Capital Allowances in Singapore Taxation
Capital Allowances
Capital allowances are a crucial aspect of tax planning for businesses, allowing them to deduct the cost of certain assets over time.
Tax computation of a trading company was covered previously.
Start with net profit before tax.
Adjust for non-trade and non-taxable income.
Make common tax adjustments on expenses.
Disallow capital expenses (Section 15).
These include expenditures on items that provide long-term benefits to the company.
Depreciation, for tax purposes, is replaced by capital allowances.
Examples include machinery, equipment, and vehicles.
Disallow other expenses (Section 14).
Expenses not wholly and exclusively incurred for the purpose of trade or business.
Private and domestic expenses.
Legal fees not related to business operations.
Learning Objectives
What can be claimed for capital allowance (CA)?
Plant and machinery, which are integral to the business operations and generate income.
Certain fixtures and fittings that are not part of the building's permanent structure.
Difference between capital allowances and accounting depreciation.
Capital allowances are statutory deductions allowed by tax authorities, while accounting depreciation is an accounting method to allocate the cost of an asset over its useful life.
Conditions for claiming CA.
The asset must be used in the trade or business.
The claimant must be the owner of the asset.
Capital expenditure must have been incurred.
How to claim CA under specific sections.
Section 19:
This section provides the general rules for claiming capital allowances on plant and machinery.
Section 19A:
This section provides for accelerated capital allowances, allowing businesses to claim deductions faster.
What happens upon disposal or write-off of plant and machinery?
Calculate balancing allowance or balancing charge to adjust for any difference between the tax written down value and the disposal proceeds.
Fundamental Concept: Tree vs. Fruit
Expenditure relating to the "tree" is capital in nature.
This refers to assets that provide long-term benefits to the business, such as machinery and equipment.
Expenses relating to the "fruit" (production of income) are revenue in nature.
These are day-to-day expenses incurred to generate income, such as salaries, rent, and utilities.
Examples of Plant and Machinery
Office providing professional services:
Tables, chairs, laptops, and mobile devices, which are essential for daily operations.
Manufacturing industry:
Automation machinery (robotic arms) to enhance production efficiency.
Assembly plants where goods are manufactured or assembled.
Shipping industry (storage spaces):
Containers used for storing and transporting goods.
Definition of Plant and Machinery
Not explicitly defined in income tax law.
Rely on dictionary definitions and common understanding to interpret its meaning.
Three characteristics:
Not part of trading stock (inventory).
These are assets used in the business and not held for sale.
Functions as an apparatus for business to earn income (movable or usable).
The asset must be actively used in the business operations to generate income.
Not part of the permanent structure of a building or factory.
Assets that are easily removable and not integral to the building's structure.
Examples
Equipment used in business processes.
Furniture and fittings (tables, chairs) to facilitate business operations.
Vehicles used for transport (company van) to transport goods or employees.
Manufacturing equipment (robotic arms) used in production processes.
Accounting Depreciation vs. Capital Allowances
In accounting, fixed assets are categorized under non-current assets or property, plant, and equipment (PPE).
Determine the useful life of the asset based on accounting standards and practices.
Calculate depreciation expense (recorded in profit or loss) to allocate the cost of the asset over its useful life.
Depreciation expense is a non-deductible expense for tax purposes.
Capital allowances can be claimed on capital expenditure used for income production, as allowed by tax laws.
Capital allowances reduce taxable income, providing tax relief to businesses.
Conditions for Claiming Capital Allowances
Taxpayer must carry on a trade, business, or profession under Section 10(1)(a).
Must be a normal trading company actively engaged in business activities.
Investment holding companies are not eligible, as they primarily earn income from investments.
Capital expenditure must be for the purpose of the business.
Cannot be for private or personal use by the taxpayer or related parties.
Capital expenditure must be incurred during the basis period.
The expenditure must be incurred within the accounting period for which the tax is being computed, not in the past or future.
Qualifying Expenditure
Includes:
Cost of the asset, including the purchase price and any directly attributable costs.
Cost of delivery and installation to make the asset ready for use.
Incidental expenditure related to the asset, such as legal fees and stamp duties.
Example: Company Van
Qualifying expenditure includes:
Cost of the van
Delivery cost to transport the van to the company's premises.
Cost of fixing the number plate to comply with legal requirements.
Cost of Certificate of Entitlement (COE) required for vehicle registration in Singapore.
Private Cars
Do not qualify for capital allowances under normal circumstances.
Exception: Private cars used overseas to transport employees or directors for business purposes, if these cars are registered overseas.
Cars registered in Singapore (S-plated or SZ-plated) do not qualify, as they are generally used for private purposes.
Types of Capital Allowances
Section 19:
Section 19(1) and 19(2) provide the main rules for claiming capital allowances.
Section 19A:
Accelerated allowances allow businesses to claim capital allowances at a faster rate than under Section 19.
Section 19: Claiming Over Prescribed Useful Life
Claiming capital allowances over the prescribed useful life of the asset (per Sixth Schedule).
Initial allowance (IA): A one-time allowance claimed in the year of purchase to provide immediate tax relief.
Annual allowance (AA): Allowance claimed annually over the asset's useful life to spread the cost over time.
Useful Life Categories
6 years: Applicable to assets with a shorter useful life.
12 years: Applicable to assets with a medium useful life.
16 years: Applicable to assets with a longer useful life.
Applies to assets acquired from Year of Assessment (YA) 2023 onwards.
Also applies to assets acquired before YA 2023 if capital allowances have not yet been claimed.
Prior to this, equipment could have useful lives of 8, 10, or 14 years, affecting the annual allowance calculation.
Section 19A: Accelerated Allowances
Claiming capital allowances faster than the prescribed useful life to provide quicker tax relief.
Four categories:
Three-year write-off: Applicable to all qualifying plant and machinery, allowing businesses to write off the cost over three years.
Two-year write-off: Applicable for YA 2021, 2022, and 2024 to improve cash flows for businesses during specific periods, such as the COVID-19 pandemic.
One-year write-off for low-value assets (<\$5,000), capped at 30,000 per YA, to simplify the claim process for smaller assets.
One-year write-off for computers or prescribed automation equipment to encourage investment in technology and automation.
Choosing Between Section 19 and 19A
Taxpayer can choose either Section 19 or Section 19A, depending on their tax planning strategy.
Cannot switch between sections for the same asset over different years to maintain consistency.
Once an election is made, it must be adhered to for the duration of the claim to prevent manipulation of capital allowance claims.
Section 19: Claiming Capital Allowances Over Prescribed Useful Life
Initial Allowance (IA): A one-time allowance claimed in the year of purchase.
Given in the basis period when the expenditure is incurred to align with the accounting period.
Initial allowance is 20% of the qualifying cost to provide immediate tax relief.
Cannot be deferred and must be claimed in the year of purchase.
Annual Allowance (AA)
Claimed throughout the useful life of the asset, allowing the cost to be spread over time.
Formula: \frac{Qualifying Cost - Initial Allowance}{Useful Life}
For subsequent years of assessment: \frac{Tax Written Down Value}{Remaining Useful Life}
Granted each year if the plant and machinery are still in use for the purpose of trade to ensure the asset is actively generating income.
Cannot claim annual allowance if not in use anymore, as the asset is no longer contributing to the business.
Annual allowance can be deferred for future years of assessment to optimize tax planning.
Example
Manufacturing machine costing 100,000, which is a significant investment for the company.
Company year-end: March 31, affecting the timing of capital allowance claims.
Purchased just before the financial year-end to take advantage of capital allowance in the current year.
Year of Assessment (YA) 2025 (Financial Year 2024) when the capital allowance will be claimed.
Initial allowance: 20% of 100,000 = \$20,000, providing immediate tax relief.
Annual allowance: \frac{{\$100,000 - \$20,000}}{6} = \$13,333, spreading the remaining cost over the asset's useful life.
Tax Written Down Value
Remaining value of the asset for tax purposes after deducting capital allowances.
Calculation: Qualifying cost - IA - AA.
Tax written down value: \$100,000 - \$20,000 - \$13,333 = \$66,667, representing the asset's value for future tax calculations.
Year of Assessment 2026
Beginning tax written down value: 66,667, carried forward from the previous year.
Beginning useful life: 5 years, reflecting the remaining period over which capital allowances can be claimed.
Annual allowance = \frac{{\$66,667}}{5} = \$13,333, spreading the remaining cost over the remaining useful life.
Year of Assessment 2027
Tax written down value: 53,334, reflecting the asset's value after deducting capital allowances for two years.
Useful life left: 4 years, indicating the remaining period for claiming capital allowances.
Annual allowance: 13,333, consistent with the previous years.
Year of Assessment 2028
Tax written down value: 40,001, representing the asset's value after deducting capital allowances for three years.
Useful life left 3 years: Indicating the asset's remaining life.
Annual allowance: 13,333, as consistent as previous years.
Section 19A: Accelerated Allowances
Three-Year Write-Off
Company can claim capital allowances under Section 19A, allowing for faster write-off.
Cannot switch back to Section 19 in future years, maintaining consistency in the claim.
Asset may not need to be in use at the end of the relevant basis period, providing flexibility.
Qualifying asset excludes motor cars, limiting the application of this provision.
Default number of years of write off is always three, simplifying the claim process.
Two-Year Write-Off
Applicable for YA 2021, 2022, and 2024, providing temporary relief during specific periods.
Aimed to improve cash flows during those periods, assisting businesses during challenging times.
First year: 75% of the cost, providing substantial relief in the initial year.
Second year: Remaining 25% of the cost, completing the write-off process.
Example
Van purchased for 70,000, representing a significant investment.
First year capital allowance: 75% of 70,000 = \$52,500, providing substantial tax relief.
Tax written down value carried forward: 70,000 - \$52,500 = \$17,500, representing the remaining value for the second year.
Useful life carried forward: 1 year, as the asset will be fully written off in the second year.
One-Year Write-Off: Low-Value Assets
Section 19A(10)(a) allows for immediate write-off of low-value assets.
Each asset must cost less than 5,000, simplifying the claim process for smaller items.
Maximum claim: 30,000 per year of assessment, limiting the total amount that can be claimed.
Example
Two tables at 4,300 each, meeting the low-value asset criteria.
20 chairs at 1,200 each, also qualifying as low-value assets.
Total cost exceeds 30,000 cap, requiring careful selection of assets to maximize the claim.
Claim full allowance on two tables plus 17 chairs to maximize write-off while staying under 30,000 threshold to optimize tax benefits.
Remaining assets can be claimed under other options, such as Section 19 or the three-year write-off.
Section 19A(2) to (10)
Computers and prescribed automated equipment qualify for one-year write-off.
Fax machines, laser printers, generators, robots, pollution control devices, and energy-efficient equipment are included.
No maximum price or cost, allowing for the full cost to be written off.
No cap of 30,000 per year of assessment, providing greater tax relief.
Website is not eligible under this section, as it is considered an intangible asset.
Example
Company XYZ purchased computers for 750,000, representing a significant investment in technology.
Claim full one-year allowance of 750,000 under Section 19A(2), providing substantial tax relief.
Tax written down value and useful life carried forward to YA 2026 are zero, as the asset has been fully written off.
Balancing Allowance or Balancing Charge
Calculated upon disposal of an asset or when an asset is no longer in use and capital allowances have been claimed to reconcile the tax treatment with the actual economic impact.
Compare tax written down value of the asset with the sales proceeds to determine if a balancing allowance or charge is applicable.
Tax written down value is cost, the qualifying cost, of the asset minus all capital allowances previously claimed, reflecting the remaining value for tax purposes.
Balancing Allowance
If tax written down value > sales proceeds, the asset has not been fully depreciated for tax purposes.
Can claim balancing allowance (additional capital allowance) to account for the difference.
Balancing Charge
If tax written down value < sales proceeds, the asset has been over-depreciated for tax purposes.
Balancing charge is taxable (claw back of previously claimed allowances) to adjust for the excess capital allowances claimed.
Restricted to the total amount of capital allowances previously claimed to prevent double taxation.
Example
Equipment purchased for 60,000 in YA 2020, representing the initial investment.
Claim capital allowances over three years under Section 19A(2) to accelerate the write-off.
Accelerated allowance of 20,000 per year, providing consistent tax relief over the period.
Scenario 1: Sold in YA 2025 for 12,000
Sales proceed: 12,000, representing the amount received from the sale.
Tax written down value brought forward: 20,000, reflecting the remaining value for tax purposes.
Balancing allowance: 20,000 - \$12,000 = \$8,000, representing the additional deduction.
Deduct \$8,000 as a balancing allowance under current capital allowances to reduce chargeable income, providing tax relief.
Scenario 2: Sold for 65,000
Sales proceed: 65,000, exceeding the tax written down value.
Tax written down value carried forward: 20,000, representing the remaining value for tax purposes.
Balancing charge: 65,000 - \$20,000=\$45,000.. Restricted to capital allowances previously claimed: 60,000-20,000 = 40,000.
Pay Tax on 40,000 to account for the excess capital allowances claimed.
Add back as balancing charge in tax computation to adjust taxable income.
Summary of Key Points
Qualify fixed assets for capital allowances to optimize tax benefits.
Section 19: Claiming over prescribed useful life, spreading the cost over time.
Section 19A: Accelerated allowances, providing quicker tax relief.
Three years: Most Common (Few Qualifying) for general plant and machinery.
Two years: YA '21, '22, and '24, providing temporary relief during specific periods.
One year: 2 Subcategories:
Assets <\$5,000, simplifying the claim process for smaller items.
Computers and Automated Equipment to encourage investment in technology.
Understand Tax Written Down Value to accurately calculate capital allowances and balancing charges.
Understand Capital Allowances Vs. Balancing Charges to properly account for the tax implications of asset disposal.