Transferring Fixed Assets to Related Companies (Section 24 Election)

When a company takes over or buys fixed assets from a related company where there are 50% or more common shareholders, both companies may "elect" to transfer the assets under Section 24 of the Income Tax Act.

Section 24 in a Nutshell

The effect of electing for Section 24 is to disregard the sale except for the change in person entitled to the allowances.

In other words, the transaction will not be considered a sale but a transfer of the assets and its allowances.

Implications of a Section 24 Election

  1. The asset is treated as sold for a sum equal to the tax written down value (TWDV) of the asset immediately before the sale;
  2. It is not necessary to calculate balancing allowance or balancing charge for the seller;
  3. No initial allowance (IA) is given to the buyer;
  4. The buyer will claim annual allowance (AA) based on the TWDV of the asset over the remaining useful life; and
  5. If the buyer subsequently sells the asset, the buyer will be subject to the balancing charge (BC) / balancing allowance (BA).

Notice of Election under Section 24

To elect for Section 24 on the transfer of fixed assets, both parties (buyer and seller) have to prepare a "Section 24 Notice of Election".

In this Notice, you have to state the names of both the buyer and the seller and confirm that Section 24 is elected in respect of the fixed assets transferred or sold. Both parties must sign the letter.

In the case of a sole proprietorship / partnership converted to a company, both the sole proprietorship / partnership (i.e. the transferor) and the company (i.e. the transferee) have to prepare and sign on the "Section 24 Notice of Election". 

You may refer to the Basic Format of Section 24 Notice of Election (for Companies) (44KB) when preparing your Notice.

Details on Fixed Assets Transferred

Both the buyer and seller must document details of fixed assets transferred / taken over, including the description, cost, written down value carried forward and the remaining useful life of each category of asset.

Submitting the Notice and Details on Fixed Assets

Companies filing Form C should submit the Notice and details on the fixed assets transferred together with the Form C in the YA relating to the year where the sale took place.

Companies filing Form C-S do not need to submit the Notice and details on the fixed assets transferred. However, the documents should be prepared and retained for submission to IRAS upon request.

Example Showing Implications of Section 24 Election

In year 2014, Company A bought a machine using cash at a cost of $30,000. In year 2016, the machine was sold to Company B (a subsidiary of Company A) for $25,000. Both companies have a 31 Dec year end.

Assuming company A was claiming capital allowance over three-year write-off under Section 19A before selling the machine to company B.

Case 1: Section 24 is Elected

Capital allowance schedule for Company A (seller)
Since Section 24 is elected, it is not necessary to compute BA / BC for Company A in YA 2017.

DescriptionMachine ($)

Cost

30,000

YA  2015 AA

10,000

TWDV c/f

20,000

YA 2016 AA

10,000

TWDV c/f

10,000

Capital allowance schedule for Company B (buyer)
Since Section 24 is elected, Company B will claim AA based on the TWDV of the asset over the remaining useful life of the asset. In this case, the remaining useful life is one year, so AA = $10,000 / 1 = $10,000.

DescriptionMachine ($)

Cost

10,000

YA 2017 AA

10,000

TWDV c/f

0

Case 2: Section 24 Not Elected

Capital allowance schedule for Company A (seller)

Since Section 24 is not elected, it is necessary to compute BA / BC for Company A based on the selling price of $25,000. In this case, there is a BC of $15,000 which is taxable as income.

Description

Machine ($)

Cost

30,000

YA 2015 AA

10,000

TWDV c/f

20,000

YA 2016 AA

10,000

TWDV c/f

10,000

YA 2017 Sale proceeds

25,000

BC

15,000

Capital allowance schedule for Company B (buyer)

Since Section 24 is not elected, Company B will claim capital allowance based on the selling price of $25,000. Company B can decide on the method of claiming capital allowance. Assuming Company B decided to write off the asset over 3 years under Section 19A, the AA will be 1/3 of $25,000, that is $8,333.

DescriptionMachine ($)

Cost

25,000

YA 2017 AA

8,333

TWDV c/f

16,667

YA 2018 AA

8,333

TWDV c/f

8,334

YA 2019 AA

8,334

TWDV c/f

0

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