How to Use Depreciation to Write-Off Tax.

Hereʼs the most effective way to save tax via depreciation
– use it now!

The straight-line method is the most effective method used when determining depreciation and wear and tear. There are various other methods but the straight-line method is the simplest and is extremely effective.

Example

Mr Jones purchases a computer at a cost of R30 000. The computer is depreciated over a period of 3 years (33.3% per year).

When Mr Jones uses the straight-line method the calculation is far simpler than the reducing balance method and the amount of accumulated wear and tear
that will be used as a deduction on his tax return is far greater, resulting in the straight-line method being more effective for tax saving.

The deduction must be reduced proportionately if the asset was acquired and  commissioned during the year (Section 11(e)). The wear and tear allowance to be
claimed must be apportioned for the period that the asset was in use e.g. if only utilised for 10 months of the financial year then the deduction allowed is 10/12 of the allowance.

Normal wear and tear is based on the standard working hours and not on an extraordinary number of consecutive hours.

Remember that you must not start depreciating from the date of purchasing the asset, but rather from the date on which you bring the asset into use.

Example

Mr Jones purchased a computer on 1 March 2007 at a cost of R30 000, a desk on 1 April 2007 at a cost of R1 500 and a chair on the same date as the desk at a cost of R300.

The straight-line method will be applied on all the above assets over the following periods:

Computer    3 years
Desk          6 years
Chair          6 years

The depreciation of the computer is illustrated in the above example. Wear and tear for the 1st tax year (1 March 2007 – 28 February 2008) is R10 000.

The desk was brought into use on 1 April 2007. Wear and tear will be calculated in the following way:

Full tax year’s (1 March 2007 to 28 February 2008) wear and tear on the desk: R1 500⁄6 years = R250

HOWEVER

Mr Jones only purchased the desk and brought it into use on 1 April 2007. As at 28 February 2008 Mr Jones had only used the desk for 11 months and therefore needs to proportion the wear and tear allowance:

R250 x 11/12 = R229.17

The accumulated wear and tear allowance for the tax year is R10 229.17 (R10 000 (computer) + R229.17 (desk)). June

In the Practical Tax Loose Leaf Service you will also find the following information on how to use depreciation to write off tax:

• How to pay less tax on assets that cost under R5 000
• What is wear and tear? How you can use it to minimise taxation
• Understanding intangible assets (goodwill, patents and trademarks)
• What is an asset?

But that's not all...

If SARS comes knocking at your door, are you 100% confident that all your books are in order?

When it comes to tax you need to make sure you know your rights and ensure you never pay too much tax or end up with penalties of as much as 200%. Just relying on your accountant or tax consultant could end up costing you hundreds of thousands of rands.

Try our complete Tax Advisory Service risk-free for 14-days. As part of this service you’ll receive the Practical Tax Handbook, three Bonus Reports, Regular updates, the Weekly Tax Bulletin, Online access to past Tax Updates and a Tax Helpdesk.

What you’ll discover in the Practical Tax Loose Leaf :

• 22 checklists to use in assessing your tax audit risk
• 13 items SARS will check during an audit
• 4 expenses SARS will target
• 11 questions SARS will ask you
• What to do when an assessment is issued
• Documents you must retain for your audit
• The risk areas on your balance sheet
• How to minimise your payroll risk
• The general checks in a Vat audit
• Real-life case studies
• What questions to ask when disputing an assessment