Manufacturing tax allowances – Section 12C and 12E

Monthly Accounting & Tax Compliance
Introduction

The machinery used in the manufacturing process provides generous manufacturing tax allowances in the form of Section 12C and 12E of the Income Tax Act, 58 of 1962. Specific requirements have to be met before this allowance can be claimed by the manufacturer. Section 12E applies to qualifying small business corporations. If your manufacturing process does not qualify for a small business corporation, section 12E may potentially be utilized.

Section 12C general requirements

The first condition is that the taxpayer must own the asset under the section 12C requirements. Secondly, the asset must be used for the first time in manufacturing. Thirdly, the asset must be commonly used in the industry. Lastly the asset must be used directly in the manufacturing process, or similar process, that is being carried out by the taxpayer. An instalment sale agreement will also qualify under the ownership condition. 

The normal allowance

The Section 12C allowance is usually 20% per year, of the cost of the asset or improvement, for a total of 5 years. The allowance may be claimed on new and used assets.

The accelerated allowance

However, if the asset was acquired after 1 March 2002 and the above conditions are complied with, an allowance of 40% may be claimed in the first year and 20% in the next three years. The allowance may only be claimed on new and unused assets.

Section 12E general requirements

The first condition is that your manufacturing business must be a qualifying small business corporation in terms of Section 12E.

This allowance is applicable to manufacturing assets that are owned by the taxpayer, either through installation or outright purchase. Secondly the machinery must be used directly in the manufacturing process or similar process. Thirdly it must be used for the first time on or after 1 April 2002.

The allowance is 100% of the purchase price of the asset, even if the asset was not used for a full year.

Conclusion

To apply the Section 12C and Section 12E tax allowances, careful analysis should be done on each asset. Consideration should be given to what constitutes the cost of an asset e.g. may interest cost or direct cost be included or situations where assets are used for a second time. Furthermore, consideration should be given in the circumstances where the asset is leased. The above gives the practical application towards the allowance but many variations may exist.

If you need any tax advice, please get in touch here.