Tax and SARS knowledge base
Why routine repairs are not CGT base cost
Why should routine repair costs be kept out of CGT base cost?
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Direct answer
SARS says current costs such as repairs are normally allowed as income deductions or are incurred for personal use and are not part of CGT base cost. Base cost is generally concerned with qualifying acquisition, enhancement and disposal costs that were actually incurred and not allowed as income deductions.
The key distinction is the work done to the asset, not the size of the invoice or the accounting label. A repair may restore an asset to its prior working condition, while an improvement may enhance it. The facts and records matter.
What this means in practice
A company may maintain a property, vehicle, machine or equipment asset for years before disposal. If all maintenance invoices are automatically added to a future CGT schedule, the capital gain may be understated and the records may not support the position. Conversely, treating every project as a repair can lose the evidence needed to assess a genuine enhancement.
SARS says base cost for assets acquired on or after the valuation date generally comprises the costs incurred in acquiring and improving them. Its guidance adds that an improvement or enhancement must still be reflected in the asset's state or nature when it is disposed of. This is a useful practical test, but it does not replace a review of the particular work and tax treatment.
Create two evidence paths from the start. Keep routine repairs and maintenance in an operating-cost file. Keep potential enhancements in an asset-improvement file containing project approvals, specification changes, invoices, completion evidence and links to the asset register. Then assess the tax treatment without double-counting.
Step-by-step
- Identify the asset.
Give every material asset a stable register reference. Record acquisition date, original cost, use, location and any relevant prior improvements. This allows later invoices to be linked to one asset rather than an undifferentiated maintenance account.
- Read the work description.
Use the work order, invoice, technical report and before-and-after records. Ask whether the work restored existing functionality or created a lasting enhancement. Do not rely only on words such as "upgrade" or "repair" in the supplier's marketing description.
- Separate invoices where necessary.
A single contractor invoice may contain both repair and improvement work. Request a meaningful breakdown and keep the allocation basis. Avoid putting the full invoice into CGT base cost merely because some part could be capital.
- Check income-tax treatment.
SARS says base-cost expenses must not be allowable as deductions from income. Review the tax workpapers and fixed-asset schedules. Accounting capitalisation does not itself decide the tax result.
- Preserve proof of the enhancement.
If a cost is potentially qualifying improvement expenditure, retain plans, quotations, approvals, invoices, payment proof and evidence that the feature remains in the asset at disposal. Where it has been removed, replaced or destroyed, seek advice before retaining it in the CGT schedule.
- Reconcile before disposal.
Before signing a sale or submitting a return, reconcile the base-cost schedule to the source documents. Remove unsupported or duplicated amounts, and confirm that each retained item is not allowable as a deduction from income. Keep a note of the decisions made.
Documents and records to keep
Keep an asset register, work orders, invoices, supplier contracts, photographs or technical reports, payment proof and income-tax treatment schedules. For an improvement, preserve a project file that explains the change and links it to the asset disposed of.
Important limits and exceptions
Routine repairs are normally not base cost, but the repair-versus-enhancement question can be factual and technical. This article does not determine the treatment of a particular project, depreciation allowance, VAT input claim or pre-1 October 2001 asset.
Do not include a cost in CGT base cost where it is allowable as a deduction from income. Do not assume a large project is an improvement or that a small project is automatically a repair.
When to get tailored advice
Seek advice for major building work, extensive refurbishment, mixed-use assets, insurance recoveries, partially destroyed assets, related-party work or projects involving both repairs and enhancement. Obtain advice before disposal when the amounts are material.
TaxProof can help keep a disciplined project and asset record. We cannot classify a particular expenditure or calculate a final capital gain without the full facts.