Additions to fixed assets

[QRS]

I have a quick question on the capitalisation of fixed assets.

I know that if the cost of an item for example a computer is less than R7000, it can be expensed directly to the income statement.

Now I have a problem - What if a truck is bought in seperate parts - all below R 7000 - and then put together in the workshop. Total cost of all parts = R 150 000. Do I capitalise the R 150 000, or do I expense each part to the income statement?

Thank you

[Dave A]

The small item write-off allowance can't be applied to individual items of a set and the dining room set example comes to mind.

You can't buy each chair and the table seperately and use the small item write-off allowance on each item. You have to apply the full cost when assessing if you can apply the allowance.

[CLIVE-TRIANGLE]

You should capitalise the R150,000

The decision to expense or capitalise is seldom taken on the basis of value, rather on nature. The practise of expensing smaller acquisitions is actually based on the presumption that within one year, it will be worthless (have zero economic benefit), not on it's insignificant value, so to speak.

Off the top of my head, your R7000 limit is somewhat high, possibly way high

[Dave A]

Off the top of my head, your R7000 limit is somewhat high, possibly way high

Per interprative note 47 the small item write-off allowance threshold is R7 000.00 for the 2012 tax year.

[CLIVE-TRIANGLE]

Agreed Dave. But note that it is a capital allowance that allows you to write off wear and tear in full in the first year, which presumes that the spend was capitalized.

The financial decision whether to capitalise or expense a spend is taken on other factors and I don't believe it would be appropriate to expense anything less than R7000 for most small businesses. Without knowing anything about the business concerned my view might be pedantic; it might well be immaterial in this case.

[Dave A]

Ok - interesting point. And thinking about it, it's ultimately a contest between tax efficiency and simplicity.

I suppose there is nothing preventing a business from capitalising the small items, but claiming the full write-off allowance in the first year for tax purposes.
However, it does make tracking the tax position a little more complex.

Not a problem where there is reasonably sophisticated financial accounting management in place, but does that generally apply to typical small businesses?
Most often in small business KISS keeps them out of trouble.

[CLIVE-TRIANGLE]

Haha, it is never really simple.

You need to distinguish, and keep separate record, of assets and their depreciation, and assets and their tax allowances. The resultant difference between book values and tax values, multiplied by the tax rate, is accounted for as a deferred tax liability, or asset.

An example that we are all familiar with is the SBC concession where you can write off the full value of manufacturing plant and equipment on acquisition, and the remaining categories at 50/30/20.

To do that in your financial records would be wholly inappropriate. If you make use of the concession you should account for the tax effect of the difference as deferred tax.

The IFRS for SME's is the same in this regard as the normal IFRS, because the nature of capital expenditure (versus operating) is unaffected.

[Dave A]

You've got me looking at my IT infrastruture now. I keep buying new bits and bobs and expensing them straight away because they're below the threshold - but they certainly add up to a fair chunk of change over the course of a year.

[jasonpat]

A truck have the parts of different costs and when you combine it will become very costly because of depends upon the performance and labor cost.

[iessa]

Ok, what if the individual assets that do not make up a bigger assets ie they are stand alone assets are individually below R7000 but the total invoice is greater that R7000 eg. I purchase 20 screens at R2000. Individually below, cumulatively R24000. Do I still write it off?

[Johann91]

To all the above users:

...What you do for Financial Accounting purposes and what you do for Taxation purposes are two different things.

The tax value of an asset is recognized when it is or exceeds R7000.00
The value of an asset for financial accounting purposes may be R6999.00 or less or more (As long as it meets the definition and recognition criteria of an asset in terms of the relevant International Accounting Standard.)

Wear-and-tear rates(SARS) and Depreciation(Your business's accounting policy) are rarely exactly the same rate. EXAMPLE: In most cases a business will provide for depreciation over 5 years on a particular asset(thus 20% of cost price of asset in year one) While SARS will let you deduct the full amount of the asset in the year of purchase for tax purposes (thus 100% of cost of asset in year one)

The calculations in your tax return and your income statement won't always agree for the above reason and this is normal. The tax man does not determine what you as an entity classifies as an asset and what is not, Accounting Standards do.

Differences between accounting treatment and taxation treatment of transactions are usually reflected in you financial record as either a "Deferred tax asset" or "Deferred tax liability" (Tax payable per income statement vs. Tax payable per tax Return)

If you have any further doubts on the above matter, please reply :]

[Mynhardt]

iessa, Yes. Since the items are unrelated to each other, you would be able to claim a wear & tear allowance for their full value in the first year for each separate item.
So in you example you would be able to claim a 20*R2000 = R24 000 S11(e) capital allowance in the year of purchase, because the items are unrelated (intended to be separate).

CLIVE-TRIANGLE is spot on with his advice. When you have an excel fixed asset register (as many small businesses do) it is a good idea to incorporate the tax values, and capital allowances already claimed on the assets into that register.
Such a combined fixed and tax asset register becomes very handy when doing your financials (calculating the deferred tax asset/liability), tax (keeps record of your claimed and claimable capital allowances).
It is also very useful when you dispose of assets, either to calculate the S8(a) recoupment or possible CGT.

[iessa]

Thanks Mynhardt! I contacted a tax advisor and that is the same as what was advised by him.

[AmithS]

Not taking any of the above into the mix...

Is there a tax benefit if you expense vs. capitalising...

Would it not add up to the same over a few years if you would expense vs. capitalise...

[iessa]

From a tax perspective, no additional monetary gain over time, the benefits of writing it off immediately in my opinion:

1. Immediate tax benefit realised
2. Not having to keep a track of a small item over the tax period from a fiscal point of view (should always track from a controls point of view).
3. Time value of money
4. Risk of legislative changes disallowing you from taking the benefit in year 1