How to calculate capital allowance

There are generally a few methods of calculating capital allowance:

Section 19A

• 100% write-off of the cost of asset in one year
• write-off of the cost of asset over three years
• write-off of the cost of asset over two years (applicable for capital expenditure incurred during YAs 2010 and 2011)

Section 19

• write-off of the cost of asset over the prescribed working life of the asset

1. Write-off in one year
   
   Example 1: Asset purchased by cash
   Example 2: Asset purchased by hire purchase
   
   
2. Write-off over three years
   
   Example 1: Asset purchased by cash
   Example 2: Asset purchased by hire purchase
   
   
3. Write-off over two years
   
   Example 1: Asset purchased by cash
   Example 2: Asset purchased by hire purchase
   
   
4. Write-off over the prescribed working life of the asset
   
   Example 1: Qualifying motor vehicle purchased by cash
   Example 2: Qualifying motor vehicle purchased by hire purchase 

100% write-off in one year (Section 19A)

Assets that qualify for 100% write-off are:

• Computers
• Prescribed automation equipment (e.g. fax machine, printer, computer software)
  - Prescribed automation equipment list for expenditure incurred before 15 Dec 2010 (83KB)
  - Prescribed automation equipment list for expenditure incurred on/after 15 Dec 2010 (25KB)
  
  From Years of Assessment (YAs) 2011 to 2015, as part of the Productivity and Innovation Credit Scheme, expenditure incurred to acquire prescribed automation equipment can qualify for 400% allowance instead of 100% allowance subject to a certain expenditure cap, and 100% allowance on the balance expenditure exceeding the cap. The allowance is granted on due claim.
  
  
• Low-value assets
  

Under the 100% write-off, capital allowance is allowed in the form of annual allowance (AA) where:

For assets purchased by cash:

AA = 100% of the cost of the asset

For assets purchased under hire purchase:

AA = 100% of the principal payment (and deposit paid where applicable)

Example 1 (Asset purchased by cash)

Your company purchased a computer for $2,000 and a telephone for $200 by cash in the year 2011.

AA for computer = 100% x 2,000 = 2,000

AA for telephone = 100% x 200 = 200

Example 2 (Asset purchased under hire purchase)

You company purchased a computer costing $2,000 in year 2011 under hire purchase.

AA = 100% of the principal payment (plus deposit paid where applicable)

Assuming the details of the hire purchase agreement is as follows:

Assuming a deposit of $100 and 2 instalments were paid in year 2011 and the remaining three instalments were paid in year 2012.

The deposit and principal payments in year 2011 = 100 + (2 x 380) = 860

The principal payments in year 2012 = 3 x 380 = 1,140

YA 2012 AA = 100% x 860 = 860

YA 2013 AA = 100% x 1,140 = 1,140

Write-off over three years (Section 19A)

With effect from YA 2009, you can use this method to claim capital allowance for all assets that qualify for capital allowance.

For YA 2008 and before, three years write-off is allowable for all qualifying assets except for commercial vehicles with maximum laden weight not exceeding 3,000 kg and motor cycle. For details on how to compute capital allowance for motor vehicles, please refer to Claiming capital allowance over prescribed working life of asset (Section 19). 

Under the three years write-off, capital allowance is allowed in the form of Annual allowance (AA) where

For asset purchased by cash:

AA for each year = 1/3 of the cost of asset

For asset purchased under hire purchase:

AA = 1/3 of the principal payment (and deposit paid where applicable) 

Example 1 (Asset purchased by cash)

Your company purchased office equipment for $3,000 by cash in year 2011.

AA for each YA = 1/3 x 3,000 = 1,000

Example 2 (Asset purchased under hire purchase)

You company purchased an office equipment costing $2,000 in year 2011 by hire purchase. The details of the hire purchase agreement is as follows:

Assuming that a deposit of $100 and two instalments were paid in year 2011 and the remaining three instalments were paid in year 2012.

The deposit and principal payments in year 2011 = 100 + (2 x 380) = 860

The principal payments in year 2012 = 3 x 380 = 1,140

Write-off over two years (Section 19A)

As announced in the 2009 Budget Statement, capital expenditure incurred on plant and machinery acquired in the basis periods for the YAs 2010 and 2011 can be allowed an accelerated write-down over two years instead of three years. This is to support companies who intend to invest in new plants and machinery in preparation for the recovery..

With this change, companies can write down the costs of these newly acquired plants and machinery within two years at the rate of 75% for the first YA of claim and remaining 25% in the second YA of claim. 

For asset purchased by cash:

AA in Year 1 = 3/4 of the cost of asset
AA in Year 2 = 1/4 of the cost of the asset

For asset purchased under hire purchase:

AA in Year 1 = 3/4 of the principal payment (and deposit paid where applicable)
AA in Year 2 = 1/4 of the principal payment

Example 1 (Asset purchased by cash)

Your company purchased office equipment for $3,000 by cash in year 2010.

AA for YA 2011 = 3/4 x 3,000 = 2,250

AA for YA 2012 = 1/4 x 3,000 = 750

Example 2 (Asset purchased under hire purchase)

Your company purchased an office equipment costing $2,000 in year 2010 by hire purchase. The details of the hire purchase agreement is as follows:

Assuming that a deposit of $100 and two instalments were paid in year 2010 and the remaining three instalments were paid in year 2011.

The deposit and principal payments in year 2010 = 100 + (2 x 380) = 860

The principal payments in year 2011 = 3 x 380 = 1,140

Write-off over the prescribed working life of the asset (Section 19)

Under this method, capital allowance is granted over an asset's prescribed working life based on the Sixth Schedule of the Income Tax Act. The initial allowance (IA) and annual allowance (AA) are computed as follows:

For asset purchased by cash:

In the first YA relating to the year in which the fixed asset was purchased:

IA = 20% x the cost of asset

AA = (80% x the cost of asset) / number of years of working life

In the second and subsequent YAs:

IA is not applicable.

AA = (80% x the cost of asset) / number of years of working life* (same as the first YA)

For asset purchased under hire purchase:

In the YA where there is deposit or instalment payments:

IA = 20% of the principal amount (and deposit paid where applicable)

AA  = (80% x the cost of asset) / number of years of working life*

In the YA where there is no payment made:

IA is not applicable

AA  = (80% x the cost of asset) / number of years of working life

*The number of years of working life is based on the Sixth Schedule of the Income Tax Act (e.g. the working life for motor vehicle is six years and that for motor cycle is eight years) 

Capital allowance claim for motor vehicles and motor cycles

Generally, motor vehicle refers to a vehicle that is constructed for not more than 7 passengers (excluding the driver) and whose unladen weight does not exceed 3,000kg.

However, 'S'-plated private passenger cars do not qualify for capital allowance.

For YA 2008 and before, capital allowance is claimed over the prescribed working life (Section 19) i.e. 6 years for motor vehicles and 8 years for motor cycles.

With effect from YA 2009, capital allowance can be claimed either over three years (Section 19A) or over the prescribed working life (Section 19).  This includes motor vehicles and motor cycles purchased before YA 2009. For qualifying motor vehicles acquired during the basis periods for the YAs 2010 and 2011, companies can claim accelerated write-down over two years instead of three years.  For more details and examples, please click here.

For motor vehicle purchased by cash on or after YA 2009:

AA = 1/3 x  the cost of asset

For motor vehicle purchased by cash before YA 2009, where capital allowance was previously computed based on the prescribed working life:

AA = 1/3 x the written down value brought forward from YA 2008

For more details, please refer to example 1 below.

Example 1 (Asset purchased by cash)

Your company purchased a van that cost $45,000 in year 2007.

For YA 2008, capital allowance must be calculated based on write-off over the prescribed working life of six years. 

For YA 2009 onwards, you can continue to claim for capital allowance over six years (refer to example 1.1) or switch to claim capital allowance over three years (refer to example 1.2) .

Example 1.1 (continue to claim capital allowance over six years for YA 2009 onwards):

AA = (80% x 45,000) / 6 = 6,000

Example 1.2 (switch to claim capital allowance over three years for YA 2009 onwards)

YA 2008

IA = 20% x 45,000 = 9,000

AA = (80% x 45,000) / 6 = 6,000

YA 2009 onwards (switch to write-off over three years)

AA = 1/3 x 30,000 = 10,000

Example 2 (Asset purchased under hire purchase)

Your company purchased a van that cost $45,000 in year 2007.

For YA 2008, capital allowance must be calculated based on write-off over the prescribed working life of six years. 

For YA 2009 onwards, you can continue to claim for capital allowance over six years (refer to example 2.1) or switch to claim capital allowance over three years (refer to example 2.2) .

Example 2.1 (continue to claim capital allowance over six years for YA 2009 onwards):

Assuming the van was purchased under hire purchase and the hire purchase details are as follows:

Assuming six instalments were paid in year 2007, 12 instalments payable in year 2008 and the remaining six instalments payable in year 2009.

Example 2.2 (switch to claim capital allowance over three years for YA 2009 onwards):

* TWDV c/f from YA2008 = Principal amount paid to date + Deposit paid to date (if any) - Initial allowance claim - Annual allowance claims to date = 16,200 - 3,240 - 6,000 = 6,960