Capital Allowances

Seminar 2 Group 4 Tan Chin Hou Lam Yi Yong Chionh Zhi Yang Chong Xue Ian Jonas Kwok Steffi Mun

Question 1

Present a summary of the test of plant, i.e. how to determine whether an asset is plant for the purposes of a claim of wear and tear allowances.

What is a Plant?

What is a Plant?

Not defined in the Act

Sixth Schedule of ITA only specifies the number of years of working life accorded to certain assets for computing annual allowances if they are plant or machinery

What is a Plant?

Apparatus with which a person carries on a trade, business or profession Numerous decided cases have provided guidance on the meaning of plant THREE (3) tests to be considered in deciding whether an item is plant:

3 Tests

Is the item stock-in-trade?

Is the item used for carrying on the business? (business use test)
Is the item the business premises or part of the business premises? (premises test)

Expenditure

Is it stock-intrade?

YES

NOT PLANT

NO
Business Use Test Does it function as apparatus used for carrying on activities in the business?

NO

YES
Premises Test Is it business premises or part of business premises?

YES

NO

PLANT

Stock-in-trade?

An item which forms part of the stock-intrade, i.e. purchased for resale, cannot be considered to be plant

Business Use Test

The asset must function as an apparatus used by the taxpayer in carrying on the activities of the business Question of fact and degree
Nature

of business or function the item serves in

Purpose

business

Dixon v Fitchs Garage Ltd (1975)

Dixon v Fitchs Garage Ltd

Building of canopy over the petrol pumps

Premises Test

The item must not be used as the premises/part of the premises, or place where the business is conducted Purpose-built structures need to pass the test
CANNOT

be simply used for shelter (St Johns School (Mountford and Knibbs) v Ward)
be used for the sole purpose of attracting customers (Benson v Yard Arm Club Ltd)

CANNOT

Premises Test

Exception: Plant-like structures

Some

premises may qualify as plant if such premises perform active operational functions (IRC v Barclay Curie & Co Ltd)

Premises Test

Setting
Assets

that are not part of the business premises but merely form part of the setting in which business is conducted will NOT qualify as plant
May qualify as plant if they were also part of the apparatus with which the trade was carried on (Jarrold v John Good & Sons Ltd) on nature of business CIR v Scottish & Newcastle Breweries Ltd (the story about hotel lights as ambience hence plant)

Exception:

Dependent

Premises Test

In summary, factors to be considered to decide whether an item is part of premises:

Does The To

an item appear visually to retain a separate identity? degree of permanence with which it has been attached to the building? what extent is the structure complete without it?

To

what extent is it intended to be permanent or is it likely to be replaced within a short period

THIS IS IT!
BYE!

Question 2

Background Information

Bad Medicine (S) Pte Ltd Pharmaceuticals Manufacturing Business YA 2013 Year ended 30 June 2012 Improvement to Leasehold Premises account

Various items relating to the renovation of the building - $2,456,943

Question

Evaluate all of the above advice and frame the broad approach that you would take in determining the appropriate claim/s to make.

claim LIA on the entire sum 25% IA, and, if the building was already in use on 30 June 2012, 5% AA as well... Mr Phua

LIA15 years write-offclaim section 19A(1) 3-year wear and tear allowances1-year writeoffPICautomation equipment Ms Cheong

Advice
detailed breakdown and description of the expenditure and make the most appropriate and tax-efficient claimssection 14(1)(c) renewal deduction, section 14Q special deduction, wear and tear allowances and LIA Mr Sangat

IBA claim Mr Seow

Overview
s19A(1) 3-year

S19 Allowance
Wear & Tear Allowances (WTA) s19A Allowance Capital Allowances (CA) Industrial Building Allowances (IBA) Land Intensification Allowances (LIA)

Accelerated Allowance s19A(2) 1-year s19A(2A) & (2B) Productivity & Innovation Credit (PIC)

Enhanced Allowance

Plant & Machinery (P&M)

s14(1)(c) Deductions

Land & Building

s14Q

Issues to take note

Are the leasehold premises in use by the company?

If not, what is happening to it?

What are the various items related to the renovation of the building?

P & M? Land & Building?

Issues to take note

15-year write-off

1-year write-off
PIC

Wear and Tear Allowance (WTA)

-

First level is to see if: The person carries on a trade, profession or business The person incurs capital expenditure on the provision of plant or machinery The plant or machinery is for the purpose of trade, business or profession

Expenditure incurred when liability to pay crystallizes

Wear and Tear Allowance (WTA)

-

S19 allowance consist of IA = 20% of CE incurred in the BP (BP basis period for YA 2013 is 1 july 2011 to 30 june 2012) AA = claim over tax life (sixth schedule ITA) = (Qualifying expenditure IA claimed) divided by no. of years of tax life

P&M must be in use as at the end of the Bp

Wear and Tear Allowance (WTA)

-

S19A (1) 3-year wear and tear allowances Claim in lieu of s19 All P&M eligible No IA AA = 1/3 of CE incurred in the BP

Wear and Tear Allowance (WTA)

1-year write-off s19A (2) accelerated allowance over 1 year

No IA
AA = 100% of CE incurred in the BP Only certain P&M eligible, eg computers or other prescribed automation equipment

PIC (Productivity and Innovation Credit) S19A (2A) and (2B)

(1) (2) (3)

Consists of PIC automation equipment, eg laptops Staff training Registering for IPRs, eg paying fees to Intellectual Property Office of Singapore Purchasing Intellectual Property Rights (IPRs), eg buying patented technology for manufacturing Design projects R&D

(4)

(5) (6)

PIC S19A (2A) and (2B)

Able to claim enhanced allowance

= (300% of [total CE incurred in BP or $400K, whichever is lower])

Since we do not know how much CE is for the automation equipment , we cannot safely say how much is claimable

Enhanced allowance can be monetized into cash grant (but only either or) = 60% x $100,000 = max $60,000 per year

Industrial Building Allowances (IBA)

Capital expenditure (CE) incurred on the construction/purchase of an Industrial Building (IB)/Industrial Structure (IS) for use in a qualifying trade CE incurred before 23 Feb 2010 Initial Allowance (IA) of 25% Annual Allowance (AA) of 3% for 25 years

IB/IS is in use as an IB/IS as at the end of the BP

Balancing adjustments

Land Intensification Allowance (LIA)

Qualifying CE incurred for construction or renovation/extension of a qualifying building or structure CE incurred on/after 23 Feb 2010, approval by EDB Initial Allowance (IA) of 25% Annual Allowance (AA) of 5% for 15 years

Upon completion
At least 80% of total floor area in use by a single use for carrying out the qualifying activity

No Balancing Adjustments

IBA
Before 23 Feb 2010 Construction/Purchase of an IB/IS for use in a qualifying trade

vs.
Date CE incurred
IA AA Balancing Adjustments

LIA
On/After 23 Feb 2010 Construction or Renovation/Extension of a qualifying building/structure

IA: 25% of the CE incurred in the BP

IA: 25% of the CE incurred in the BP

AA: 3% of the CE for 25 years

AA: 5% of the CE for 15 years

Balancing Adjustments

No Balancing Adjustments

S14 (1)(c) renewal deduction

Replacement of the whole/substantially the whole of the asset

Cost of replacement item is deductible, to the extent it does not include any element attributable to improvement
Excluded from scope:

Renewal of P&M which is subject to capital allowances under s19/19A

Reconstruction or rebuilding of any premises, buildings, structures or works of a permanent nature

S14Q special deduction

Expenditure on renovation/refurbishment works Cap on qualifying expenditure (incurred on/after 16 Feb 2008): $300,000 CE over every relevant 3-year period (wef YA2013) Deduction claimed over 3 years on a straight line basis

(1) (2) (3)

But need to exclude

Designer fees or professional fees Antiques Work of fine art

Overview
s19A(1) 3-year

S19 Allowance
Wear & Tear Allowances (WTA) s19A Allowance Capital Allowances (CA) Industrial Building Allowances (IBA) Land Intensification Allowances (LIA)

Accelerated Allowance s19A(2) 1-year s19A(2A) & (2B) Productivity & Innovation Credit (PIC)

Enhanced Allowance

Plant & Machinery (P&M)

s14(1)(c) Deductions

Land & Building

s14Q

Relevant Information

Pharmaceuticals Manufacturing Business YA 2013 for BP 2012 Year ended 30 June 2012 Improvement to Leasehold Premises account Various items relating to the renovation of the building - $2,456,943

Overview
s19A(1) 3-year

S19 Allowance
Wear & Tear Allowances (WTA) s19A Allowance Capital Allowances (CA) Industrial Building Allowances (IBA) Land Intensification Allowances (LIA)

Accelerated Allowance s19A(2) 1-year s19A(2A) & (2B) Productivity & Innovation Credit (PIC)

Enhanced Allowance

Plant & Machinery (P&M)

s14(1)(c) Deductions

Land & Building

s14Q

LIA: Annex A of EDB Circular

Broad Approach

Detailed breakdown & description of expenditure, and claim accordingly:

Plant & Machinery

WTA

s19: 20% IA + 80% AA over tax life s19A(1): 33 1/3% AA for 3 years (in lieu of s19) s19A(2): 100% AA over 1 year (for certain P&M) PIC: lower of 300% CE and $400,000

S14(1)(c) renewal deduction (if not under s19/s19A) LIA: 25% IA + 5%AA for 15 years s14Q special deduction: Up to $300,000 over 3 years on a straight-line basis

Land & Building

Questions?