Closing in on lease loss claims

Tim Desmond, Director - Tax and Commercial Departments Garlicke & Bousfield Inc

The South African Revenue Service (SARS) has recently released a new interpretation note, dealing with the limitation of allowances granted to lessors of certain assets. The limitation in question is in terms of section 23A of the Income Tax Act.

Section 23A was introduced into the Income Tax Act in 1984 and has been amended several times since then. It is an anti-avoidance provision, intended to prevent what was regarded as the misuse of accelerated capital allowances available in respect of certain assets. Taxpayers were acquiring assets for purposes of letting them. The accelerated capital allowances resulted in large assessed losses from the letting activities, which were then set off against the taxpayers’ other taxable income.

The mechanism that section 23A employs to achieve its anti-avoidance objectives, is to effectively ring-fence losses attributable to capital allowances in respect of certain leased assets. The assets in question, termed “affected assets”, include machinery, plant and aircraft.

In circumstances where section 23A applies, a taxpayer must calculate its taxable income, before taking the capital allowances into account, derived from rental income. The capital allowances that can be deducted in the relevant year of assessment will then be limited to that amount. The “excess” capital allowances will be carried forward, for potential deduction in the next year of assessment.

There are exclusions from the operation of section 23A. It will not, for instance, apply to assets leased in terms of an operating lease. There are several requirements for a lease to qualify as an operating lease. It must firstly be a lease of moveable property concluded in the ordinary course of a letting business (other than a banking, financial services of insurance business). The property must also be available for hire by members of the general public, directly from the taxpayer, for a period of less than a month. The taxpayer must bear the cost of repairing and maintaining the property and any risk of destruction must be with the taxpayer (other than a claim against a lessee that fails to take proper care of the property).

Section 23A will also not apply to assets that are mainly used by the taxpayer, during the relevant year of assessment, in the course of any trade other than a letting trade. SARS will require that the assets are used more than 50% in a non-letting trade. It will regard assets as forming part of a letting trade, for as long as they are available for letting (whether or not they are actually let).