IRAS » Accelerated Capital Allowances

Capital allowances (CA) are deductions you can claim for wear and tear of qualifying fixed assets purchased and used in your trade or business. Skiptocontent IRAS»AcceleratedCapitalAllowances AcceleratedCapitalAllowancesThisannouncementisrelatingtothenewacceleratedCAannouncedin2020and2021budget.Whatarecapitalallowances?Capitalallowances(CA)aredeductionsyoucanclaimforwearandtearofqualifyingfixedassetspurchasedandusedinyourtradeorbusiness.Fortaxpurposes,werefertoqualifyingfixedassetsas“PlantandMachinery”. Companieshavedifferentdepreciationpoliciesfordifferentassetclassesandallocatethecostoftheassetsoveritsusefullife.Depreciationaccountedforinfinancialstatementsisnottaxdeductible.E.g.CompanyAmaydepreciateitsofficeequipmentover5yearswhileCompanyBover3years.Inordertoallowtaxdepreciationorcapitalallowancestobeclaimedbythesecompanies,onlyfixedassetspurchasedbythebusinessthatqualifyasplantandmachineryfortaxpurposesmayqualifyforcapitalallowances/taxdepreciation.Claimingcapitalallowanceoveraperiodoftimebythebusinessisallowingthewritingoffofassets.Whocanclaimcapitalallowances?CompaniesthatcarryonatradeorbusinessexceptwhereCAisspecificallyprohibitedundertheIncomeTaxAct(e.g.“S”plateprivatepassengercar)underS15.PlantandMachineryTherearenodefinitionofplantandmachineryintheIncomeTaxAct. Machinerybasicallyreferstotheordinaryperson’sunderstandingoftheterm.Theycanbereferredtoassetswithmechanicalparts.Whiletheterm“Plant”ismoredifficulttodefine. TheSixthScheduleoftheITAidentifiescertainassetsthatqualifyasplantandmachinery. “Plant”encompassesaverywidedefinitionthatincludesofficeequipment,furniture,motorvehiclesincludingcommercialvehicles.  Toqualifyasplantandmachinery,therearebasically3tests: Stock-in-tradetest–Istheitemastock-in-trade?Theitemmustnotbeatradingstockofyourcompany(i.e.notforresalepurposes).BusinessUsetest/functionaltest–Istheitemfunctionasanapparatususedincarryingontheactivitiesofthebusiness?Businesspremisestest–Theitemisnotpartofthesettingorpartofthepremisesinwhichyourbusinessiscarriedon.ThoseitemsthatarepartofthesettingofpartofthepremisesmaybeclaimedasrenovationorrefurbishmentunderS14Qdeduction.Assetsthatcanqualifyasplantandmachineryhavetobeevaluatedonacasebycasebasis.MethodsincalculatingcapitalallowancesAbusinessorcompanymaywriteofthecostofthequalifyingassetover1year,2years(announcedforYA2021andYA2022),3yearsovertheprescribedworkinglifeoftheasset.AcceleratedCA–Writeoffover2yearsAnnouncedinBudget2020and2021,companiesorbusinessesaregivenanoptiontoacceleratethewriteoffover2years,insteadofthenormal3yearsorovertheprescribedtaxlifeoftheasset.TheobjectiveofthisschemeistoeasethecashflowofbusinessesduringthisdownturnduetoCovid.ThereareafewpointsthatbusinesseswouldneedtotakenoteofiftheychoosethisoptioninYA2021andYA2022:75%ofthecostincurredtobewrittenoffinthefirstyear(i.e.YA2021orYA2022)Remaining25%ofthecostincurredtobewrittenoffinthesecondyear(i.e.YA2022orYA2023)Nodefermentofcapitalallowanceisallowedifbusinesseselectthisoption.BusinessescancontinuetoclaimCAoverthecurrent1yearor3yearsunderS19AorovertheprescribedtaxlifeunderS19iftheydonotelectthisoption.FornewassetsacquiredunderhirepurchaseagreementduringthebasisperiodofYA2021andYA2022,theacceleratedCAof75%and25%willapplytoalltheprincipalcomponentspaidonsuchHPassets.BelowisthesummarytableshowingthedifferentwaysforbusinessestoclaimCA: howtocalculatecaqualifyingassetsannualallowance(AA)S19-overworkinglifeofasset1)Applytoallqualifyingassets2)Referto6thScheduleofITAforworkinglifeofthequalifyingassetsorplantormachineryFromYA2023,optiontoclaim:1)6or12yearsforprescribedworkinglifeof12yearsorless2)6,12or16yearforprescribedworkinglifeof16years1)Initialallowance(IA)=20%ofcost2)Annualallowance(AA)=(80%ofcost)/No.ofyearsofworkinglifeS19A(1)-3-yearwriteoffApplytoallqualifyingassetsAA=1/3ofcostS19A(1B)-2-yearwriteoffApplytoallqualifyingassetsacquiredduringthebasisperiodofYA2021toYA2022YA2021/YA2022AA=75%ofcostYA2022/YA2023AA=25%ofcostS19A(2)-1-yearwriteoff(forspecificassets)1)Computers2)PrescribedautomationequipmentlistedinIncomeTax(AutomationEquipment)Rules2004andAmendmentRules2010(effectivefrom15Dec2010)AA=100%ofcostS19A(10A)-1-yearwriteoffforlowvalueassetsLowvalueassetsare:1)Costofeachassetnotmorethan$5,000.2)Totalclaimfor1-yearwriteoffofallsuchassetsshallcapat$30,000perYA.Existinglowvalueassetsexceeding$30,000thresholdcancontinuetobeclaimedovertheprescribedworkinglifeor3years.Insubsequentyear,itcanbewrittenoffover1yearaslongasthetotalclaimfor1-yearwriteoffofallsuchassetsdoesnotexceed$30,000perYA.AA=100%ofcost Whendoyouusethisscheme?Businessescanchoosethisschemewhenyourbusinessisexpectedtobeprofitableinthecomingfewyearsandyouintendtoinvestinnewassets.Itmeansthatyouwillhavelessertaxtopay. Inourview,businesseswhowanttoexplorethisoptionneedtotakenoteofthefollowing: 1)Section10Ecompaniesconsideringthisoptionneedtobemindfulthattheoptionisrevocableandcannotbedeferredinsubsequentyears(i.e.YA2022andYA2023).ItrunstheriskofhavingitsunutilizedcapitalallowancesforfeitedinYA2022(onthebasisthatthecapitalallowancesarefullyutilisedinYA2021)ifthetaxableprofitinYA2022isinsufficienttoutilisetheremainingcapitalallowancescomputedusingthisoption. 2)Acompanythinkingofclaimingacceleratedcapitalallowancesin YA2021inordertocarrybackunutilizedcapitalallowancestoYA2020tooffsetthetaxinYA2020willneedtoassessthevalueofsuchcarrybackagainstcarryingforwardforfutureutilisationtakingintoaccounttheeffectivetaxrateapplicabletothetaxableprofitsrelievedfromtax. 3)Companiesthatincurqualifyingrenovationandrefurbishment(R&R)expensesunderS14QoftheIncomeTaxActwillnotbeabletobenefitfromthisschemeiftheyhavemaximisedthe$300,000cap.Ifyouareinterestedtoknowmore,please contactus or whatsapp orfillintheformbelowforafreeconsultation. 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