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Income Tax Act, 1962 (Act 58 of 1962)

South African Revenue Service

Practice Note No. 1 of 1999

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

 

 

Date: 4 April 1996

 

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 purpose of his trade. The allowance is additional to the normal annual expenditure incurred in keeping the ship in running repair and is designed to cover the cost of heavy repairs in overhauling and refitting which at the time the allowance was introduced was understood normally to be effected about once in every five years.

 

2) Practice Note No. 26 dated 18 August 1994 was issued with a view of clarifying the Commissioner's practice regarding the provision for ship repairs in terms of section 14(1)(c) of the Act. It has come to the attention of this office that the practice note is being interpreted in a manner which results in an allowance being claimed which exceeds that which was intended. Practice Note No. 26 is, therefore, hereby withdrawn and replaced by this practice note with effect from 4 April 1996.

 

3) It is evident that the allowance contemplated in 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 year of assessment regard must be had to the 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 expenditure likely to be incurred during the next five years, the estimation being subject to revision from year to year.

 

4) The accepted method for the calculation of the expenditure to be allowed as a deduction from income is the following:

 

4.1) In the current year of assessment the expenditure likely to be incurred on heavy (extraordinary) repairs in each of the next five years must be estimated. The total amount to be allowed in the current year of assessment (year 0) of the estimated expenditure will be:

 

100% of the estimated expenditure to be incurred in year one
50% of the estimated expenditure to be incurred in year two
33.3% of the estimated expenditure to be incurred in year three
25% of the estimated expenditure to be incurred in year four
20% of the estimated expenditure to be incurred in year five

 

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

 

5.1) Year 0: Estimated expenditure likely to be incurred on heavy (extraordinary) repairs during the period ending five years after the current year (year 0).

 

Vessel

Y1

Y2

Y3

Y4

Y5

No 1 (Estimated expenditure)

R25 000

 

R300 000

 

R50 000

No 2 (Estimated expenditure)

 

R150 000

R72 000

 

 

No 3 (Estimated expenditure)

R75 000

 

R28 000

R150 000

 

Total estimated expenditure

R100 000

R150 000

R400 000

R150 000

R50 000

Percentage to be allowed

100%

50%

33.3%

25%

20%

Allowance

R100 000

R75 000

R133 200

R37 500

R10 000

 

 

5.1.1) The allowance deductible in year 0 amounts to R355 700 (R100 000 + R75 000 + R133 200 + R37 500 + R10 000).

 

5.2) Year 1: Estimated expenditure likely to be incurred on heavy (extraordinary) repairs during the period ending five years after the current year (year 1)

 

Vessel

Y2

Y3

Y4

Y5

Y6

No 1 (Estimated expenditure)

 

R300 000

 

R50 000

R10 000

No 2 (Estimated expenditure)

 

R150 000

R20 000

 

R70 000

No 3 (Estimated expenditure)

R28 000

 

R15 000

 

R20 000

Total estimated expenditure

R28 000

R450 000

R35 000

R50 000

R100 000

Percentage to be allowed

100%

50%

33.3%

25%

20%

Allowance

R28 000

R225 000

R11 656

R12 500

R20 000

 

5.2.1) The allowance deductible in the current year (year 1) amounts to R297 156 (R28 000 + R225 000 + R11 656 + R12 500 + R20 000 The allowance of R355 700 (see par 5.1.1) deducted in the preceding year (year 0) must be included in the income of the taxpayer in the current year (year 1).

 

6) As the quantum of the allowance is at the discretion of the Commissioner, the taxpayer, if he wishes to claim it, will have to furnish the necessary information to the relevant Receiver of Revenue to enable him to calculate the allowance.

 

7) Since it is difficult to define "heavy repairs" (as the conditions relevant to, or the extent of, the repairs will vary from ship to ship), a useful guideline would be to distinguish between "ordinary running repairs", which are normally incurred every year, and "extraordinary repairs", which are expected to occur at intervals of more than a year.

 

 

 

COMMISSIONER FOR INLAND REVENUE

PRETORIA