TAX DEPRECIATION, AMORTISATION, PRE-COMMENCEMENT EXPENDITURE ICAP F students 1) TYPES OF DEPRECIATION a) Normal depre !at!

on" Normal tax depreciation is allowable on WDV of assets at the beginning of the tax year at the following rates: Assets Buildings !urniture and fittings #lant and machinery $ general %omputers and allied items including printer& monitor and '( related plant and machinery (echnical and professional boo*s +otor ,ehicles and ships -ircrafts and aero engines Rate o# depre !at!on 10 1" 1" )0 1" 1" )0

Normal depreciation on an asset ac.uired during a tax year shall be calculated on full year/s basis 0where the asset is commissioned for use) on the cost of asset as reduced by initial allowance while no depreciation shall be calculated in the year of disposal1 $% In!t!al allo&an e ' se t!on () 'nitial allowance is allowable 2 "0 of the cost of asset if the asset is used for business purpose in the tax year in which the asset is placed into ser,ice or in which commercial production is commenced whiche,er is later& other than the following: o 3oad transport ,ehicle not plying for hire 4Vehicles gi,en on lease under finance lease shall be considered as not plying for hire $ %B3 brochure 105 o !urniture and fittings o -ny plant and machinery that has been used pre,iously in #a*istan o -ssets allowed as tax expense o Building gi,en on rent along with plant and machinery 4plant and machinery is eligible for initial allowance $ section 605 't means that initial allowance is allowable on the following assets: o Buildings $ all types o #lant and machinery not pre,iously used in #a*istan1 't means that second hand imported machinery is eligible for initial allowance1 o 3oad transport ,ehicle plying for hire o %omputers and allied items including printer& monitor o (echnical and professional boo*s E*ample o# Ta* Depre !at!on 7pening tax WDV of plant and machinery 3s1"00&000

 Ans&er+

#urchase of plant during the year eligible for initial allowance 3s1800&000 (ax WDV of disposals during the year 3s19"&000

,D- Depre !at!on

7pening tax WDV :ess: WDV of disposal during the year -dditions net off initial allowance -mount eligible for normal depreciation 'nitial allowance 2 "0 Normal tax depreciation 2 1" 81 a)

"00&000 9"&000 61"&000 100&000 "1"&000 100&000 ;;&8"0

OT.ER ASPECTS Depreciable asset means any tangible mo,able property& immo,able property or structural impro,ements to immo,able property 0excluding cost of land) owned by a person that has a normal useful life exceeding one year1 <tructural impro,ement includes any building& road& dri,eway& car par*& railway line& pipeline& drainage& bridge& tunnel etc1 %B3 brochure 10: /O&ned0 means legal ownership in most cases1 =owe,er& it also includes real or beneficial ownership in certain cases and therefore tax depreciation can be claimed e1g1 Where a person can exercise the right of ownership and is entitled to the use or income thereof without legal title Where a person en>oys full possession of the property and the entire consideration paid but formal con,eyance deed not yet executed Building constructed by the person on land not owned e1g1 leasehold land -ssets held by members and applied for -7#/s business Benami (ransactions 4Benami purchases are purchases in false name of another person& who does not pay the consideration but merely lends his name1 'n this case the beneficial owner is the person who actually purchased and paid the amount of property15

b)

%ost

of an asset shall be the total of the following: %onsideration gi,en or !+V of any consideration gi,en in *ind ?xpenditure incurred in ac.uiring and disposing off the asset@ and -mount paid to bring the asset to its present location and condition fit for its intended use such as incidental expenses incurred in ac.uiring& transporting& altering& impro,ing& renewing& installing1
2

%ost of internally produced assets will also include a fair proportionate part of factory and admin o,erheads 4%B3 brochure 1051 c) Part!al use #or $us!ness" 'f an asset is used partly for business purpose and partly for other use in a tax year then normal depreciation for the year shall be allowed proportionately1 =owe,er& initial allowance shall be calculated in the normal manner as the pro,ision of proportionate calculation is gi,en in section 88 0for normal depreciation) and not in section 8) 0for initial allowance)1 E*ample+ +r1 - purchased a building on 1 Auly at 3s1900&000 which is used B0 for his retail shop and 60 for his pri,ate residence1 %alculate the amount of depreciation he can claim as tax deductible1 Ans&er+ Ta* Dep %ost on 1 Auly 'nitial allowance 2 "0 Depreciation for the year 2 10 Normal depreciation allowable $ B0 %losing WDV d) 900&000 600&000 600&000 60&000 of 60&000 )B0&000 600&000 86&000

Cain or loss on disposal of an asset shall be ta*en into business income and considered as per tax wor*ings i1e1 consideration recei,ed less tax WDV1 (herefore& the following ad>ustments are re.uired while calculating taxable business income: -ccounting gain on disposal of an asset (ax gain on disposal of an asset -ccounting loss on disposal of an asset (ax loss on disposal of an asset dedu t!on add $a 1 add $a 1 dedu t!on

-t the time of disposal& tax WDV shall be increased by the amount of depreciation disallowed on account of nonDbusiness use1 E*ample+ +r1 % purchased a computer on 11;1800" at 3s190&000 which is used 90 for his business and 80 for his pri,ate purpose1 +r1 % sold this computer on "1;1800; for 3s1"0&0001 %alculate the amount of tax gain or loss under business income1 Ans&er+ Depre !at!on Allo&a$le 2345 $us!ness use% Ta* 6ear (447 %ost on 1 Auly 800" 'nitial allowance 2 "0 Depreciation for the year 2 )0 %losing WDV 90&000 60&000 60&000 18&000 89&000 60&000 E&B00

Ta* 6ear (448 7pening tax WDV Depreciation for the year 2 )0 %losing WDV

89&000 9&600 1E&B00

B&;80

Ta* 6ear (443 7pening tax WDV -dd: Depreciation disallowed for nonDbusiness use 'n the tax year 800B 018&000 $ E&B00) 'n the tax year 800; 09&600 $ B&;80) (otal tax WDV :ess: sale proceed (ax gain on disposal e)

1E&B00 8&600 1&B90 8)&B90 "0&000 8B&)80

Disposal includes disposal of a part of an asset1 - person shall be treated to ha,e made a disposal when he parts with the ownership of the asset including when the asset is sold& exchanged& transferred& cancelled& destroyed& lost& expired etc1 -pplication of a business asset wholly to personal use shall be treated as a disposal of asset at !+V at the time it is so applied1 :i*ewise& application of a personal asset wholly or partly to business use shall be treated as an ac.uisition of asset at !+V at the time it is so applied1 -ny rebate& commission& grant or subsidy 0not being in the nature of loan) from Co,ernment or any other person shall be deducted from the cost of asset1 %B3 brochure 10: o 3ecoupment of cost shall be deducted from the cost F WDV of asset o o Wai,er of debt owed by the taxpayer related to ac.uisition of an asset shall also be deducted from the cost F WDV of asset1 Where a depreciable asset is ac.uired as a result of wai,er of debt owed to the taxpayer then the cost shall be e.ual to the debt wai,ed and not the !+V of the asset1

f)

g)

h)

?xchange difference in ma*ing payment of liability in foreign currency against an asset shall be added to or deducted from the cost of asset on accrual basis including the effect of hedging arrangement relating to the loan1 E*ample+ %ost on 11118008 $ own in,estment D !oreign currency debt
E* 9an:e Rate Cost 2Rs"%

";100

1&)00&00 0 "&;00&00
4

G100&000 Debt outstanding on )01B18008 G100&000 %ost for the purpose of tax depreciation !irst installment paid on 1111800) G10&000 Debt outstanding on )01B1800) GE0&000 Net increase to be capitaliHed i)

";18"

0 8"&000 ;&08"&00 0 0)&000) 88&"00 1E&"00

"B1E" ";1"0

Where the ac.uisition of an asset is the deri,ation of an amount chargeable to tax& the cost of the asset shall be the amount so charged plus any amount paid by the person for the asset1 <imilarly where the ac.uisition of an asset is the deri,ation of an amount exempt from tax& cost of the asset shall be the amount so exempt plus any amount paid by the person for the asset1 E*ample+ #urchase of a paper cutting machine to be used in printing business #rice actually paid ;"&000 NonDcash benefit gi,en #rinted stationery gi,en 0taxable income) 1"&000 -gricultural produce gi,en 0exempt income) 1"&000 %ost for tax depreciation purpose 10"&00 0

;%

Cars+ o +aximum allowable cost of one car was 3s11 million up to )01B1800"1 (his limit has now been remo,ed1 o 3ate of normal tax depreciation on ,ehicles was 80 up to the tax year 800" o 'f a car& ha,ing original cost in excess of maximum allowable cost& is subse.uently disposed off then sale proceed shall also be reduced proportionately as under: 3estricted %ost x sale proceed I #roportionate sale proceed 7riginal %ost o +aximum allowable cost of one car before the tax year 800) was as under: ,!t9 e##e t #rom Assessment 6ear 1EE0DE1 1EE8DE) 800118 Ma*!mum allo&a$le ost 8"0&000 B00&000 ;"0&000

E*ample+ +r1 - purchased a car of 3s11&600&000 on 11;18006 for his business and sold this car on )11;1800; for 3s1E00&0001 %alculate tax gain or loss on disposal of car in the tax year 80091 Ans&er+
5

%ost of car on 1 Auly 8006 3s11&600&000 %ost of car for tax purpose 1&000&000 :ess: (ax depreciation 2 80 for the tax year 800" 800&000 900&000 :ess: (ax depreciation 2 1" for the tax year 800B 180&000 B90&000 :ess: (ax depreciation 2 1" for the tax year 800; 108&000 7pening tax WDV for the tax year 8009 ";9&000 <ale proceed 01&000&000 F 1&600&000) x E00&000 B68&9"; (ax gain on disposal of car in the tax year 8009 B6&9"; 1% De#!n!t!on o# ons!derat!on re e!<ed+ i) ii) iii) Normal ase+ -ctual sale proceed or !+V whiche,er is higher1 Cons!derat!on re e!<ed !n 1!nd+ !+V Non-arm0s len:t9 transa t!on+ !+V at the time of disposal1 (he purchaser shall be treated to ha,e ac.uired the said asset at the same !+V and not at the cost paid by him1 %B3 brochure 10: -rm/s length transaction means a transaction between two parties who are: Not related Not on close terms Not in,ol,ed in a confidential relationship #resumed to ha,e roughly e.ual bargaining powers Jnowledgeable about the deal@ and Willing to underta*e the deal Asset !s destro6ed or lost+ <crap ,alue along with any compensation& indemnity or damages recei,ed under an insurance policy& agreement& settlement or >udicial decision1 Sale o# an asset $6 an appro<ed leas!n: ent!t6+ 3esidual ,alue on maturity or on preDmature termination of lease sub>ect to the condition that residual ,alue plus other lease amounts are not less than original cost of asset1 -fter purchase of an asset on maturity or preDmature termination of lease the purchaser is entitled to claim tax depreciation on residual ,alue or bargain purchase price1 ,i) E*port o# asset a#ter use !n Pa1!stan+ 7riginal cost of the asset1 'n this case gain on disposal shall be e.ual to depreciation allowed ,ii) Cons!derat!on re e!<ed on d!sposal o# !mmo<a$le propert6 1 Where the consideration recei,ed exceeds the cost of immo,able property& the consideration recei,ed shall be treated as cost of the property1
6

i,)

,)

E*ample+ +r1 K purchased a factory building for his business for 3s1900&000 and up to )01B1800; he has claimed tax depreciation of 3s1"B)&906 on the building1 7n )1191800; he sold his factory building for 3s18&900&0001 %alculate tax gain or loss on disposal of the factory building1 Ans&er+ <ale proceed of building %ost of building :ess: (ax dep up to )01;1800; (ax WDV (ax gain on disposal 8&900&000 8&900&000 "B)&906 8&8)B&1EB "B)&906

'n this case gain& if any& shall not exceed depreciation allowed and therefore consideration recei,ed in excess of original cost shall be exempt1 =">A+ !rom the following data calculate tax depreciation& tax gain or loss on disposal of assets and taxable income of K 0#,t) :td: 3s1 0a) -ccounting profit before charging accounting depreciation 8&600&000 and tax 0b) -ccounting depreciation B60&000 0b) 7pening tax WDV of assets are: #lant and machinery 1&"00&000 !urniture and fixtures E00&000 !actory Building 07riginal purchase cost BE8&""0 3s11&E00&000) Vehicles 1&600&000 0c) #urchase of assets during the year: #lant and machinery 680&000 !urniture and fixtures 90&000 7ne (oyota %ar 1&8"0&000 0d) Disposal of plant and machinery during the year: <ale proceed 1E0&000 (ax WDV 16"&000 -ccounting WDV 80"&000 0e) Disposal of factory building during the year: <ale proceed )&B00&000 (ax WDV BE8&""0 -ccounting WDV 1&))0&000 Ans&er+ (axable income 3s1LLLLLLLLL NO ?AIN NO @OSS TRANSACTIONS $ section ;E 0i1e1 nonDrecognition rules) a) No gain or loss shall arise in the following transactions if the transferee is a resident person at the time of ac.uisition of asset and the transferee shall be treated to ha,e ac.uired the asset at the cost e.ual to the cost of asset for the transferor at the time of disposal: i1 ii1 iii1 Between spouses under an agreement to li,e apart Cift (ransmission of an asset on the death of a person
7

i,1 ,1

By a company to its shareholders on its li.uidation By an -7# to its members on its dissolution where the assets are distributed to the members in accordance with their interests in the capital of -7#

b) Where an asset is disposed off on compulsory basis under any law and the consideration recei,ed is rein,ested in another asset of a li*e *ind within one year of disposal then the cost of replacement asset shall be the cost of asset disposed off M consideration gi,en for replacement asset in excess of consideration recei,ed for the asset disposed off1 E*ample+ %ost of a particular e.uipment NO/ disposed off on 1191800; under the law "00&000 (ax depreciation allowed 880&000 (ax WDV of e.uipment NO/ 890&000 <ale proceed of e.uipment NO/ recei,ed E00&000 -nother similar e.uipment NK/ was ac.uired on 8"191800;E90&000 Ta* treatment !n t9e ta* 6ear (443+ - (ax WDV of O shall be deducted from opening tax WDV of plant and machinery - %ost of e.uipment K for tax depreciation purpose shall be "90&000 i1e1 "00&000 M 0E90&000 $ E00&000)1 Certa!n spe !al ases+ 1) %ost of an asset owned by more than one person in the hands of each coD owner is their cost of ac.uiring and not the cost of asset itself1 'n a special case& e.ual coDowners may ha,e different costs e1g1 cost of office building for +r1 - is 3s11 million1 -fter one year +r1 - sold "0 of building to +r1 B for 3s1900&0001 #art of an asset disposed off shall be considered as disposal of asset1 Now the cost of "0 for +r1 - is 3s1"00&000 and for +r1 B 3s1900&0001 8) %ost of a depreciable asset ac.uired with some thing else in a single transaction shall be restricted to !+V e1g1 a photocopy machine ha,ing !+V of 3s1;0&000 is purchased at 3s190&000 due to B months ser,ice and maintenance contract1 'n this case& depreciable amount would be 3s1;0&000 and the balance shall be allowed as re,enue expenditure1 )) %ost of two or more assets ac.uired in a single transaction is apportioned in proportion to their !+V at the time of ac.uisition e1g1 %ost of furniture and computer 100&000 !+V at the time of ac.uisition: !urniture ;0&000 %omputer "0&000 (herefore cost for tax depreciation purpose: !urniture "9&))) %omputer 61&BB; AMORTIAATION OF INTAN?IB@ES ' se t!on (C
8

a)

'ntangible means any patent& in,ention& design& secret formula& copyright& trade mar*& scientific or technical *nowledge& computer software& motion picture film& export .uota& franchise licence or li*e property or right and any expenditure that pro,ides an ad,antage for a period of more than one year1 Where an intangible is used for business purpose an amortiHation deduction in a tax year is allowable as under: %ost of intangible Normal useful life in whole years Where an intangible has a normal useful life of more than 10 years or does not ha,e an ascertainable useful life then the same shall be treated as 10 years1

b)

c)

'f an intangible is used partly for business purpose and partly for other use in a tax year then amortiHation deduction shall be allowed proportionately1 E*ample+ +r1 - ac.uired an intangible asset on 11;1800; at a cost of 3s1"00&000 which is used B0 for his business and 60 for other use1 Pseful life of the intangible is estimated to be 9 years1 %alculate amortiHation deduction allowable for the tax year 80091 Ans&er+ %ost of the intangible as on 11;1800; -mortiHation for the year 0"00&000 F 9) %losing WDV -mortiHation deduction allowable for the tax year B0 "00&000 B8&"00 6);&"00 of B8&"00 );&"00

d)

'f an intangible is not a,ailable for use for the whole tax year then amortiHation deduction shall be calculated proportionately based on number of days available for use di,ided by number of days in the tax year1 E*ample+ +r1 B ac.uired an intangible on 1 +arch at 3s1)00&000 with estimated useful life of 18 years and there was no other use1 %alculate the amount of amortiHation he can claim as tax deductible for the year ended )0 Aune1 Ans&er+ %ost of intangible )00&000 :ess: -mortiHation 0)00&000 F 10) x 0188 F )B") 10&08; %losing WDV 89E&E;)

e)

-mortiHation deduction is not allowed in the year of disposal of intangible1 -ny gain or loss on such disposal shall be considered for tax purpose and shall be calculated by deducting tax WDV from consideration recei,ed1

PRE-COMMENCEMENT EXPENDITURES ' se t!on (>

a)

#reDcommencement expenditures that were not allowed as tax expense shall be amortiHed 2 80 on straight line basis and amortiHation shall be allowed as a tax deduction1 #reDcommencement expenditure means any expenditure incurred before the commencement of business 0i1e1 before the commencement of commercial production) exclusi,ely for business purpose including the cost of feasibility studies& prototypes and trial production acti,ities but excluding cost of land& depreciable assets and intangibles1

b)

10