Accelerated Capital Allowances

This announcement is relating to the new accelerated CA announced in 2020 and 2021 budget.

What are capital allowances ?

Capital allowances (CA) are deductions you can claim for wear and tear of qualifying fixed assets purchased and used in your trade or business. For tax purposes, we refer to qualifying fixed assets as “Plant and Machinery”. 

Companies have different depreciation policies for different asset classes and allocate the cost of the assets over its useful life. Depreciation accounted for in financial statements is not tax deductible. E.g. Company A may depreciate its office equipment over 5 years while Company B over 3 years. In order to allow tax depreciation or capital allowances to be claimed by these companies, only fixed assets purchased by the business that qualify as plant and machinery for tax purposes may qualify for capital allowances / tax depreciation.

Claiming capital allowance over a period of time by the business is allowing the writing off of assets.

Who can claim capital allowances ?

  1. Companies that carry on a trade or business except where CA is specifically prohibited under the Income Tax Act (e.g. “S” plate private passenger car) under S15.
Plant and Machinery
There are no definition of plant and machinery in the Income Tax Act.
 
Machinery basically refers to the ordinary person’s understanding of the term. They can be referred to assets with mechanical parts. While the term “Plant” is more difficult to define.  The Sixth Schedule of the ITA identifies certain assets that qualify as plant and machinery.
 
“Plant” encompasses a very wide definition that includes office equipment, furniture, motor vehicles including commercial vehicles. 
 
To qualify as plant and machinery, there are basically 3 tests:
 
  1. Stock-in-trade test – Is the item a stock-in-trade ? The item must not be a trading stock of your company (i.e. not for resale purposes).
  2. Business Use test / functional test – Is the item function as an apparatus used in carrying on the activities of the business ?
  3. Business premises test – The item is not part of the setting or part of the premises in which your business is carried on. Those items that are part of the setting of part of the premises may be claimed as renovation or refurbishment under S14Q deduction.

Assets that can qualify as plant and machinery have to be evaluated on a case by case basis.

Methods in calculating capital allowances

A business or company may write of the cost of the qualifying asset over 1 year, 2 years (announced for YA 2021 and YA 2022), 3 years over the prescribed working life of the asset.

Accelerated CA – Write off over 2 years

Announced in Budget 2020 and 2021, companies or businesses are given an option to accelerate the write off over 2 years, instead of the normal 3 years or over the prescribed tax life of the asset. The objective of this scheme is to ease the cashflow of businesses during this downturn due to Covid.

There are a few points that businesses would need to take note of if they choose this option in YA 2021 and YA 2022:

  1. 75% of the cost incurred to be written off in the first year (i.e. YA 2021 or YA 2022)
  2. Remaining 25% of the cost incurred to be written off in the second year (i.e. YA 2022 or YA 2023)
  3. No deferment of capital allowance is allowed if businesses elect this option.
  4. Businesses can continue to claim CA over the current 1 year or 3 years under S19A or over the prescribed tax life under S19 if they do not elect this option.
  5. For new assets acquired under hire purchase agreement during the basis period of YA 2021 and YA 2022, the accelerated CA of 75% and 25% will apply to all the principal components paid on such HP assets.

Below is the summary table showing the different ways for businesses to claim CA:

how to calculate ca

qualifying assets

annual allowance (AA)

S19 - over working life of asset

1) Apply to all qualifying assets

2) Refer to 6th Schedule of ITA for working life of the qualifying assets or plant or machinery


From YA 2023, option to claim:

1) 6 or 12 years for prescribed working life of 12 years or less

2) 6, 12 or 16 year for prescribed working life of 16 years


1) Initial allowance (IA) = 20% of cost


2) Annual allowance (AA) = (80% of cost)/No. of years of working life

S19A(1) - 3-year write off

Apply to all qualifying assets

AA = 1/3 of cost

S19A(1B) - 2-year write off

Apply to all qualifying assets acquired during the basis period of YA 2021 to YA 2022

YA 2021 / YA 2022

AA = 75% of cost


YA 2022 / YA 2023

AA = 25% of cost

S19A (2) - 1-year write off (for specific assets)

1) Computers

2) Prescribed automation equipment listed in Income Tax (Automation Equipment) Rules 2004 and Amendment Rules 2010 (effective from 15 Dec 2010)

AA = 100% of cost

S19A (10A) - 1-year write off for low value assets

Low value assets are:

1) Cost of each asset not more than $5,000.

2) Total claim for 1-year write off of all such assets shall cap at $30,000 per YA.


Existing low value assets exceeding $30,000 threshold can continue to be claimed over the prescribed working life or 3 years. In subsequent year, it can be written off over 1 year as long as the total claim for 1-year write off of all such assets does not exceed $30,000 per YA.

AA = 100% of cost

When do you use this scheme ?

Businesses can choose this scheme when your business is expected to be profitable in the coming few years and you intend to invest in new assets. It means that you will have lesser tax to pay.
 
In our view, businesses who want to explore this option need to take note of the following:
 
1) Section 10E companies considering this option need to be mindful that the option is revocable and cannot be deferred in subsequent years (i.e. YA 2022 and YA 2023). It runs the risk of having its unutilized capital allowances forfeited in YA 2022 (on the basis that the capital allowances are fully utilised in YA 2021) if the taxable profit in YA 2022 is insufficient to utilise the remaining capital allowances computed using this option.
 
2) A company thinking of claiming accelerated capital allowances in  YA 2021 in order to carry back unutilized capital allowances to YA 2020 to offset the tax in YA 2020 will need to assess the value of such carry back against carrying forward for future utilisation taking into account the effective tax rate applicable to the taxable profits relieved from tax.
 
3) Companies that incur qualifying renovation and refurbishment (R&R) expenses under S14Q of the Income Tax Act will not be able to benefit from this scheme if they have maximised the $300,000 cap.

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