However, when these taxpayers acquire an existing and used commercial building, they invariably dismiss capital allowances due to a lack of knowledge, and overlook the significant asset value within the building that will qualify for wear and tear allowances (section 11(e) allowances of the act).

For example, the purchaser will be acquiring not only the shell or fabric of the building, but also qualifying plant and machinery elements (wear and tear assets) contained therein, like the power supply, air-conditioning systems, lifts, fire-sprinkler systems, etc.

This means that a detailed analysis of the acquisition expenditure needs to be carried out to ascertain what will be treated as eligible wear and tear assets for tax purposes.

Usually, such a claim (note that this would also be applicable to acquiring a new and unused building) will involve separating the qualifying wear and tear assets from the land and building value and then applying a "just and reasonable" apportionment of the total purchase consideration.

Depending on the specifications and location of the commercial building, experience has shown that there can be significant wear and tear deductions, in the region of between 10% and 30% of the total price.

However, it is also important to note that a proper due diligence investigation should be undertaken before acquiring an existing building.

To elaborate on this point, sellers familiar with capital allowances may set out in the sale contract how the price is split between (1) the land and buildings and (2) the plant and machinery on which wear and tear allowances have been claimed. This is a valuable planning technique used by some sellers to mitigate the possible recoupment of previously claimed wear and tear allowances by way of setting the values of these assets to their tax written-down values in the sale contract.

For the well-advised buyer, this can be an area for negotiation, either on the values set out in the sale contract or on the actual sale price. Therefore, it is important to fully understand the inherent tax-savings opportunities in respect of acquiring existing commercial buildings.

• Vas Naidoo, director at Capital Allowances Specialists.

Source: BDLive