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Make sure you understand the Capital Gains Tax implications before you scrap an old company asset or you could lose a valuable tax deduction

by , 28 January 2015
When an asset gets so old, it doesn't work anymore, you can scrap it.

Now many business owners just assume that scrapping an asset means there's no Capital Gains Tax (CGT).

But this isn't always the case. Depending on your specific situation, you might still have to pay CGT.

To get this right, make sure you understand these CGT implications so you can deal with the loss correctly and claim a tax deduction on it ...

 

Here are the Capital Gains Tax implications of scrapping an asset

 
If the asset was a depreciable asset, then you can use the scrapping allowance. If so, you won't have any Capital Gains Tax implications and you can't claim it as a capital loss.
 
But if it wasn't a depreciable asset, it's a capital loss. This loss is easy to calculate (proceeds – zero – minus the base cost). You can claim this capital loss against your capital gains for the year.
 
So how do you work out if it's a depreciable asset or not?
 
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Here's how to work out if an asset is depreciable or not

 
To work out if your asset depreciates, work out it's current value. It the current value is less than the base cost you originally paid for it, it depreciated.
 
But non-depreciable assets are ones you use and disposed of in the same taxable year. We say these are non-depreciable because you don't use them long enough for them to depreciate over time. Here you throw the asset away when it's no longer useful. 
 
For example, if you run a hotel, the hangers are a non-depreciable asset because they break so quickly.
 
It's really that simple. 
 
But if you're scrapping a depreciable asset, you need o be aware of this one important point.
 

Be careful of this one important point when you scrap a depreciable asset

 
Be aware of scrapping an asset that still has value. According to David van Niekerk, Editor-in-Chief of the Practical Tax Loose Leaf Service, SARS might treat the market value of this asset as the proceeds. After all, why would someone throw away an asset if it still had a value? It might think you're trying to avoid tax! 
 
There you have it. The golden rule is to determine whether the asset is depreciable or not to find out if there are CGT implications.
 
If you have any questions, just ask the experts on the AccountingandTaxClub.co.za. You can also check out the Practical Tax Loose Leaf Service for more information on Capital Gains Tax and scrapping an asset. 
 

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