Question

QUESTION THREE [20]

Super Select, a VAT vendor, carries on a manufacturing process in a factory in Cape Town. The following information is provided regarding the machinery used in the process. Machine 1 This machine was acquired and brought into use in July 2017. The machine had cost R400 000 (excluding VAT). In March 2019 the gearbox on the machine had to be replaced because it was worn out. The cost of a new gearbox was R50 000 (excluding VAT). Although a gearbox similar to the old one could have been purchased at a cost of R45 000 (excluding VAT), it was decided to purchase a more reliable type of gearbox. As a result of the repair the machine was out of action for one month. Machine 2 This is a second hand machine, which was purchased for R100 000 from a person who is not a VAT vendor. The machine was purchased and brought into use in September 2019. The market value of the machine was R80 000 at the date of purchase.

Required:

3.1. Discuss the VAT implications in as far as they are relevant for the year ended 31 December 2019 for the machines. (5)

3.2. Discuss and compute the income tax allowances, deductions and/or recoupment for the machines for the year of assessment ended 31 December 2019. (15)

Answer 1

Treatment in books of accounts:

VAT Implications on machine - The amount of VAT Paid is included in the cost of machine only if:

a) the amount of VAT paid is already available as deduction i.e. Input Vat Credit.'

If the VAT paid on machines is eligible for input vat credit, then the same should not be included in cost of the machine while recording in books of accounts.

Whereas, if the VAT paid is not eligible for input vat credit then the same shall be included in the cost of machine.

So the cost of machine shall be:

Cost of machine 1 - 4,50,000 (including the cost of gearbox)

Cost of machine 2 - 80,000 (the machine shall be recorded at market value in books of accounts)

Income tax allowances, deductions:

If input tax credit on VAT is available then the same shall not be included in the cost of asset. The depreciation claimed on the asset as per the rates mentioned in the income tax act, shall be allowed as deduction.

If input tax credit on VAT paid is not available, the the same shall be included in the cost of asset. The depreciation as per the rates mentioned in income tax act on the total amount of asset shall be allowed as deduction.

Cost of machine 1 - 4,50,000

Cost of machine 2 - 80,000

Depreciation on machine 2 shall be allowed as deduction only for half year, as the machine is put to use for less than 180 days in a year.