Capital Allowance

What is Capital Allowance?

After the financial year end, company are required to file its tax to IRAS. Usually Tax accountant will prepare a Tax Computation, which computes its income after taking away its daily operation costs, as well as any other deductions and reliefs to get the final tax payable for that year of assessment (YA). In order to help the company reduce their overall chargeable income, a number of Allowance and Deductions have been introduced and made available to businesses.

One common form of allowance is known as the Capital Allowance and it refers to deductions that businesses can claim for the wear and tear of the qualifying fixed assets that they have bought to carry out their trade or business. Simply put, fixed assets depreciate (i.e., “wear and tear”) over time, but such depreciation is not tax deductible. As such, the rationale behind capital allowance is that it compensates for the cost of depreciation of the assets, which eventually helps businesses to reduce the amount of tax that they have to pay.

Generally, companies engaging in a trade or a business will be able to claim the capital allowance on the expenses incurred when they purchase “plant and machinery” for use in the company.  On the other hand, investment holding companies that derive passive income from investments are not eligible to claim for capital allowance.


What can be claimed under Capital Allowance?

Assets that qualify for capital allowances must be “plant and machinery” used in the business. According to IRAS, “plant and machinery” refers to a fixed asset that encompasses the following characteristics:

  1. The item is not a trading stock of your company (not for resale purposes);
  2. The item functions as an apparatus used for carrying out the business or trade activities of your company; and
  3. The item is not part of the setting or part of the premises in which your business is carried on. Those items that are part of the setting or part of the premises may be claimed as renovation or refurbishment instead under Section 14Q deduction.

Some examples of qualifying assets would thus include carpet, furniture, office equipment, motor vehicle (goods/commercial vehicle such as a truck, lorry, etc.), signboard, etc.

In contrast, companies cannot claim capital allowances on expenses for assets that are not for use in their trade or business (e.g., designer’s fees on renovation) or assets that are specifically prohibited under the Income Tax Act (e.g., S-plated private passenger car). Additionally, capital allowance also cannot be claimed on assets that are bought solely for the purpose of donations since they are not used in the company’s trade or business.

Lastly, if a company has outsourced some its operations to subcontractors, it can also claim the capital allowance for expenditure on the plant and machinery used by its subcontractors. The only condition is that the plant and machinery must be used solely for the purpose carrying out the company’s business and to produce income. In the case of such outsourcing arrangements, the company must take note to retain the necessary documents listed below so as to ensure that they would be able to claim capital allowances:

  1. The business arrangement with the subcontractor (i.e., contract);
  2. The connection between expenditure incurred on the plant and machinery and the company’s trade;
  3. The level of control the company has over the plant and machinery; and
  4. Compliance with the arm’s length principle for subcontractors who are related parties.

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