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Capital Allowance

Capital Allowance

 

This is a standardised deductible allowance in place of Financial Accounting depreciation. It is granted to a person who owns depreciable assets and use those assets in the production of income from business. It is calculated in accordance with the provisions specified in the Third Schedule of the Act – Income Tax Act, 2015 (Act 896) as amended.

Base Rules for granting of Capital Allowance

  • Capital Allowance is granted on Depreciable Assets
  • The Depreciable Assets must be owned by the person.
  • The Depreciable Assets must be used in carrying on the business of the person during the relevant basis period.
  • The Depreciable Assets must be owned at the end of a basis period of the person ending within the year of assessment.
  • Capital Allowance granted in respect of a particular year of assessment shall not be deferred by a person entitled to that Capital Allowance as provided in section 14 (3) of the Act.

Classification of Depreciable Assets

For the purpose of Capital Allowance, depreciable assets are classified as follows:

CLASS

DEPRECIABLE ASSETS

RATE

1

Computers and data handling equipment together with peripheral devices.

40%

2

(i)             Automobiles, buses and minibuses, goods vehicles; construction and earth-moving equipment, heavy general purpose or specialised trucks, trailers and trailer-mounted containers; plant and machinery used in manufacturing.

(ii)            Assets resulting from expenses incurred by a person in the production of income of that person;

 a) in respect of planting vegetation from which timber, rubber, oil palm or other crops are derived; and

b) where the business is a timber concern or a large scale rubber, oil palm or other long term crop plantation. (Note: such expense shall be treated as if the expense was incurred in securing the acquisition of a depreciable asset used by the person in the production of income)

30%

3

Railroad cars, locomotives and equipment; vessels, barges, tugs and similar water transportation equipment; aircraft; specialised public utility plant, equipment and machinery; office furniture, fixtures and equipment; any depreciable asset not included in another class.

20%

 

4

 

Buildings, structures and similar works of a permanent nature

10%

5

Intangible assets

1 divided by the useful life of the asset in the pool

It is worth noting that an importer or manufacturer of excisable goods shall be granted 50% capital allowance on machinery and equipment imported for the purpose of affixing Excise Tax Stamps.

Description of Depreciation Allowance

This is an allowance granted to a person for using depreciable assets in the production of the income of the person during the person’s basis period ending in a year of assessment.

Method of Calculating Depreciation

Allowance Depreciation for the year of assessment for each pool of depreciable asset is computed as follows:

  • Classes 1-3 pool is calculated using the Reducing Balance method.
  • Classes 4 & 5 pool is calculated using the Straight line method.

Depreciation Allowance is calculated using the formula:

A x B x C/365 where

 A – is the depreciation basis of the pool of depreciable asset at the end of the basis period.

B – is the depreciation rate applicable to the pool of depreciable assets; and

C – is the number of days in the basis period of the person

Treatment of Capital Allowance- Petroleum Operations

  • Capital allowance expenditure is to be placed in a separate pool
  • Rate of depreciation is 20% using the straight line method
  • Consideration received in respect of disposal of an asset shall be included in assessable income

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