A SA question: I have a sole trader client who is a small-scale cleaning contractor. Times are lean: to bring in extra cash he buys cars, does them up and after several months sells them on, hopefully for a small profit (but not always).
He generally only has two cars at any one time and is quite likely to use them for his contracting business before flogging them.
Is it likely that he can claim for depreciation of these cars (as well as owning up to any balancing charge if he sells at a profit)?
It's hard to prove one way or the other: maintenance, cleaning and mechanical repairs are all part of his contracting work. Normally I would not expect capital allowances to be admissable unless the assets were losing value because they were involved in generating the business's profits. Times are hard; all his vehicles have been very low in value and he argues that that's the reason he needs to replace them fairly frequently; he can see when they are going to be too costly to maintain any longer.
The position I think I can argue is that only one car at a time could be said to be used for the contracting business. As a sole trade, the other few would be private/casual trades giving rise to an aggregate sum which should be declared as "other taxable income".
If he only keeps the vehicle for a few month then he would have any depreciation to cover would he?
If he uses them for the business then I would add them to the asset register, any gains/ losses being taken care of when sold. Servicing and repairs would be normal expenses. Only claim any AIA/ Reliefs etc on vehicles still held at year end on the register, and make adjustments with balancing charges when sold. Although it may not be worth it, as it AIA etc is meant for capital assets that are held for more than two years.
If he does not use them then they are stock items, and repairs to bring them to a saleable condition would be part of the cost value, and would have a closing stock value which would not have any allowances.
I have generally applied AIA allowances to capital items with an expected economic life of at least 1 year, but being prepared to calculate depreciation pro rata if that life is n years plus or minus so many months. I've not noticed the "two years" before; is that custome & practice, or is it a regulation? I'm thinking that it's perfectly possible to have a capital item which doesn't meet its full expected life before disposal, so could be gone within a year. Owner's prerogative etc.
I'm seeing the guy tomorrow and I'm going to invite him to convince me what the cars are for (per your last paragraph) one way or the other.
