My client has gone overseas to study. He is renting out his flat. I am not sure about this deduction, if it is a deduction or not. He has to have his floors redone as they are beyond repair. Can he only claim depreciation on the flooring or is he able to
Important:
This answer is based on tax law year ending 28 February 2018.
Answer:
From the information provided, it is possible that the individual has not commenced the trade yet. That is generally why the deduction could not be made. Section 11A of the Income Tax Act however deals with expenditure (and losses) incurred prior to the commencement of any in preparation for carrying on a trade. These expenses, that would otherwise have qualified to be deducted, are accumulated and can only be deducted when income is derived from the trade.
One of the requirements of section 11A, see section 11A(1)(b), is that the expenditure must be expenditure which would have been allowed as a deduction in terms of section 11 (other than section 11(x)), 11D or 24J, had the expenditure or losses been incurred after that person commenced carrying on that trade.
Section 11(d) allows for expenditure actually incurred during the year of assessment on repairs of property occupied for the purpose of trade or in respect of which income is receivable to be deducted.
Judge Joubert, in Flemming v KBI, said
“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.”
My translation: The common meaning in the dictionaries of these definitions of “repair”, "repairs" and "herstel" are that they relate to the repair, refurbishment or restoration of an object which, in comparison with its previous condition, has suffered a defect.
The judge said one must apply the grammatical meaning of the word repair. The judge effectively held that there will be a repair if the purpose was to restore (something damaged, faulty, or worn) to a good condition.
The judge also considered whether a repair can be an improvement and said that “repair might involve some degree of improvement.” The judge referred to foreign precedent in respect of this, but then said that our courts have not laid down precise guidelines to distinguish “repair” and “improvement”. In Flemming’s case the Judge held that the amount was expended to improve (the water supply) of the farm and was therefore not a repair.
The principle is that if the property didn’t require to be repaired, it may well be an improvement.
SARS, in the practice generally prevailing (which you should refer to), states the following:
It is immaterial whether repairs occur as a result of some fortuitous act, such as a storm or fire, or as a result of the wearing out, damage or deterioration of an asset by use. Restoration involves a renewal or replacement of subsidiary parts of the structure and the expenditure incurred will be deductible. However, if the damage is of such an extent that the asset is partially destroyed, it will then be necessary to consider whether the repair or renovation is a reconstruction of the entire asset, in which event the expenditure will not be deductible.
Once you concluded that it is a repair, it would have qualified, and it is then claimed under section 11A. It is ringfenced, but will effectively be allowed in the year income is derived from carrying on that trade.