Capital Allowances Capital allowances are deductions that you can claim for the wear and tear

of the fixed assets that you have bought and used in your trade or business. Capital allowances are given in place of depreciation and other capital expenditure, which are not deductible for income tax purposes. Who can claim Capital Allowances If you are carrying on a trade, business or profession, you can claim Capital allowances on the plant and machinery that you have bought and used in your trade, business or profession. Assets that qualify for Capital Allowances Electrical and electronic equipment Plant and machinery Furniture and fixtures Office equipment Motor vehicles (only commercial vehicles & Q-plate cars registered before 1 Apr 1998) Motorcycles and bicycles

Assets that do not qualify for Capital Allowances General lightings* Doors, roller shutters and gates* Windows* Fixed partitions* False ceiling, ceiling boards and other ceiling work* S-plate cars

*For renovation expenditure incurred between 16 Feb 2008 to 15 Feb 2013, please refer to Section 14Q deduction for expenditure incurred on renovation or refurbishment works. Calculating Capital Allowances There are three ways of calculating capital allowances: One-year write-off (Section 19A) You can use this method if you buy computers, computer peripherals, fax machines, and other automation equipment and these are used for your business. You can also use this method for assets costing no more than $1,000 each, bought from year 2004. Please see examples. Under this method, the full cost of the asset may be claimed as capital allowance in one year. However, for assets costing no more than $1,000 each, the claim for one-year write-off of all such low value assets must be capped at $30,000 per Year of Assessment (YA). From YA 2013 As announced in Budget 2012, with effect from YA 2013, the threshold on the cost of each low value asset will be increased from $1,000 to $5,000. The aggregate cap of $30,000 per YA for one-year write-off of all such assets remains unchanged. This e-Tax Guide Simplification of Income Tax Rules and Procedures - 100% Capital Allowance for Items of Machinery or Plant Costing No More Than $1,000 will be revised by Jun 2012 to incorporate the tax changes announced in Budget 2012.
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Three-year write-off (Section 19A) With effect from YA 2009, you can use this method to claim capital allowance for all assets that qualify for capital allowance. Under this method, the full cost of the asset can be claimed as capital allowance over three years. Please see examples. For YA 2008 and before, three years write-off is allowed for all qualifying assets except commercial vehicles with maximum laden weight not exceeding 3,000 kg and motorcycles. For details on how to compute capital allowance for motor vehicles, please refer to the next paragraph on Write-off over the working life of the asset (Section 19).

Write-off over the working life of the asset (Section 19) You can use this method for all assets including Q-plate cars (COE issued before 1 Apr 1998), vans, pick-ups, trucks, buses, lorries, office equipment, furniture, etc. In the year that you buy the asset, you can claim: o o initial allowance equal to 20% of the cost of the asset annual allowances, which is calculated by taking 80% of the cost and dividing it by the working life of the asset.

In the subsequent years up to the number of years of the working life of the asset, you can claim only the annual allowance. Please see examples. Buying the asset in cash as compared to buying the asset under hire-purchase terms There is a slight difference when you calculate capital allowances for assets bought in cash as compared to these assets bought under hire purchase terms. When you calculate capital allowances for assets bought under hire purchase terms, you have to exclude the hire purchase interest from the calculation. You can claim the hire purchase interest as a separate business expense. One-year write off Example 1: In 2007, you bought a computer in cash for $3,000. You can claim the full cost of the computer in one year. Example 2: On 1.9.2007, you bought a computer under hire purchase terms. The terms are:

Cash price

$ 3,000

Down payment

$ 300

Hire purchase interest

$ 600

Hire purchase price

$ 3,600

Amount for each instalment

$ 275

Total number of instalments

12

Workings: In year 2007

Down payment made

$ 300

+ Instalments paid

4 months X $275

$1,100

- Hire purchase interest paid

4/12 X $600

$ 200

Total amount paid less hire purchase interest

$1,200

In year 2008

Instalments paid

8 months X $275

$2,200

- Hire purchase interest paid

8/12 X $600

$ 400

Total amount paid less hire purchase interest

$1,800

You can claim capital allowances as follows:

YA 2008

YA2009

YA2010

$1200 paid in 2007 to be claimed over one year

$1,200

$1,800 paid in 2008 to be claimed over one year

$1,800

Total Capital Allowances Three-years write-off Example 3:

$1,200

$1,800

In 2007, you bought an air-conditioner in cash for $3,000. You can claim capital allowances as follows:

1st year (YA 2008)

Annual Allowance

$3,000/3

$1,000

2nd year (YA 2009) 3rd year (YA 2010) Example 4:

Annual Allowance Annual Allowance

$3,000/3 $3,000/3

$1,000 $1,000

On 1 Sep 2007, you bought an air-conditioner under hire-purchase terms. The terms are:

Cash price

$ 3,000

Hire purchase price

$ 3,600

Down payment

$ 300

Amount for each instalment

$ 275

No. of instalments

12

Hire purchase interest

$ 600

Workings: In year 2007

Down payment made

$ 300

+ Instalments paid

4 months X $275

$ 1,100

- Hire purchase interest paid

4/12 X $600

$ 200

Total amount paid less hire purchase interest

$ 1,200

In year 2008

Instalments paid

8 months X $275

$2,200

- Hire purchase interest paid

8/12 X $600

$ 400

Total amount paid less hire purchase interest

$1,800

You can claim capital allowances as follows:

YA 2008

YA2009 YA2010 YA2011

$1200 paid in 2007 to be claimed over 3 years

$400

$400

$400

$1,800 paid in 2008 to be claimed over 3 years

$600

$600

$600

Total Capital Allowances Accelerated Write-down

$400

$1,000

$1,000

$600

As announced in the Budget 2009 Statement, capital expenditure incurred on plant and machinery acquired in the basis periods for the Years of Assessment (YA) 2010 and 2011 can be allowed an accelerated write-down over two years instead of three years. This is to support businesses which intend to invest in new plants and machinery in preparation for the recovery from economic downturn. With this change, businesses can write down the costs of these newly acquired plants and machinery within two years with 75% of the write-down taking place in the first year of capital allowance claim alone. For asset bought in cash: Annual Allowance in Year 1 = 3/4 of the cost of asset Annual Allowance in Year 2 = 1/4 of the cost of asset For asset bought under hire purchase terms: Annual Allowance in Year 1 = 3/4 of the principal payment (and deposit paid where applicable) Annual Allowance in Year 2 = 1/4 of the principal payment Example 5 In year 2009, you bought an office equipment for $3,000 by cash. Annual Allowance (AA) for YA 2010 = 3/4 x 3,000 = 2,250 Annual Allowance (AA) for YA 2011 = 1/4 x 3,000 = 750

The capital allowance schedule is as follows:

Description

Office equipment

Cost

3,000

YA 2010 Annual Allowance

2,250

Written down value (WDV) c/f

750

YA 2011 Annual Allowance

750

Written down value (WDV) c/f

Example 6 In year 2009, you bought an office equipment costing $2,000 under hire purchase terms. The terms are: Purchase price $ 2,000

Deposit

$ 100

Hire purchase interest

$ 50

Number of instalment

$5

Amount payable per instalment

$ 390

Hire purchase interest per instalment

50 / 5

$ 10

Principal payment per instalment

390 - 10

$ 380

Assuming that a deposit of $100 and two instalments were paid in year 2009 and the remaining three instalments were paid in year 2010. The deposit and principal payments in year 2009 = 100 + (2 x 380) = 860 The principal payments in year 2010 = 3 x 380 = 1,140

Annual Allowance for each YA is computed as follows:

Year of payment

Deposit and principal amount paid

Amount of AA to be claimed in:

YA 2010

YA 2011

YA 2012

2009

860

645

215

2010

1,140

855

285

Total

645

1,070

285

The capital allowance schedule is as follows:

Description

Office equipment

Cost

2,000

YA 2010 Annual Allowance

645

Written down value (WDV) c/f

1,355

YA 2011 Annual Allowance

1,070

Written down value (WDV) c/f

285

YA 2012 Annual Allowance

285

Written down value (WDV) c/f Write-off over the working life of the asset Example 7:

In 2007, you bought a van in cash for $45,000. The van has a working life of six years. You can claim Capital Allowances as follows:

YA2008 YA2009 YA2010 YA2011 YA2012 YA2013

Initial Allowances (20% x cost of van)

$9,000

Annual Allowances (80% x cost of van) 6

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

Total Capital Allowances

$15,000 $6,000

$6,000

$6,000

$6,000

$6,000

Example 8: On 28 Sep 2007, you bought a van under hire purchase terms. The van has a working life of six years. The terms are:

Cash price

$ 45,000

Down payment

$ 15,000

Hire purchase interest

$ 3,000

Total no of instalments

24

Amount for each instalment

$ 1,375

Workings: In year 2007

Down payment made

$ 15,000

+ Instalments paid

4 months x $1,375

$ 5,500

- Hire purchase interest paid

4/24 x $3,000

$ 500

Total amount paid less hire purchase interest

$ 20,000

In year 2008

Instalments paid

12 months X $1,375

$ 16,500

- Hire purchase interest paid

12/24 X $3,000

$ 1,500

Total amount paid less hire purchase interest

$ 15,000

In year 2009

Instalments paid

8 months X $1,375

$ 11,000

- Hire purchase interest paid

8/24 X $3,000

$ 1,000

Total amount paid less hire purchase interest

$ 10,000

You can claim capital allowances as follows:

YA 2008

YA2009 YA2010 YA2011 YA2012 YA2013

Initial Allowances $4,000 (20% x Total amount paid less hire purchase interest)

$3,000

$2,000

Annual Allowances (80% x Cash price) / 6

$6,000

$6,000

$6,000

$6,000

$6,000

$6,000

Total Capital Allowances

$10,000 $9,000

$8,000

$6,000

$6,000

$6,000

Table of assets and their working life

Assets

Working

Taxis

Buses, lorries, trucks, trailers and vans

Q-plate cars with COE issued before 1 Apr 1998

Motorcycles and bicycles

Plant and machinery How to claim Capital Allowances

You can include the capital allowances as part of your allowable business expenses when you report your 4-line statement in the income tax return. You have to submit the certified statement of accounts of your business together with your Income Tax Return to IRAS if the turnover of your business is $500,000 or more. What if I sell or scrap my fixed assets? If you sell or scrap your fixed assets on which you have previously claimed capital allowances, you have to compute the Balancing Allowance or Balancing Charge. Balancing Allowance is given if the Written Down Value of the asset exceeds the sale/disposal proceeds. This balancing allowance can be deducted against income. Balancing Charge arises when the sale proceeds of the asset exceeds the Written Down Value. The amount of balancing charge is restricted to the actual capital allowances previously granted for the asset. The balancing charge is taxable. Written Down Value is the cost of the asset minus the amount of capital allowances previously claimed. To illustrate the Balancing Allowance/Balancing Charge computation, please see three examples below. Example 1: Balancing Allowance You sold your asset in the year 2007 for $1,000. The original cost of your asset is $6,000. You have previously claimed total capital allowances of $4,000. Therefore, the written down value of the asset is $2,000. The balancing allowance is computed as follows:

Written Down Value as at 31 Dec 2006

$2,000

Less: Sales proceeds in year 2007

$1,000

Balancing Allowance

$1,000

As the sale proceeds is lower than the Written Down Value, you may claim $1,000 of the balancing allowance in YA 2008. Example 2: Balancing Charge

You sold your asset in the year 2007 for $3,000. The original cost of your asset is $6,000. You have previously claimed total capital allowances of $4,000. Therefore, the written down value of the asset is $2,000. The balancing charge is computed as follows:

Written Down Value as at 31 Dec 2006

$2,000

Less: Sales proceeds in year 2007

$3,000

Balancing Charge

$1,000

As the sale proceeds is higher than the Written Down Value, $1,000 is taxable as balancing charge in YA 2008. Example 3: Balancing Charge restricted to actual capital allowances previously claimed You sold your asset in the year 2007 for $3,500. The original cost of your asset is $3,000. You have previously claimed total capital allowances of $1,000.

Written Down Value as at 31 Dec 2006

$2,000

Less: Sales proceeds in year 2007

$3,500

Balancing Charge

$1,000

As the sale proceeds is higher than the Written Down Value, $1,000 is taxable as balancing charge. The balancing charge is restricted to actual capital allowances previously claimed instead of $1,500 (i.e $3,500 - $2,000).