The South African Revenue Service (SARS) included special tax breaks to accommodate asset depreciation. Whether you’re dealing with investment property, fixed asset depreciation or looking for ways to maximize tax savings, this guide will cover the basics and help you make informed decisions.
Asset depreciation is generally for companies – however, SARS has special tax breaks for property investors who own property within a company or in their name. This article will focus on companies, with a special section on investment/rental property that applies even if you have the property in your own name.
What Is Asset Depreciation?
Depreciation impacts financial statements, tax and profitability.
[Depreciation] …allows for a portion of the cost price to be written off as a deduction on your income statement and in your income tax calculation. Under this method, you can claim the allowance in equal instalments over the prescribed useful life of the asset.
Sage Accounting – How to claim tax back
The South African Revenue Service has a table with the depreciation for common fixed assets and how much can be deducted over a period.
Which Depreciation Methods Should You Use?
There are several depreciation methods available, each suitable for different types of assets and business scenarios. The two most commonly used methods are the straight-line and reducing balance method.
Straight-Line Depreciation Method
This method spreads the cost of the asset evenly over its useful life. It’s the simplest depreciation method and is commonly used for assets that provide consistent value over time. The formula is:
Reducing Balance Depreciation Method // Diminishing Value Method
In this method, the depreciation expense decreases over time because it’s calculated on the remaining book value of the asset. This method is suitable for assets that lose value quickly in the early years. The formula is:
Depreciation Expense = Book Value at Beginning of Year × Depreciation Rate
What Are Wear and Tear Allowances?
Wear and tear allowances refer to the deductions you can claim for the depreciation of assets. The South African Revenue Service (SARS) provides specific guidelines on these allowances, which outline the depreciation rates and periods for different asset types. These allowances help businesses account for the natural decline in the value of their assets due to everyday usage.
How Can You Use Depreciation to Claim Tax Back?
Depreciation directly affects the net income of a business, as it reduces taxable income. By claiming depreciation on assets used for business purposes, you can claim tax back. To do this, you need to Determine the Asset’s Cost, Select the Appropriate Depreciation Method, Calculate Annual Depreciation, Record Depreciation in Financial Statements and claim the tax deduction.
Speak to an accountant that understands this, as it can get very complicated very quickly!
Can You Use Depreciation to Claim Tax Back On Rental Property?
Can You Depreciate an Investment Property in South Africa? Sort of. Certain aspects of an investment property can be depreciated to reduce your taxable income. While the land and building itself are not depreciable, you can claim depreciation on movable assets and improvements. This includes furniture, fixtures and appliances.
If you are looking to depreciate the building, Section 13sex allows for a deduction that could be interpreted as a ‘depreciation’. However, the entry-level is fairly steep, with 5 properties required in the same entity (your name, company or trust) and can claim depreciation on new or unused properties.
My article on Section 13sex can guide you through all the requirements.
What Are the Depreciation Rates for Common Fixed Assets?
The South African Revenue Service (SARS) provides specific depreciation rates for various fixed assets. These rates are designed to standardize how different types of assets are depreciated for tax purposes. Here is a table summarizing some common asset types and their depreciation rates:
| Asset Type | Depreciation Rate | Depreciation Period |
|---|---|---|
| Air Conditioners | 16.6% | 6 years |
| Burglar Alarms | 10% | 10 years |
| Computers (PC) | 33.3% | 3 years |
| Computer Software | 50% | 2 years |
| Fax Machines | 33.3% | 3 years |
| Furniture and Fittings | 16.6% | 6 years |
| Passenger Cars | 20% | 5 years |
| Photocopying Equipment | 20% | 5 years |
| Power Tools | 20% | 5 years |
| Shop Fittings | 16.6% | 6 years |
| Telephone Equipment | 20% | 5 years |
| Trucks (Heavy Duty) | 33.3% | 3 years |
| Workshop Equipment | 20% | 5 years |
Can You Claim Depreciation for Renewable Energy Investments?
South Africa offers a Renewable Energy Allowance under Section 12B of the Income Tax Act, which allows businesses to write off the cost of renewable energy installations (e.g., solar panels) in the year the expense is incurred.
As an individual, you can claim a solar tax break.
Small Business Corporations and Depreciation of Assets
Small businesses in South Africa may qualify for accelerated depreciation allowances, making it easier to recover costs quickly. For example, Small Business Corporations (SBCs) can apply the 50-30-20 depreciation method:
- 50% in the first year
- 30% in the second year
- 20% in the third year
To qualify, the small business corporation qualifying criteria include having an annual turnover of less than R20 million and not being a personal services provider unless employing at least three full-time employees.
What Records Should You Maintain for Depreciation Claims?
To ensure compliance and avoid disputes with tax authorities, maintain comprehensive records of all assets and their depreciation. This includes:
- Purchase receipts and invoices
- Depreciation schedules
- Asset registers
- Tax returns with claimed depreciation amounts
These records should be kept for at least five years after the disposal of the asset.
Final Thoughts
Understanding and applying the correct depreciation formulas is essential for any business looking to maximize tax savings and accurately reflect the wear and tear on assets. Always consult the latest SARS guidelines or a tax professional to ensure compliance with current tax regulations, and speak to a proper accountant.
Happy investing!
