Car instalment sale asset or liability

[miriam790]

Hi there

My client bought a second hand car (an instalment sale over 60 month). I took over the books and I am not 100% sure if this is booked correctly.

1. The instalment amortisation schedule amount is incl. interest in the books as a bank asset (credit)
2. The deferred finances charges (interest) are booked as a bank asset (debit)
3. The car dealer invoice for the same car is booked (excl. VAT and finance charges) as an fixed asset for Motor and Vehicle (debit)
4. The depreciation is booked accordingly over 5 years (credit)

What is an instalment sales? Liability as we still owe the money to the bank or must this be booked as an asset?
They declared the VAT on the purchase and SARS didn't accept the amount, can the company claim the VAT in full in the month of the purchase?
What is the useful life for a second hand car?

Thank you
Miriam

[Beancounter]

1. The car excl VAT and finance charges is correctly debited to fixed assets
2. Instalment sale owing including interest = long term / short term liability. Split so that the next 12 months is the short term portion
3. Total interest = prepaid expense (asset)
4. Depreciation: Dt depreciation expense, Cr accumulated depreciation per annum (net off the liability against motor vehicle asset in balance sheet and reflect details in notes)

The VAT will be disallowed if the vehicle is a passenger vehicle bought as an asset or if the tax invoice is invalid in terms of section 20(4) of the VAT Act.

The wear and tear period for tax purposes is 5 years. For accounting purposes the useful life has to be reconsidered each year and disclosed accordingly in the financial statements.

[dellatjie]

@Beancounter, according to Interpretation Note 47, for tax purposes the wear and tear allowance of a motor vehicle is 4 years.

The other thing that I am curious about, is the term "deferred interest charges". When is it still acceptable to show your liability inclusive of finance charges?

[miriam790]

Thank you Beancounter. Sorry, you said the company can't claim the VAT also not on the instalments? (it is a normal passenger vehicle). If we can't claim the VAT must we not book in the car in the fixed asset register with the full gross amount incl. VAT?

[dellatjie]

@miriam790,

1) You cannot claim VAT on the installments, as that is a repayment of debt. IF you can claim VAT, you will claim it on the cost price on the date the vehicle was bought / financed.

2) a normal passenger vehicle is a 'motor car' as defined in the VAT Act, which means that you cannot claim VAT thereon, with a few exceptions:

"a)vehicles capable of accommodating only one person or suitable for carrying more than 16 persons, or

b)vehicles of an unladen mass of 3 500 kilograms or more; or

c)caravans and ambulances;

d)vehicles constructed for a special purpose other than the carriage of persons and having no accommodation for carrying persons other than such as is incidental to that purpose;

e)game viewing vehicles (other than sedans, station wagons, minibuses or double cab light delivery vehicles) constructed or permanently converted for the carriage of seven or more passengers for game viewing in national parks, game reserves, sanctuaries or safari areas and used exclusively for that purpose, other than use which is merely incidental and subordinate to that use; or

f)vehicles, constructed as or permanently converted into hearses for the transport of deceased persons and used exclusively for that purpose;"

If the vehicle bought does not fall under any of these, and you cannot claim VAT thereon, then yes, you have to include it in your financials at the cost inclusive of VAT.

[Beancounter]

@Beancounter, according to Interpretation Note 47, for tax purposes the wear and tear allowance of a motor vehicle is 4 years.

The other thing that I am curious about, is the term "deferred interest charges". When is it still acceptable to show your liability inclusive of finance charges?

According to IN 47 its 5 years for a passenger vehicle. 4 Years apply to commercial use vehicles like delivery vehicles. I presumed when mentioning a "second hand car" it was meant to be a passenger vehicle.

I'm not keen on showing the deferred interest as a liability because the instalment sale agreement can be cancelled and the interest then doesn't become payable but I noticed the auditors like doing that.

[Beancounter]

Thank you Beancounter. Sorry, you said the company can't claim the VAT also not on the instalments? (it is a normal passenger vehicle). If we can't claim the VAT must we not book in the car in the fixed asset register with the full gross amount incl. VAT?

The vehicle is still an asset and must be reflected as such in the balance sheet, even if the VAT on it could not be claimed.

VAT can never be claimed on the instalments of an instalment sale agreement as you won't have tax invoices for each instalment. It's claimed on the purchase price of the vehicle as stated in the instalment sale agreement.

[Beancounter]

@ dellatjie - Also note that VAT cannot be claimed on a hearse although its used in the production of income. Can't help but wonder about the concept of passengers in a hearse, hahah!

[Dave A]

I'm not keen on showing the deferred interest as a liability because the instalment sale agreement can be cancelled and the interest then doesn't become payable but I noticed the auditors like doing that.

Not sure what concerns you here.

The detail of full liability over the term and the deferred interest portion is normally in the notes. When it comes to the balance sheet, the amount reflected is the result of the full term liability less the deferred interest portion - which altogether seems a fair enough way to reflect the current financial position.

[dellatjie]

@Beancounter

Are you sure about the hearse not being claimable? It doesn't make sense to me?

[CLIVE-TRIANGLE]

exceptions:

f)vehicles, constructed as or permanently converted into hearses for the transport of deceased persons and used exclusively for that purpose;"

[Beancounter]

@Beancounter

Are you sure about the hearse not being claimable? It doesn't make sense to me?

That was what we were advised by the SARS call centre and we had a good laugh about it in the office.

[Beancounter]

Not sure what concerns you here.

The detail of full liability over the term and the deferred interest portion is normally in the notes. When it comes to the balance sheet, the amount reflected is the result of the full term liability less the deferred interest portion - which altogether seems a fair enough way to reflect the current financial position.

I agree Dave. Guess its different strokes for different folks

[dellatjie]

I am starting to think that Call Centre operators are merely there to read details from a screen to us, not to think!