In the ordinary course of business, assets used by taxpayers to conduct their trade are often written down over a number of years in the form of accounting depreciation. The Income Tax Act provides similarly for assets to be written down for tax purposes over a period of time, and which wear and tear related decrease in value may be claimed annually as a wear and tear allowance against taxable income. These allowances are granted in terms of a number of provisions, depending on the relevant nature and purpose that the applicable assets may be used for.
The Income Tax Act makes provision for these allowances to subsequently be reversed, were they to be recovered or recouped. In other words, where an allowance claimed for tax purposes can subsequently be recovered, for example through a sale of the asset, the allowances previously granted in terms of that asset now disposed of may be reversed to a certain extent.
Take the delivery van of Company A as an example. It is being written down for tax purposes over a period of 5 years, and allowances claimed on the vehicle (which had initially cost the company an amount of R150,000) amount to R30,000 per year. At the end of the 3rd anniversary of the vehicle being acquired, Company A had already claimed allowances against the cost of the vehicle amounting to R90,000. It has a tax value left therefore of R60,000. Were it to sell the vehicle at that stage for an amount of R150,000, it will effectively have recovered the entire R90,000 claimed as allowances over the past 3 tax years. Similarly, a sale at R70,000 will lead to a recoupment of only R10,000.
Any recoupment is included in the taxable income of the taxpayer and taxed on income tax account: it is effectively a reversal of deductions previously granted.
From a capital gains tax perspective, the base cost of an asset is reduced as and when allowances are claimed against the wear and tear of the asset annually. At the point of sale by Company A above therefore, the delivery vehicle in our example will only have a base cost of R60,000 too. Will a sale at a value above this then not give rise to double taxation, in other words, both on capital gains tax and income tax account? The Eighth Schedule to the Income Tax Act takes this into account: to the extent that an amount is received for the disposal of an asset and that amount is already included in the taxable income of the taxpayer, the proceeds for capital gains tax purposes is reduced accordingly. Where the delivery van is therefore sold for R70,000, a recoupment will be recognised (and taxed on income tax account) of R10,000, yet with proceeds (R70,000 minus R10,000) then being equal to the base cost of R60,000, giving rise to no gain for capital gains tax purposes to be recognised.
The take-away from the above is that the sale of depreciable assets may give rise to tax consequences other than capital gains tax related results. Although double taxation does not arise, harsher income tax consequences may arise than would have been the case for capital gains tax consequences, the latter being which many taxpayers mistakenly assume is the only consequences on the sale of any and all assets: depreciable or not.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)
 58 of 1962
 Typically, allowances are claimed in terms of sections 11(e), 11D, 12B to 12F
 Paragraph 20(3)(a) of the Eighth Schedule to the Income Tax Act
 Paragraph 35(3)(a)