A capital allowance represents the portion of capital investment costs a business can deduct from its income under the Income Tax Act. In South Africa, as in many other jurisdictions, capital investments are usually not immediately deductible in the year the expense is incurred. Instead, these investments are written off over a specified period. By the end of this write-off period, the business would have deducted the full cost of the asset.
Taxpayers should be aware of certain nuances when transferring these allowance assets under the corporate roll-over provisions in sections 41 to 47 of the Income Tax Act. Let's illustrate this with an example: Suppose a transferor company sells a business as a going concern to a transferee company. Both companies are South African tax residents and belong to the same group of companies, with a 31 December year-end. The transferor company transfers its assets to the transferee company on 31 August 2023 as part of an intra-group transaction. These assets include those on which the transferor company claimed various allowances, such as section 12C (for assets used by manufacturers) and section 13quin (for commercial buildings).
The question arises whether the transferor company can claim these allowances for the 8 months from 1 January to 31 August 2023 and whether the transferee company can claim them for the remaining 4 months from 1 September to 31 December 2023. Alternatively, only one of the companies may qualify for these allowances.
On 20 December 2018, SARS issued Interpretation Note 107, which provides guidance on section 13quin. According to IN 107, if the transferor company meets the requirements for claiming the section 13quin allowance before the transfer, it will claim the full section 13quin allowance for that year in which it transfers the allowance asset to the transferee company, even if the transferee company also meets the requirements. The transferee company cannot claim the allowance for the same period, as the two companies are deemed to be one and the same person for determining the allowance. Thus, in our example, the transferor company would claim the section 13quin allowance for the entire 2023 tax year, despite owning the assets for only 8 months. The transferee company is unable to claim the section 13quin allowance in the 2023 tax year even though it acquired the assets for the remaining 4 months.
This tax treatment is predictable when the asset purchase agreement is not subject to any suspensive conditions, as the disposal date is considered the agreement's conclusion date. The contracting parties are able to determine the date on which the asset purchase agreement will be concluded. However, if the agreement includes a suspensive condition, the disposal date is when the condition is satisfied. As this is outside the control of the parties, there is a risk that if the suspensive conditions are fulfilled in February 2024, the transferor company would be entitled to the capital allowance for the full 2024 tax year. According to IN 107, the capital allowance cannot be apportioned, potentially causing a mismatch in income and expenses, as the transferee will start deriving income from the business in 2024 while the transferor continues to claim the allowance for the full 2024 tax year.
IN 107 explicitly states that section 13quin is a non-apportionable allowance in the context of a section 45 intra-group transaction. This approach also applies to transfers under section 42 (asset-for-share transactions), section 44 (amalgamations) and section 47 (liquidation distributions) as these provisions contain similar 'one and same person' deeming provisions.
The issue is whether SARS' approach to non-apportionable allowances is limited to the section 13quin allowance or if it extends to other capital allowances. Other potentially non-apportionable allowances may include those in section 12C (assets used by manufacturers or hotel keepers, and for aircraft and ships) and section 12D (pipelines, transmission lines, and railway lines). The SARS approach in IN 107 would not apply to section 11(e) wear and tear allowances.
Taxpayers are urged to exercise caution in apportioning allowances when transferring allowance assets under the corporate roll-over provisions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
