AKWA IBOM STATE POLYTECHNIC (IKOT OSURUA) IBADAN STUDY CENTRE CAPITAL ALLOWANCE INTRODUCTION Capital allowance is defined as a standardized depreciation for tax purpose or is an amount granted in lieu of depreciation in asset for tax purpose. Assets are called qualifying capital expenditure (QCE), and the rate of allowance as regard each capital expenditure are as determined by the government. Issues like accounting policy, inflationary trend or revelation do not affect the rate, the amount and the nature of capital expenditure and method of their computation. Capital allowance is a form of relief that is granted to any person/company who incurred qualifying capital expenditure during a basis period in respect of asset in use for the purpose of a trade or business at the end basis period. QUALIFYING CAPITAL EXPENDITURE These are incurred for the purpose of earning income, which also qualify for the granting of capital allowance. Note that all qualifying capital expenditure are assets but not all assets are QCE e.g. Land. Categories of qualifying Capital Expenditure: Categories of capital expenditure that qualify for capital allowances are as follows: 1. Qualifying Building Expenditure This refers to expenditure on the construction of building structures or works of permanent nature. There are two types. A. Non Industrial Building Expenditure This represents all expenditure incurred in the construction of building works or structures of a permanent nature not in regular use for industrial purposes e.g. for accommodation, administrative etc. B. Qualifying Industrial Building Expenditure This refers to expenditure on the construction of industrial building or structures in regular use as mill-factory, mechanical workshops, doc, port, wharf, and jetty. Also for the operation of a railway for public use or of a water or electricity for public consumption. 2. Qualifying Plant Expenditure This refers to expenditure incurred on plants and machinery
3. 4. 5. 6. 7. 8. 9.
Qualifying Motor Vehicle Expenditures Qualifying Housing Estate Expenditures Qualifying Research and Development Expenditures Qualifying Plantation Equipment Expenditures Qualifying Ranching Expenditures Qualifying Ranching and Plantain Expenditures Qualifying Mining Equipment Expenditures
This refers to capital expenditure incurred on Motor Vehicle This refers to expenditure incurred on housing estate This refers to expenditure incurred on research and development This refers to expenditure incurred on plantation equipment This refers to expenditure incurred on ranching This refers to expenditure incurred on ranching and plantation This refers to expenditure incurred on mining equipment FEATURES OF CAPITAL ALLOWANCE a. It must be claimed by the tax payer b. must be in use at the end of the Basis Period c. Unabsorbed CA can be carried forward from year to year d. Asset disposed cannot It enjoy capital allowance It is computed on as straight basis WEF 1985 YOA. CONDITIONS FOR GRANTING CAPITAL ALLOWANCE i. ii. iii. iv. v. The QCE must be owned by tax payer It must be put into use during a basis period QCE must be incurred for the purpose of business The business must in writing claim CA An acceptance certificate shall be required on QC incurred in excess of N500 obtained from Minister of trade. TYPES OF CAPITAL ALLOWANCE INITIAL ALLOWANCE This is an allowance granted on a QCE in the first year it is purchased and put into use. I. A. is granted once in the lifetime of a QCE and it is not pro-rated. The only reason for pro-rating I. A. is there is an element of domestics or private use, and this is at the option of tax authority.
Any second hand QCE shall enjoy Initial Allowance and Annual Allowance in the hands of new purchaser with the exception of second had building. Computation of Initial Allowance It is computed or calculated by applying applicable percentage on the cost of the QCE. IA = Relevant Rate Cost of QCE ANNUAL ALLOWANCE Annual allowance unlike initial allowance for any year of assessment is that period by reference to the profit of which assessable income or profit for that year falls to be computed such income or profit should be in respect of trade or business in which there was use of an asset in conjunction with which such allowance or change fall to be made. Problem involving basis period in the computation of capital allowance problems do arise when considering basis period for capital allowance purpose for qualifying capital expenditure It occurs in a situation of commencement, cessation and change of accounting date. In which case there is a situation where there is either an overlapping period or a gap period between basis period and the following rules applied. 1. Over-lapping period: When there is overlapping basis period of 2 year of assessment the period that is common to both periods is deemed to form part of the earlier year of assessment for initial allowance purpose. 2. Gap basis period: When there is a gap between two years of assessment. The gap period is deemed to be part of the latter tax payer. Except when the later tax year is the year of cessation. In which case the gap will form part of earlier year of assessment. BALANCE ALLOWANCE AND BALANCE CHARGES When a business or company disposes off its asset in a year of assessment and where the asset had previously claimed capital allowance the business or company is entitled to either: A. Balancing Allowance: Is the excess of tax written down value over the sales proceeds of QCE. This is the difference between the sales proceed and TWDV of a QCE that is disposed off. It is also known as a loss. S.P. TWDV B. Balancing Charge: Is the excess of sales proceeds of QCE over and above the tax written down value of an asset. It is similar to profit on gross profit of the trading P&L it should be an addition to assessable profit. INVESTMENT ALLOWANCE An investment allowance of 10% in addition to capital allowance (initial + annual allowance) is allowance on all plant and equipment used in agricultural production.
Is an incentive on the expenditure incurred, any QCE acquired to replace asset destroy during civil wars or expenditure incur to provide certain essential facilities to the area in which a business is located. Also from 1990 YOA a provision of 10% of qualifying expenditure on new agric production machinery is also granted as investment allowances. It is pertinent to note however that investment allowance is granted in full in the st year of purchase of asset and it is not deducted from the cost of the new asset when 1 calculating on initial and annual allowance. It is also disregarded when balancing charges or balancing allowances are to be made on the disposal of assets. It is computed by applying applicable percentage on the cost of the QCE. IA = Relevant Rate x Cost of QCE Forms of Investment Allowance: i. Investment allowance on asset acquired to replace the one destroy during civil war 25% ii. QCE incur on P & M used for Agric production 10% iii. QCE incur in respect of manufacturing company on new production machinery 10% WEF 1985 YOA iv. Rural investment allowance – this is claimable on any capital expenditure incur to provide certain essential facilities to any area in which a business suitable that is 20km far from the availability of facilities. The rates are as follows: Provision of water 50% Tarred Road 30% Electricity 15% No telephone 5% No facility at all 100% BASIS PERIOD IN THE COMPUTATION OF CAPITAL ALLOWANCE For proper and easy computation for CA, there is the need to understand the different basis period that exists in granting CA. These BP are as follows: 1. Coincidental BP – this is a situation where 2 consecutive years of allowance have a common different basis period. Is usually occur at the commencement of a business e.g. YOA BP 1999 1/1/99 – 31/12/99 2000 1/1/99 – 31/12/99 The essence of coincidental BP is that if a QCE acquired during this BP, IA will be granted in the early year. 2. Overlapping BP – This is a situation where 2 consecutive years of assessment share a period in their BP e.g.
YOA BP 1999 1/3/99 – 31/12/99 2000 1/3/99 – 2802/2000 For the purpose of granting IA, in case a QCE is acquired during the period, it should be granted in the early year. 3. Gapping BP – This is a situation where between 2 years of assessment, a BP has not been utilized (is missing). It occurs during cessation period. For the purpose of granting IA in this wise, there is the need to determine whether the business permanently or temporarily ceasing of operation. If the operation is ceased permanently, IA should be granted in the early year, but if it is temporary IA permanently, I should be granted in the early year, but if it is temporary IA should be granted in later year.
QUESTION 1 Ayuba Ventures commence business as a manufactures of Nylon of Pure Water on 1 st of May 1999. The following assets were purchased for the business. Plant & Machinery N20,000 on 15/04/1999 Motor Vehicle N25,000 on 17/10/1999 F&F N12,000 on 03/07/2000 Building N55,000 on 01/11/2002 You are required to compute C/As for the relevant YOA. The business normally ends its accounting year on 30/09… SPECIAL PROVISION TO CAPITAL ALLOWANCE a. SECOND HAND ACQUISITION OF ASSET: Any QCE incurred shall attract both initial and annual allowance. However, second hand acquisition of building is it office or industrial building shall attacks only annual allowance in the hand of the owner based on the lower of: i. ii. actual purchase price by the new owner and The original cost of acquisition or construction by the old owner.
In case of a building that had not been used before by the old owner but which is now being disposed off to the new purchaser, such a building shall enjoy both initial and annual allowance in the hands of the owner. b. HIRE PURCHASE ACQUISITION OF QCE In case an asset is purchased or acquired on hire purchase basis, a tax payer will be deemed to have incurred a QCE expenses on the asset. The taxpayer will therefore be entitled to claim for capital allowances on the asset. The tax payer will enjoy both
initial and annual allowance on the amount of each installment paid on any YOA but excluding the interest element on each installment. The life span of the asset acquired on HP shall be caused to reduce as the year passes by in the calculation of annual installment.
QUESTION 1: John Alozie Ltd commenced business on 1st of May 1998 making upon its account regularly to 31st October each year. The business had acquired a machine under a HP agreement. The agreement contains among others, the following terms and conditions: i. ii. iii. iv. HP price paid N118,000 Deposit payable on 30/6/98 when the agreement was signed N30,000 The balance on the HP selling prices is required to be paid monthly over a period of 26 months commencing from 1/10/98 HP interest to compute capital allowance claimable up to and including 2001 year of assessment.
QUESTION 2: Paradise Enterprises whose acquiring year ends on 30th June has the following assets at 30/6/90 at their written down value (TWDV). ASSET Factory Building Motor Vehicles Office Furniture RUL 6 years 2 years 5 years TWDV N360,000 N755,000 N83,000
Additions during the accounting year ended 30/6/91 were as follows: Motor Vehicles N230,000 Furniture N9,000 You are required to compute the capital allowances for the relevant of assessment and the TWDV carried forward, take the following rate at Capital Allowance: Factory Building 15/10; Motor Vehicle 50/25; Furniture 20/10 Question 3: James Joju Nigeria Limited was incorporated on April 4, 1995 but commenced business on July 1, 1996. The following assets were purchased on the date stated hereunder: 1/7/96 Plant and Machinery N 260,000
Motor Vehicles Furniture, Fixture & Fittings
You are required to compute capital allowances for the relevant years of assessment. Rates: Motor Van 50/25; Office Building 15/10; F & F 25/20; P & M 15/Nil