Claim Capital Allowances

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 equipments and use it for your business. You can also use this method for assets costing no more than $1,000 each, bought from year 2004 onwards. 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 assets must be capped at $30,000 Year of Assessment (YA).

• 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:

  • 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:

Workings:

In year 2007

In year 2008

You can claim capital allowances as follows:

Three-years write-off

Example 3:

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

Example 4:

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

Workings:

In year 2007

In year 2008

You can claim capital allowances as follows:

Accelerated Write-down

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

Example 6 

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

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

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:

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:

Workings:

In year 2007

In year 2008

In year 2009

You can claim capital allowances as follows:

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:

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:

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.

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).

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