Hidden Tax Hit When You Reclassify Assets - New IN 137 Deals with Recoupments of Tax Claimed
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SARS has just issued Interpretation Note 137 dealing with the recoupment of previously claimed deductions when an asset starts being held as trading stock.
🧾 In Plain Terms: What Changed?
When a business decides to switch the use of an asset — say a vehicle or machine — from capital use (like leasing or internal use) to trading stock (i.e. to sell), SARS says you must now "recoup" deductions previously claimed under capital allowances.
This rule kicks in when a business starts using an asset as trading stock instead of for long-term use. Section 8(4)(k)(iv) of the Income Tax Act treats this change as if the asset was sold at market value. Why? So that any tax deductions previously claimed on the asset can be added back into income or ‘recouped’. The recouped amounts are then added to the taxable income of the taxpayer.
Previously, this was only a capital gains tax (CGT) issue. Now, SARS says: you also need to handle normal tax recoupments.
👩💼 Who Is Affected?
Businesses or individuals who convert assets from capital use to resale (e.g., equipment, vehicles, property).
Accountants who prepare financials for clients doing asset reclassifications or asset transfers between divisions.
Tax practitioners assisting with section 11 to 20 deductions and capital allowance claims.
💡 Key Issues You Should Watch For
✅ When does this apply?
It applies when a business changes how it uses an asset — for example, if a machine or vehicle that was used internally (as a capital asset) is now going to be sold (as trading stock). Check your clients' fixed asset registers and stock records. If assets were reclassified or moved between divisions (e.g., from leasing to sales), SARS may expect you to recalculate and declare recoupments — even without a physical sale.
✅ What triggers tax?
As soon as the asset is reclassified as trading stock, SARS treats it as if it was sold at market value — even if it hasn’t actually been sold. This "deemed sale" means any previous tax deductions claimed on that asset must now be added back into income (recouped).
✅ Which deductions are affected?
This rule affects a wide range of deductions previously allowed under the Income Tax Act, specifically those listed in section 8(4)(a). These include:
Wear-and-tear allowances under section 11(e)
Capital allowances for buildings, manufacturing assets, research and development, etc.
Deductions for repairs, improvements, and certain leasehold improvements
These deductions come from sections 11 to 20, and a few others such as sections 24D, 24F, 24G, 24I, 24J, 27(2)(b), and 37B(2) — all listed in section 8(4)(a).
If these deductions were claimed while the asset was held as a capital asset, and the business later decides to start holding it as trading stock, then section 8(4)(k)(iv) triggers a deemed disposal at market value. This allows SARS to recoup those previously claimed deductions — meaning they must be added back into the taxpayer’s gross income in the year the asset's use changes.
✅ Is there also capital gains tax (CGT)?
Yes. Capital Gains Tax may still apply, even though there’s no actual sale of the asset. When a business changes the use of an asset from capital use to trading stock, SARS treats it as if the asset was sold and immediately reacquired at its market value on the day the change happens.
For CGT purposes, this is called a deemed disposal, and it can trigger a capital gain if the market value is higher than the asset’s base cost. So your client may face both a recoupment and a capital gain in the same year.
✅ Is this double taxation?
No. SARS has built in rules to avoid taxing the same amount twice. The capital gain is reduced by any income that is already included as a recoupment.
✅ Are there any exceptions?
Yes. If the asset was always trading stock (like demo vehicles made by a car manufacturer), then this rule does not apply.
