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Tax Case Law: Qualifying for a scrapping allowance

by , 23 December 2015
A scrapping allowance is an allowance which is claimed when an asset is disposed of, and the accrual from it is less than its tax value.

But now, how do you know if you 'actually' qualify for a scrapping allowance?

Find out here with this Tax Case example:

Tax Case (54 SATC 387)

In this case, the applicant's helicopter crashed and became damaged one day after its delivery.

The court then had to decide if he actually qualified for a scrapping allowance.

Keep reading to find out what the Court decided…


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Article continued…

Facts of the case:

The applicant had arranged for the helicopter to be operated by a pilot who would also teach him how to fly at some stage in the future.

Now, although the pilot was qualified and had some experience in flying helicopters, he had to get a 'conversion' certificate first for the relevant helicopter model he was to operate.

The applicant and the pilot took delivery of the helicopter, and directly afterwards the pilot began training for his conversion certificate. But the next day, while the pilot was still training, the helicopter went down, resulting in it becoming damaged beyond repair.

After having tried to sell the parts, to no avail, he traded the asset (the helicopter) in for a ski boat.

What was decided?

It was held that the pilot's training was so closely related to the applicant's trade that the helicopter may be considered as having had been used for the applicant's (taxpayer's) trade.

He therefore qualified for a scrapping allowance.

What can you learn from this case?

In order to qualify for a scrapping allowance, you MUST have used the asset for the purposes of your trade.
NOTE: It doesn't matter if you continue your trade WITHOUT the scrapped asset or replace it with a similar one. All you're required to do is withdraw the asset from use within your trade.
*Do you want to learn more details in understanding scrapping allowances? Then subscribe to the Practical Tax Loose Leaf Service right here.

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