Depreciation and depletion
A depreciation (wear and tear) allowance may be deducted on movable assets used for the purpose of trade. There are no statutory provisions relating to rates of wear and tear, but the SARS has published a table of periods over which the assets may be written off. The rates of wear and tear, based on the cash cost, are calculated either according to the straight-line or diminishing-balance method.
New and unused machinery used in a process of manufacture or in a similar process is depreciable at the rate of 40% in the first year of use and 20% in the three following years. If the machinery is not new and unused, an allowance of 20% per year over five years is available.
An accelerated depreciation allowance (50% in the first year of use, 30% in the second, and 20% in the third year) applies to the machinery and articles used in farming, production of biodiesel or bioethanol, and production of energy from certain renewable sources.
Specific allowances are also provided for pipelines, transmission lines, railway lines, rolling stock, airport property, ports, ships, mining operations, and other qualifying industrial assets.
Buildings and other permanent structures may not be depreciated, apart from an annual allowance for each of the following:
- Buildings used in a process of manufacture or a process similar to a process of manufacture: For buildings erected before 1 January 1989, a 2% rate applies per year. For buildings erected after 1 January 1989, a 5% rate applies.
- Hotel buildings: For buildings built prior to 4 June 1988, a 2% rate applies per year. For hotel buildings erected after 4 June 1988, a 5% rate applies. Improvements within the existing building framework that commenced on or after 17 March 1993 are depreciated at the rate of 20%.
- Agricultural cooperative storage buildings: For buildings built prior to 1 January 1989, a 2% rate applies per year. For buildings erected on or after 1 January 1989, a 5% rate applies.
- Housing projects of not less than five units: Housing projects of not less than five units of residential accommodation, which consist of more than one room and the erection of which commenced on or after 1 April 1982 and before 21 October 2008, are subject to a 2% rate of depreciation. After 21 October 2008, an allowance of 5% is available on this type of property. The 5% depreciation rate is available to the taxpayer provided that the unit is used by the taxpayer solely for trade purposes, the unit is situated in South Africa, and the taxpayer owns at least five units in South Africa used for the purposes of trade. An additional allowance is available for a low-cost residential unit.
- Buildings in urban development zones: Improvements to an existing building in an urban development zone, where the existing structural or exterior framework is preserved and brought into use before 31 March 2014, qualify for an accelerated allowance of 20% per year. Buildings that are erected, extended, or added to in an urban development zone on or after 21 October 2008 and which are not covered by the first mentioned allowance qualify for a 20% allowance in the first year and an 8% allowance in the following ten years. As of 21 October 2008, new and unused low-income residential units located in urban development zone demarcations are subject to an additional annual depreciation allowance. The rate is 25% in the first year, 13% in the succeeding five years, and 10% in the year following the last year. Improvements are subject to a depreciation allowance of 25% over a period of four years. The allowance will no longer be available if a building ceases to be used solely for the purposes of trade, was disposed of in a previous year of assessment, or was brought into use after 31 March 2023.
- Commercial buildings: The cost to the taxpayer of any new and unused building owned by the taxpayer, or any new and unused improvement to any building owned by the taxpayer, if that building or improvement wholly or mainly is used by the taxpayer for trade purposes, other than the provision of residential accommodation, is subject to a 5% rate of depreciation. This allowance is applicable to any building or improvement contracted for on or after 1 April 2007 and the construction of which commenced on or after 1 April 2007.
An allowance for assets disposed of or scrapped during a year of assessment is determined by reference to the cost less allowances already granted and the proceeds on disposal (if any). Recoupments of allowances granted are taxable where disposal proceeds exceed the tax basis at the time of sale. Such recoupments cannot exceed the cost of the asset. Proceeds above cost will be taxed as a capital gain.
Book depreciation does not need to be consistent with tax depreciation.
No cost or percentage depletion is available for natural resources.
The sale and purchase of goodwill is generally a transaction on capital account, and the person paying for the goodwill will usually be unable to claim a deduction. No capital allowances are available for goodwill.
Special relief is provided for start-up (or pre-trade) expenditure to allow for a deduction in the year that trade commences. The expenses are only deductible if they would have been deductible had they been incurred after the commencement of trade. These expenses and any loss they create are ring-fenced and may only be deducted against income from the trade to which the start-up costs relate.
Generally, interest expenditure incurred in the production of non-exempt income and for the purposes of trade is deductible. However, interest that is incurred to produce income that is exempt from tax will not be allowed as a tax deduction. A special dispensation applies to the deduction of interest on debt used to acquire shares in a company, provided certain requirements are met.
Special rules apply to determine the amount of interest and timing of any deductions taking into account all payments and receipts in respect of debt instruments with interest being determined on the basis of an internal rate of return.
Certain debt instruments that are convertible to shares or may be settled in shares or where repayment is subject to solvency or related to connected-party debt with a maturity of 30 years or more are treated as hybrid debt instruments and no interest deduction is allowed in respect thereof. Certain hybrid interest is also treated as a dividend.
In addition, the interest deduction for interest paid between parties in a controlling relationship is limited where such interest is not subject to income tax or WHT on interest at the full domestic rate. Any excess interest may be carried forward to the following year for deduction. Effective for tax years ending on or after 31 March 2023, the scope of the interest limitation rules is expanded to include payments that are economically equivalent to interest, and the percentage for net interest expense will be limited to 30% of adjusted taxable income (i.e. tax EBITDA).
Further interest deduction limitations also apply to interest paid on debt used to fund acquisitions of shares or businesses under certain of the corporate rollover relief provisions (see the Group taxation section).
The deduction of cross-border interest paid to connected persons is subject to transfer pricing rules (see Transfer pricing and thin capitalisation in the Group taxation section).
Bad debts are tax deductible if the debt relates to an amount that has been included in the taxpayer’s taxable income in any tax year if it is due at the end of the year of assessment. A tax allowance is also provided for in respect of doubtful debts.
Any bad debts arising on loaned money is deductible if it was lent in the course of a money-lending business.
Donations to certain charitable organisations approved as public benefit organisations are tax deductible, up to a maximum of 10% of taxable income.
Cost of inventory
The cost of inventory is, in principle, deductible as soon as the inventory is acquired. However, at the end of each year, the cost of the inventory still on hand has to be added to the company’s income. Then in the next year, it can be deducted again. This has the effect of timing the deduction of the cost of inventory to match the time of its realisation.
Assets acquired for shares issued
When assets are acquired by a company in return for shares issued to the seller, the purchaser of the assets is deemed to have incurred expenditure equal to the market value of the shares immediately after acquisition. Special rules apply in the case of a mismatch in the value of the shares and assets.
Fines and penalties
Any fine or penalty imposed in respect of an unlawful activity carried out in South Africa, or in any other country where it would be unlawful in South Africa, is not deductible for tax purposes.
Most taxes (other than income taxes, donations tax, WHT on interest, and dividends tax) are deductible from taxable income for the corporation, provided they qualify for deduction under general rules.
Net operating losses
Assessed losses may be carried forward indefinitely, provided an active trade or business of a similar nature is carried on without interruption. For tax years ending on or after 31 March 2023, companies with assessed losses will be entitled to set off any balance of assessed loss carried forward to the extent that the set-off amount does not exceed the higher of R1 million and 80% of the taxable income for that year.
Loss carrybacks are not provided for in South Africa.
Payments to foreign affiliates
Deductions may be claimed for royalties, managerial service fees, and interest charges paid to foreign affiliates, provided such amounts approximate those that would be paid to an unrelated party in an arm’s-length transaction.
Interest deductions may be limited in certain circumstances (see Interest expenses above and Transfer pricing and thin capitalisation in the Group taxation section).