Depreciating your assets for tax purposes requires you to use the wear and tear allowance given by SARS. It prescribes assets that can be depreciated when calculating your taxable income and what rates should be used.
Obviously, this could lead to a discrepancy in the profit you arrive at internally and your profit according to SARS, for you might have different conventions for depreciating your assets. Because properly depreciating your assets is important for the financial health of your business, you may need to stick to these conventions.
For the most part though, where there’s no particular reason to use a different rate, use the one determined by the revenue authority. It’s determined by finance professionals and bound to work better than a sheer guess. At the very least, it saves you the trouble of having to reproduce TAX-depreciated accounts.
Requirements when depreciating your assets for tax
Only assets owned by the client can be depreciated in your taxable income. This is also the rule for depreciation for internal purposes, but here the definition may be stricter. Assets will be deemed as being “owned” if;
- They were outright purchased by you for the purposes of use in the business
- They were purchased, by you, for use in the business, under an “instalment credit agreement” as defined in the VAT act
Always keep a copy of your proof of ownership for your assets. This could be in the form of receipts, signed contracts, but anything that shows the asset belongs to you and its value. In case SARS wants to do an audit on you, you may be asked to provide this proof.
Buildings or assets that tend to a have very long lifespan do not qualify for wear and tear allowance. This is because, with prescribed repair and maintenance, your buildings don’t lose value, if anything they gain it.
Wear and tear allowance is calculated on the total cost of bringing the assets to it’s working state, excluding financing costs. Financing costs do not add any value to the asset and are accounted for separately as an expense. This means for the purposes of determining your asset’s value you can include;
- The purchase price of the asset
- The cost of transporting the asset to where it will be used. These can be delivery costs charged by the manufacturer or costs incurred by you to transport your asset
- Any costs directly related to installing or modifying the asset so that it can work in the desired manner.
Depreciating your assets for tax purposes under partial use
Wear and tear allowance is given to a business for assets used for the purposes of trade. Where such use is partial, the allowance must be claimed on a pro-rata basis. If you use your asset partially for business and personal use, wear and tear allowance must be claimed on the portion of that asset used for business.
This means you need to keep records of this use as far as possible, e.g. trip logs in the case of a car. Equally, if the asset was used for part of the year, you may only claim the allowance for the proportion of the year that the allowance was used.
For example, using the asset for 3, 4, or 6 months would allow you to claim 25%, 33.33%, and 50% of the allowance respectively. Regardless of when an asset is purchased, you can only start depreciating it for tax purposes once you start using it for trade.
Methods for depreciating your assets for tax
You can depreciate your assets using the straight line or the diminishing value method. When using the diminishing value method, you calculate the wear and tear allowance on the income tax value of the asset. This is the remaining value of the asset after deducting the allowances from previous tax periods.
The straight-line method is simpler; it applies a uniform depreciation through the useful life of an asset. This means an asset worth R100.00, useful for five years will be depreciated at R20.00 per year (R100.00/5).
You can switch from the diminution value to the straight line method without informing SARS. Be sure to keep a record of your write-offs in case they are requested. Switching methods simply requires you to apply the straight-line method to the remaining value of the asset in equal instalments over its remaining estimated useful life.
SARS allows you to expense any small assets, which means claiming full wear and tear on them in the first year. This is for assets with a value of R7 000.00 or less, and are not components of a set with a bigger value. This means these assets need to be purchased for use on their own.
What to do if you are not covered by the schedule
It may be the case sometimes that you want to depreciate your asset over a shorter period. In that case, you need to motivate your case to SARS before claiming wear and tear allowance. Rental assets may be depreciated for the period of the lease should this period exceed that allowed in the schedule.
Second-hand assets and assets not in the schedule can be depreciated using a reasonable estimate of useful life. You can infer this from related assets found in the schedule or the useful life of new assets. There may be special allowances that apply to your industry, e.g. agriculture, or your business, e.g. SBCs, be sure to know them and take advantage.
Write off periods for depreciating your assets
|Asset||Write-off in years|
|Air handling units||20|
|Aircraft: light passenger or commercial helicopters||4|
|Arc welding equipment||6|
|Cell phone antennae||5|
|Cell phone masts||10|
|Cheque writing machines||6|
|Cold drink dispensers||6|
|Computers & Computer Software:|
|Main frame / Servers||5|
|Computer software (main frames) Purchased||3|
|Computer software (main frames) Self-developed||1|
|Computer software (personal computers)||2|
|Concrete mixers (portable)||4|
|Concrete transit mixers||3|
|Dental and doctors equipment||5|
|Drilling equipment (water)||5|
|Fire extinguishers (loose units)||5|
|Fire detection systems||3|
|Furniture and fittings||6|
|Garden irrigation equipment (movable)||5|
|Gas cutting equipment||6|
|Gas heaters and cookers||6|
|Health testing equipment||5|
|Weights and strength equipment||4|
|Hot water systems||5|
|Ironing and pressing equipment||6|
|Laboratory research equipment||5|
|Law Reports: Sets (Legal practitioners)||5|
|Lift Installations (goods/passengers)||12|
|Medical theatre equipment||6|
|Mobile refrigeration units||4|
|Motorised concrete mixers||3|
|Neon signs and advertising boards||10|
|Office equipment – electronic||3|
|Office equipment – mechanical||5|
|Ovens and heating devices||6|
|Ovens for heating food||6|
|Packaging and related equipment||4|
|Patterns, tooling and dies||3|
|Power tools (hand-operated)||5|
|Public address systems||5|
|Radio communication equipment||5|
|Security systems (removable)||5|
|Solar energy units||5|
|Special patterns and tooling||2|
|Spot welding equipment||6|
|Staff training equipment||5|
|Television and advertising films||4|
|Television sets, video machines and decoders||6|
|Trucks (heavy duty)||3|
|Vending machines (including video game machines)||6|
|Water distillation and purification plant||12|
|Weighbridges (movable parts)||10|
|Wire line rods||1|
|X-ray equipment 5||5|