Can a building be claimed as part of plant and machinery over three years?

Expenditure on the acquisitions of capital assets is not considered as a normal expense that can be claimed once off for tax as is the case with normal operating expenses. Capital allowances are available for these expenditures incurred.

The principles are broadly as follows:

Wear and tear allowances

Section 17(1) (e) of the Income Tax Act allows a taxpayer to claim an allowance when an expense was incurred during the year of assessment in respect of the acquisition of one or more of the following items, where these re used in your business (i.e. as part of trade): vehicles, aircraft, sea-going craft, machinery, implements, utensils and articles.

The claim is available for three consecutive years, starting in the year that the expense was incurred (i.e. when the asset is bought).

Building allowances

Building used as part of the trade, can be claimed with an initial allowance of 20% of the cost of erection in the year the building is first brought into use, and then 4% is deductible annually for 20 years after that. A building is not defined in the Income Tax Act, however a definition has been derived from South African case law, as a substantial structure, more or less of a permanent nature, consisting of walls, a roof and the necessary accessories.

There may be instances where plant and machinery are attached to a building to the extent that they become inseparable. The Income Tax Act does not make provision for a building to be claimed over three years.

In an Income Tax Appellate Tribunal in India, the case of Hotel Srilekha (P) Ltd vs Third Income-Tax Officer, 1983 5 ITD 541 Mad, decided on 30 April 1983, it also dealt with whether building could be seen as plant. One of the tests applied in this case was to ask the question of whether the structure (i.e. building) is an essential part of the plant or whether it is merely a setting in which the operation takes place. During that case it was held that as there was an inseparable combination of building, plant, furniture, etc., it was to be treated as a plant the revenue authorities has to recompute the taxable income by allowing claim of the hotel premises as a plant. A number of other international cases also support this view.

Questions

The following questions would be relevant in considering whether a building can be regarded as part of plant.

* Is the building the “apparatus” used by the taxpayer for carrying on his business?

* Is the building part of the entire operation undertaken for the purpose of obtaining the end-product?

* Is the structure or building the means by which a trading operation is carried out or is it merely the place within which business activities are carried on?

* Does the building form an integral part of the plant that is used for purposes of carrying on a trade?

Where the answer to the questions above are in the affirmative, the taxpayer can present a good case in arguing that a building can be regarded as plant and may qualify to claim the more advantageous capital allowances. Before an approach like this is taken we advise that careful consideration should be given to the specific facts at hand.

Johan Nel is a tax partner at PwC Namibia. Tax Time is published in Market Watch bi-monthly, usually on a Monday.