner for a shortened write-off period.
The new issue of BGR 7 deals with two further notable aspects which are not addressed in the previous issue, being: the implications of section 24M, dealing with unquantifiable acquisition costs; and personal use assets becoming used in a taxpayer’s trading activities.
Section 24M(2) regulates the consequences of a taxpayer disposing of or acquiring an asset where part of the consideration is unquantifiable. Section 24M(4) deals with circumstances where a taxpayer would have received a greater amount of Wear and Tear Allowance, but for the unquantifiable part of the acquisition cost of such asset. It provides that in such a circumstance, where the amount becomes quantifiable, then a “catch-up” allowance will be granted in that year of assessment.
BGR 7 also details SARS’ position where personal use assets later become used in the taxpayer’s trade. SARS takes the view that it is unacceptable that the original acquisition cost be used as the basis for depreciation. Therefore, BGR 7 takes the stance that the value of the qualifying asset must be determined at the date when the asset is brought into use for trade, as the lower of the original market value or the market value at the date when it is brought into trade. The write-off period must similarly be determined at the date the asset is brought into trade, considering its condition at that point.
The amendments to section 11(e), while not fundamentally changing the way the Wear and Tear Allowance operates, do provide more certainty and clarity for taxpayers. SARS had previously attempted to provide taxpayers with this certainty in the form of published and binding guidance. Now with a formal requirement for this guidance in the Income Tax Act, taxpayers engaged in trades are assured of having a means to better understand the Wear and Tear Allowances available regarding various qualifying assets.