Capital Allowance – Part 2

Claiming Capital Allowance

After a company purchases plant and machinery for its business, it will be able to claim capital allowances for the incurred expenses. There are a few methods to go about calculating and claiming capital allowances – companies can choose to write-off their assets in one, two, or three years, or even over the prescribed working life of the asset.

  1. Write-Off in One Year

Under Section 19A, the full cost (i.e., 100%) of the following assets can be written off and claimed as capital allowance: 1) computers, 2) prescribed automation equipment (e.g., printers, computer software), and 3) low-value assets.

 

Computers & Prescribed Automation Equipment

As part of the Productivity and Innovation Credit Scheme, companies would be able to claim for 400% allowance instead of 100% allowance (subject to relevant PIC expenditure cap) on expenses incurred to purchase computers and prescribed automation equipment from YAs 2011 to 2018. If the expenditure exceeds the cap, a 100% allowance will be granted.

 

Low-value Assets

In order to claim capital allowances for low-value assets (including those purchased under hire purchase), the following conditions must be met:

  1. The assets must be plant and machinery that qualify for capital allowances under Sections 19, 19A or 19A(1B) of the ITA
  2. The assets must be acquired for the purposes of your trade, profession or business
  3. Each low-value asset must not cost more than $5000 (from YA 2013 onwards) or $1000 (from YA 2005 to YA 2012)
  4. The total claim for a one-year write-off of all low-value assets must not exceed $30,000 per YA
    1. Capital allowances can be claimed over three years/the prescribed working life should the amount exceed $30,000

 

Low-value assets can be written off in one year in any YA (subject to a maximum claim of $30,000), given that they are:

  • Acquired in the YA
  • Acquired before the YA and capital allowance has not been claimed yet
  • Acquired before the YA and capital allowance has been claimed previously and a tax written down value is brought forward to the current YA

 

For assets that are purchased with cash, the entire amount can be claimed.

 

For assets purchased under hire purchase, 100% of the principal payment and the deposit amount (if any) can be claimed.

 

  1. Write-Off in Two Years

In view of the economic downturn in 2008/2009, it was announced in Budget 2009 that assets that are purchased in YAs 2010 and 2011 are eligible for write-off in two years instead of three years.

 

For assets purchased with cash,

  • Companies can claim for 75% of the cost of the assets acquired with cash in the first YA and the remaining 25% in the next YA.
  • Companies may also choose to defer their capital allowance claims to subsequent YAs and the write-down of 75% and 25% in the first and second YA respectively will still apply.

 

For assets purchased under hire purchase

  • During YAs 2010 and 2011, companies will also be able to claim 75% of the principal payment and deposit amount (if any) in the first YA and 25% of the principal payment in the next YA. This is applicable even if instalments are paid after YA 2011, as long as the hire purchase agreements were entered during YAs 2010 and 2011.
  • Before YA 2010, instalments that are paid in YAs 2010 and 2011 will not be eligible for the two year write-down.

 

  1. Write-Off in Three Years

Beginning YA 2009, companies can also choose to defer their capital allowance claims to subsequent YAs (up to 3 years). The capital allowance claimed in each year is the cost of assets divided by 3.

 

For assets purchased with cash, one-third of the cost can be claimed. As for assets

 

For assets purchased under hire purchase, one-third of the principal payment and the deposit amount (if any) can be claimed. 

 

  1. Write-Off Over the Prescribed Working Life of the Asset

Under this final method, capital allowance is claimed over the working life of the asset, in which the working life of an asset is based on the Sixth Schedule of the Income Tax Act. Also, capital allowance is claimed in the form of initial allowance (IA) and annual allowance (AA) unlike the first three methods, whereby capital allowance is allowed only in the form of AA.

 

For assets purchased with cash,

  • In the first YA, capital allowance = IA (20% of cost of asset) + AA (80% of cost of asset)/number of years of working life
  • In the second and subsequent YAs, capital allowance = AA (80% of cost of asset)/number of years of working life; IA is not applicable after the first YA

 

For assets purchased under hire purchase,

  • In the YA where a deposit and/or instalment is paid, capital allowance = IA (20% of the principal amount and deposit, if any) + AA (80% of the cost of asset)/ number of years of working life
  • In the YA where no payment is made, capital allowance = AA (80% of the cost of asset)/ number of years of working life; IA is not applicable

 
 
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