Capital allowances simplified - Part 2

Tax Education Series - Episode 6

By Richard Okunola

Continuation....

Generally, investment allowance is granted to encourage businesses or companies that made capital investments in certain sectors.

This is in two categories;

a. Investment allowance on plant and machinery

This can only be claimed on plant and machinery in their first year of purchase at a rate of 10%. This rate is charged on the initial cost of qualifying expenditure. Please note that there are other conditions to be considered in claiming investment allowance.

b. Rural investment allowance

This is available to any taxpayer whose business is situated under certain CIRCUMSTANCES and CONDITIONS provided by the government, parameters of which include; unavailability of electricity, absence of water, absence of tarred road and absence of social amenities etc.

In general, investment allowance is only claimable on specific capital expenditures and can be claimed only in the first tax year in which the asset is put to use, subject to the approval of the revenue service.

Other types of capital allowance are:

a. Balancing allowance

This occurs when the sales proceed from the disposal of an asset is below the tax written down value (TWDV) of the same asset. i.e when you made loss upon selling your asset. Note that this asset must be a QCE. Meanwhile, TWDV means the balance deduction of all allowance in a year. i.e Initial Cost - ( initial allowance + annual allowance (till date)). Investment allowance is only deducted once (in the first year) from the initial cost of an asset and does not affect the TWDV.

b. Balancing charge

This occurs when the sales proceeds from the disposal of an asset exceeds the TWDV of the same asset. This results into a profit for the entity and is therefore subjected to additional tax under CITA.

Summary

- There are three main types of capital allowance which are: initial allowance, annual allowance, andi nvestment allowance

- Other types of capital allowances are: balancing allowance and balancing charge.

- Capital allowance is only claimable on qualifying capital expenditures at an approved capital allowance rate.

PS: We will discuss QCE later. Stay Tuned.

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