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

Department of Finance

Practice Note No. 26

Provision for Ship Repairs in terms of Section 14(1)(C) of the Income Tax Act

 

Date: 18 August 1994

 

1) Section 14(1)(c) of the Income Tax Act (the Act) provides for a deduction from the income of a person referred to in section 9(1)(c) of the Act in respect of any expenditure which such person can satisfy the Commissioner for Inland Revenue he is likely to incur within five years from the end of the year of assessment in question on repairs to any ship used by him for the purposes of his trade.

 

2) It is evident that the allowance section 14(1)(c) of the Act cannot be "compartmentalised" into fixed "cycles" of five years. In the determination of the allowance at the end of any particular of assessment regard will be had to the relevant expenditure likely to be incurred during the next five years. In other words, the allowance must be recalculated at the end of each year of assessment in relation to the relevant expenditure likely to be incurred for the next five years.

 

3) The following examples illustrate the calculation of the allowance:

 

3.1 Example

 

Estimated cost at end of year 0 of major refit in year 5 is R100 000. No major repairs are envisaged for years 6, 7, 8, 9 and 10.

 

Year 0:

Estimated cost: R 100 000

 

Allowance (20% of R 100 000)

(R 20 000)

Year 1:

Estimated cost: R 112 000

 

Allowance (40% of R 112 000)

(R 44 800)

Add back

R 20 000

Year 2:

Estimated cost: R 128 000

 

Allowance (60% of R 128 000)

(R 76 800)

Add back

R 44 800

Year 3:

Estimated cost: R 140 000

 

Allowance (80% of R 140 000)

(R 112 000)

Add back

R 76 800

Year 4:

Estimated cost: R 150 000

 

Allowance (100% of R 150 000)

(R 150 000)

Add back

R 112 000

Year 5:

Actual repairs

(R 153 400)

Add back

R 150 000


 

Note: Should the actual refit have been done in year 6 (with no major repairs envisaged until after year 11) the position would be as follows:


 

Year 5:

Estimated cost: R 160 000

 

Allowance (100% of R 160 000)

(R 160 000)

Add back

R 150 000

Year 6:

Actual repairs

(R 155 000)

Add back

R 160 000

 

3.2 Example:

 

Assume at the end of year 4 (using the same estimates in 3.1 above for years 0, 1, 2 and 3) it is estimated that a major refit will again be necessary in year 8 at an estimated cost of R100 000.

 

Year 4:

Estimated cost:

R 150 000 + R 100 000 = R 250 000

 

Allowance (100% of R 150 000)

 

+ 25% of R 100 000*

(R 175 000)

Add back

R 112 000


 

* In relation to the R 100 000 this year 0 and the refit is scheduled for year 4 (year in relation to the R150 000) - thus R 100 000 divided by 4 = R 25 000 (25% of R 100 000).



Year 5:

Estimated cost: R 120 000

 

Actual repairs

(R 153 400)

Allowance (50% of R 120 000)

(R 60 000)

Add back

R 175 000

Year 6:

Estimated cost: R 140 000

Allowance (75% of R 140 000)

(R 105 000)

Add back

R 60 000

Year 7:

Estimated cost: R150 000

Allowance (100% of R150 000)

(R150 000)

Add back

R150 000

Year 8:

Actual repairs

(R156 000)

Add back

R150 000

 

Notes:

i) The provision to be allowed in year 8, or for that matter any year, will depend on the estimated expenditure for the next succeeding five years.
ii) Should the need for a major refit in the relevant five years fall away, the need for a corresponding allowance will also fall away.

 

4) As the quantum of the allowance is at the discretion of the Commissioner, should the taxpayer wish to claim it, he will have to furnish the required information to the Receiver of Revenue to enable him to determine

 

5) Because it would be extremely difficult to define "major refit" (as the conditions relevant to, or the extent of the repairs would vary from ship to ship), a useful guideline would be to distinguish between "ordinary running repairs", which are basically incurred every year, and "extraordinary repairs", which are expected to occur at intervals of longer than a year.