Depreciation allowances for tax purposes in periods of less than a year

Abstract

In tax legislation, a depreciation allowance is applied in three provisions and results in a reduction of taxable amounts. A depreciation allowance is calculated for the period an employer owned a vehicle prior to granting the right of use to an employee (paragraph 7(1) of the Seventh Schedule to the Income Tax Act and section 10(13) of the Value-Added Tax Act) or the period an asset was leased prior to acquisition by the lessee (section 8(5)(bB) of the Income Tax Act). Both periods could consist of or include a period of less than a year. The uncertainty of interest in this article is whether a depreciation allowance should be disregarded or not when a period of less than a year is concerned. The tax implications, wording, and context of the three tax provisions were considered with due regard for the limited current guidance offered by the SARS. The findings of this article suggest that a taxpayer following current guidance in the application of all three tax provisions would not be correct. In line with current guidance relating to paragraph 7(1) of the Seventh Schedule to the Income Tax Act, the depreciation allowance contemplated in section 10(13) of the Value-Added Tax Act should disregard a period of less than a year. Contrary to current guidance, the different context of the depreciation allowance contemplated in section 8(5)(bB) of the Income Tax Act is argued as affording the opportunity to apply the depreciation allowance when a period of less than a year is concerned. A depreciation allowance applied for a period of less than a year would result in a lower recoupment for inclusion in taxable income for normal tax purposes and, as a result, argued as beneficial to taxpayers.