Capex and Income Tax | The win-win for small business

Under S12E of the Income Tax Act, and as a fiscal incentive for small business, Small Business Corporations* enjoy special allowances on assets used in the business.  These allowances are designed to accelerate write-offs of capital expenditures to encourage growth through income tax relief for the small business owner.

In a nutshell, the S12E concessions are as follows:

  • For manufacturing assets, 100% of the cost of production assets is claimable as a deduction.
    • The assets must be used in a process of manufacture or a similar process.
    • This does not apply to mining or farming.
  • For non-manufacturing assets, the deductions are:
    • 50% in the year of acquisition
    • 30% in the year following acquisition
    • 20% in the year thereafter
  • Any assets costing less than R7,000 may be written off in full in the year of acquisition.

The concessions under S12E apply to assets paid for in full or purchased under an instalment sale agreement.  Costs of installation are included in the gross asset value.  Note that the gross asset value for income tax purposes is reduced by any recoupment not included previously in taxable income.  Due to the concession pertaining to assets costing less than R7,000, the extent of write-off claimed should be determined on an asset-by-asset basis.

The concessions under S12E present a significant income tax planning opportunity for the small business owner due to absence of apportionment.  To demonstrate this, consider this example:

Accounting implication Tax implication
Trading profit before income tax or wear and tear deduction 1,500,000 1,500,000
Depreciation on production assets acquired during year of assessment at cost of R2m, depreciated over 5 years (400,000) (2,000,000)
Profit/(Loss) after Depreciation or S12E Allowance 1,100,000 (500,000)

This example demonstrates the profound implication that the timing of asset purchases can have on small business.  For a small business owner, the legitimate impact on cash flow of an assessed loss cannot be underemphasized.  Income Tax Planning is vital to using these concessions correctly.  Contact your MMS Consultant to facilitate effective planning ahead of 28 February 2019.