My client is a nursery school. They constantly need to replace their astro turf (which is part of the main playground) due to wear and tear. SARS has disallowed it as a taxable deductible expense and says it is of capital nature. We would like to dispute
Important:
This answer is based on tax law year ending 28 February 2019.
Answer:
This is quite a complex issue in respect of which you have requested guidance. It is item (ii) of section 11(e) that states that “in no case shall any allowance be made for the depreciation of buildings or other structures or works of a permanent nature”.
Relevant to this are the following comment made by Judge Trollip, in SIR v Charkay Properties (Pty) Ltd:
“The word 'article' is of a wide and somewhat vague or indefinite connotation. Its ordinary meaning, relevant here, is a material thing forming part of, or coming under the head of, any class ... The phrase quoted above itself identifies the particular class of things in question. 'Articles' there thus means the class of all those material things that are used by the taxpayer for the purpose of his 'trade'. 'Things' means, of course, material entities or objects of any kind. …. Hence the class of things involved is of considerable amplitude. Apart from machinery, implements and utensils, the material things that are capable of being used in those multifarious activities, and which are subject to wear and tear through being so used, are infinite.”
“… I do not think that any limitation to the meaning of 'articles' by the ejusdem generis rule is justified.”
“To sum up: before an article attached to a building of a permanent nature can be said to form part of it for the purposes of proviso (ii) to sec. 11 (e) of the Act, it must have been structurally integrated or otherwise physically incorporated into the building permanently in such a way that it has lost its own, separate identity and character; the question whether or not that has occurred is one of fact.”
We submit that the ‘astro turf’ will in fact be an asset and the question if whether it is has “been structurally integrated or otherwise physically incorporated into the building (replace with land) permanently in such a way that it has lost its own, separate identity and character”. If not, we submit that a section 11(e) allowance may be available on the initial acquisition.
As was stated by Judge Joubert, in Flemming v KBI,
“Die gemeenskaplike betekenis van al hierdie omskrywings in die woordeboeke van "repair". "repairs" en "herstel" is dat hulle betrekking het op die regmaak, opknap of herstel van 'n voorwerp wat in vergelyking met sy vorige toestand 'n gebrek of tekortkoming opgedoen het.”
The judge also considered whether a repair can be an improvement.
Under section 11(d), it must be a repair to ‘property occupied for purposes of trade’ or ‘the repair of … utensils and other articles. In this regard, Judge Joubert said the following:
“Die woord "property" ("eiendom" in die Afrikaanse teks) is blykbaar grond en geboue soos uit die konteks blyk deur die gebruikmaking van die werkwoord ‘occupied’ geokkupeer word in die Afrikaanse teks)"
For it to be a repair, the astro turf must have formed part of the land. If not, the replacement thereof, would in our view not be a repair, but the replacement of an asset.
You may want to provide your client with an opinion on this, obtain an opinion from a tax practitioner or from SARS.