The South African Revenue Service (SARS) issued Binding Private Ruling 145 (ruling) on 8 May 2013. The ruling deals with the tax treatment of assets forming part of a sale and leaseback arrangement, with specific reference to the write-off period of these assets in terms of s11(e) of the Income Tax Act, No 58 of 1962 (Act).

The applicant in the ruling is a company incorporated in and a resident of South Africa, who intends to provide financing to another company (company) by way of a sale and leaseback arrangement (arrangement). In terms of the arrangement, the applicant will purchase plant and machinery from the company. The purchase price of the assets is to be determined through a valuation conducted by an independent third party. The assets are currently used in a process of manufacture by the company. It is assumed that the company has been claiming allowances in terms of s12C of the Act in respect of the assets.

Immediately after the sale of the assets, the applicant will leaseback the specified assets to the company for a period of 7 years. Also, the company will have right to repurchase the assets from the applicant within a period of 30 days after the termination of the lease at market value.

The critical issues to be established by the ruling for purposes of the proposed transaction was:

• whether the applicant would be entitled to claim a deduction under s11(e) of the Act; and
• what the write-off periods for the specified assets would be.

Generally, the Act allows a taxpayer to deduct from its taxable income any expenditure or losses actually incurred in the production of income, except expenditure and losses of a capital nature. Section 11(e) of the Act however provides interalia for a taxpayer to deduct from its taxable income a reasonable sum representing the amount by which the value of any machinery or plant, used for the purposes of the taxpayer's trade, has diminished by reason of wear and tear or depreciation during the year of assessment.

In light of the aforementioned and based on the facts of the proposed transaction, SARS ruled that the applicant may deduct a wear and tear allowance in respect of the specified assets which form part of the sale and leaseback arrangement over each individual asset's expected useful life.

Written by Nicole Paulsen, Associate, Tax, Cliffe Dekker Hofmeyr