Income Tax Act, 1962 (Act No. 58 of 1962)

Department of Finance

Practice Note No. 15

Deduction in respect of Wear and Tear or Depreciation in terms of Section 11(e) of the Income Tax Act: Leased Machinery, Plant, Implements, Utensils and Articles (Including Vehicles and Equipment)

Purchase

Date: 16 March 1992

For income tax purposes, leased articles [i.e. machinery, plant, implements, utensils and articles (including vehicles, equipment, etc.)] must be capitalized in the books of the lessor. Lease charges received by or accrued to the lessor during a year of assessment in respect of all lease agreements held by him, represent "gross income" in his hands. From such income the lessor is entitled to claim a deduction in respect of, inter alia, wear and tear (depreciation) (hereinafter referred to as "the section 11(e) deduction") in terms of section 11(e) of the Income Tax Act, 1962, as amended ("the Act"). Other expenditure incurred by the lessor in the production of such income is also allowable as a deduction. The section 11(e) deduction and the deduction of other expenditure are, moreover, governed by section 23A of the Act.

The section 11(e) deduction may be calculated on the straight-line basis on the cost of the leased article to the lessor over the period of the lease agreement where the useful life of the leased article is sufficiently short to warrant such procedure. [Note: The cost of machinery etc. acquired on or after 15 March 1984 is determined in accordance with the provisions of proviso (vii) to section 11(e). While section 23C prohibits the capitalisation of input tax (value-added tax) for purposes of determining the section 11(e) deduction, it does not prohibit the capitalisation of output tax and therefore there need be no change to the present practice of lessors in this regard.]

In instances where the useful life of the leased article exceeds the period of the lease agreement, the cost of the leased article must be written off over the useful life of the article. The section 11(e) deduction should be reduced proportionately in the year of acquisition. The schedule contains examples of write-off periods for leased articles which would be acceptable to Inland Revenue. It must be borne in mind that these write-off periods are not applicable in respect of articles for which the allowance is claimable in terms of section 12B or 12C of the Act.

Where a least is entered into for a period exceeding the period indicated in the schedule, the article must be written off over such longer period.

In instances where a lease agreement provides that the residual value tie the estimated fair market value of the leased article as at the date of termination of the period of lease, as agreed between the lessor and lessee at the commencement of the lease) of the leased article should be taken into account in determining the rental payable by the lessee, such residual value may not be written off for purposes of determining the section 11(e) deduction. The cost of the leased article must therefore, be reduced by the residual value thereof in calculating the section 11(e) deduction. At the termination of the lease the residual value will be the value of such article for income tax purposes and any further write-off or recoupment will depend on how such article is dealt with. (As far as the lessee is concerned, the recoupment provisions of section 8(5) of the Act should be borne in mind.)

Where a lessor can satisfy the Receiver of Revenue that, for purposes of claiming the section 11(e) deduction, the volume of his leasing business renders it impracticable to maintain a separate asset account for each article leased, such lessor may adopt the "debtor accounting" system for income tax purposes. (Under the "debtor accounting" system, only the finance charges earned by the lessor during a year of assessment are to be reflected as "gross income".) It follows that in such a case the lessor will not be allowed the section 11(e) deduction in respect of leased items. To be permitted to adopt the "debtor accounting" system for income tax purposes, the lessor must comply with the following requirements:

4.1	Adequate records must be maintained.

4.2	The period of the lease contract must be substantially in accord with the useful life of the leased article as reflected in the schedule.

4.3	A statement disclosing the period for which lease contracts were concluded in respect of the several classes of assets on lease must accompany the lessor's income tax return.

4.4	The records maintained are such that it will be possible to determine the written down value of any article leased at any stage.

4.5

The auditors of the lessor must furnish a certificate to the effect that they an satisfied that the formula (the formula must be disclosed) used for determining the portion of the finance charges as having been received or accrued in respect of any year of assessment, is reasonable and that the "debtor accounting" system will give substantially the same result as the "asset based" accounting system.

This practice note is in fact a confirmation of the correct method of determining the section 11(e) deduction in the relevant circumstances which should have been applied in respect of all assessments raised. It is, however, not the intention that assessments which have already been raised and in which another method was used to calculate the section 11(e) deduction, be reopened.

Schedule to Practice Note No. 15

Write off periods acceptable to Inland Revenue

Item	Period of write-off (Number of years)
Adding machines	5
Air conditioner (window type, moving parts only)	5
Aircraft: Light passenger/commercial/helicopters	4
Arc welding equipment	5
Balers	5
Calculators	3
Cheque writing machines	5
Cold drink dispensers	5
Compressors	3
Computers (main frame)	5
Computers (personal computers)	3
Crop sprayers	5
Debarking equipment	3
Demountable partitions	5
Drills	5
Electric saws	5
Electrostatic copiers	5
Excavators	3
Fertiliser spreaders	5
Fishing vessels	10
Fitted carpets	5
Fork-lift trucks	3
Front end loaders	3
Furniture and fittings	5
Gantry cranes	5
Gas cutting equipment	5
Gas heaters and cookers	5
Gear shapers	5
Graders	3
Grinding machines	5
Guillotines	5
Harvesters	5
Heat dryers	5
Heating equipment	5
Heavy trucks	4
Incubators	5
Ironing and pressing equipment	5
Kitchen equipment	5
Knitting machines	5
Lathes	5
Lift installations (goods)	10
Lift installations (passengers)	10
Medical theatre equipment	5
Milling machines	5
Mobile cranes	3
Mobile refrigeration units	3
Motorised chain saws	3
Ovens and heating devices	5
Ovens for heating food	5
Passenger cars and delivery vehicles	4
Perforating equipment	5
Photographic equipment	5
Planers	5
Pleasure craft	10
Ploughs	5
Portable concrete mixers	3
Refrigerated milk tankers	3
Refrigeration equipment	5
Refrigerators	5
Sanders	5
Seed separators	5
Sewing machines	5
Shop fittings	5
Spin dryers	5
Spot welding machines	5
Television and advertising films	3
Television sets	5
Tractors	3
Traxcavators	3
Truck mounted cranes	3
Typewriters	5
Vending machines	5
Washing machines	5
Water distillation and purification plant	10
Water tankers	3
Water tanks	5

Income Tax Act, 1962 (Act No. 58 of 1962)

Department of Finance

Practice Note No. 15

Deduction in respect of Wear and Tear or Depreciation in terms of Section 11(e) of the Income Tax Act: Leased Machinery, Plant, Implements, Utensils and Articles (Including Vehicles and Equipment)

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