A taxpayer has developed his own gaming software, of which the cost has been capitalized. He furthermore claimed a section 11(e) allowance on the asset, as the software was used in the course of his trade. Sales from the software has however dropped by mo
Author: Peter Surtees
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
The impairment cost for accounting purposes is not an expense “actually incurred in the production of income, provided such expenditure and losses are not of a capital nature” in terms of section 11(a) of the income Tax Act. For tax purposes you add back the impairment cost. The client may continue to claim the section 11(e) annual deduction based on cost, but not the extent of the impairment. This is because section 11(e) requires that the value has diminished “by reason of wear and tear or depreciation during the year of assessment”. The diminution in the financial records arose in consequence of accounting practice and not by reason of use in the course of trade. If and when the software loses its value completely, section 11(o), the scrapping allowance, will permit the residual value to be written off.