Deterioration, obsolescence and wear and tear are among the reasons why assets decrease in value. By realising a deduction on depreciation for tax purposes, your company can recover the costs of certain moveable assets that are used in the production of income.
Generally, businesses won’t be able to make use of assets like heavy machinery or computer equipment, for example, for an indefinite period. As assets work together to generate an income for your business, over time these assets will have to be replaced with newer, more efficient ones. This article briefly looks at the basic concepts of depreciation for accounting purposes and wear and tear allowances for taxation purposes.
Depreciation – Accounting
Depreciation is essentially the decline in the value of an asset over time due to the wear and tear that occurs as a result of the normal use of that asset. For accounting purposes, a company’s assets should be depreciated on a systematic basis over the assets’ useful life. In addition, the depreciation method used should reflect the way in which assets’ economic benefits are utilised by the company and should also be reviewed regularly. The different methods of depreciation include: the straight-line method, reducing balance method as well as the production unit method.
For accounting purposes, depreciation is charged as an expense in a company’s income statement and is not deductible for tax.
Wear & Tear – Taxation
Wear and tear refers to the method in which the South African Revenue Services (SARS) allows companies to write off an asset for taxation purposes over a predetermined period. This wear and tear allowance permits companies to deduct, over a period of time, the amount that was paid for the movable goods that are used in the production of income. This deduction will result in a reduction of your company’s tax liability.
The period over which wear and tear can be claimed depends on the type of asset, as each asset will have a different write-off period. SARS has a prescribed schedule (Annexure A of Interpretation Note 47) for all assets, as well as predetermined rates at which companies can claim ‘depreciation’ for taxation purposes.
Any assets purchased for less than R7 000 may be deducted in full in the year in which the asset is purchased.
Recovering Wear & Tear Allowances
When an asset is sold, the wear and tear allowances claimed need to be recouped for that asset. The wear and tear claimed for the periods that the asset was in use is then added back to the taxpayer’s taxable income in the year in which the asset was sold.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)