Taxpayers who let certain assets may qualify for a wear and tear deduction in respect of that asset. Under certain circumstances, the wear and tear deductible in respect of those assets are effectively limited to the rental income generated from that asset. Lessors should therefore be mindful of the applicable tax legislation governing wear and tear deductions on assets under lease to ensure that excess wear and tear is not deducted as doing so will expose the taxpayer to a wide range of penalties which could be as high as 200%.
By way of example:
A taxpayer who lets a solar system generating less than 1 megawatt may be entitled to an allowance equal to 100% of the cost of the system. However, if that system is used by a lessee under a lease agreement, the allowance is limited to the taxable income generated from rental income. Say then for example the cost of the System is R4 000 000, the allowance would typically be R4 000 000 but if the taxable income from rental is only R800 000 in that year, the allowance is capped at R800 000. Whilst the excess cost of R3 200 000 not claimed as an allowance in year 1 would typically be rolled over to the subsequent year, the taxpayer would have been exposed to penalties if it were to claim the excess amount in the first year and not apply the limitation.