Within Singapore’s contemporary tax landscape, the amount of tax you declare is essentially the starting point for assessing your tax liability. This means it’s crucial for you, as a taxpayer, to get your tax calculations and declarations right, especially when dealing with significant capital expenses. Neglecting this meticulous process may result in potential tax penalties looming over the taxpayer.
The examination of Capital Allowances is essential to ensure accurate claims. It’s surprising how many taxpayers are unaware that this tax deduction can significantly improve their company’s tax management. What often needs to be noticed is the proper utilisation of capital allowances for the equipment and machinery within a building, like fire alarms, sprinkler systems, security features, and building management systems. Due to a lack of awareness, many eligible taxpayers still need to fully claim their entitled capital allowances, missing out on opportunities to maximise their claims.
This article will clarify what qualifies for capital allowance and how to calculate and claim capital allowances.
Inside This Article:
- What Determines Eligibility for Capital Allowances?
- How to Determine Capital Allowances Calculation?
- Can Companies Defer Capital Allowances?
- How to Claim Capital Allowances?
- What is the tax treatment in case of Sale/ Disposal/ Conversion/ Transfer of Fixed Assets?
- What are the Tax Implications of Transferring Fixed Assets to Related Companies?
What Determines Eligibility for Capital Allowances?
Fixed assets undergo a natural ‘wear and tear process and gradually lose their value over time. It’s important to clarify that the depreciation recorded in financial statements cannot be claimed as a tax deduction.
Instead, businesses can utilise capital allowances to account for the wear and tear of specific fixed assets that have been acquired and are actively used in their trade or day-to-day operations.
This procedure of seeking capital allowances is often called ‘writing off the asset’ over a specified period.
Crucially, it should be noted that companies are eligible to claim capital allowances when the expense is legally incurred. The legal obligation to make payment is the trigger for eligibility, irrespective of the actual payment date.
Effective January 1, 2021, capital allowances no longer apply to expenses that have received funding from capital grants provided by the Government or Statutory Boards, as outlined in the Budget 2020 announcement.
To illustrate this concept practically, let’s consider a hypothetical scenario in which a company invested $400,000 in a qualifying fixed asset for its business. This expenditure was partially covered by a government capital grant of $100,000, approved on January 1, 2021. In this instance, capital allowances would be computed based on the net expenditure of $300,000.
The following table determines eligibility for Capital Allowances on various assets.
|Eligibility for Capital Allowances on Assets
|‘Plant and machinery’ used in your company’s trade, business, or profession qualify for capital allowances.
|Assets acquired solely for donation purposes are ineligible.
|Prohibited assets like S-plated private cars are not eligible.
|Qualified assets should not be trading stock, should serve a business purpose, and should not be part of the building structure.
|Examples of Qualifying Assets
|Examples of Qualifying Assets
|Use by Subcontractors
|– Capital allowances for assets used by subcontractors require valid business reasons.
|Electrical and electronic equipment
|Fixed partitions and walls
|Proper documentation demonstrating the business connection and control is essential.
|Electrical fittings (except for identifiable plant components)
|Furniture and fixtures
|Ceiling work and floor finishes
|Private passenger cars
|Business-use motor Vehicles (e.g., vans, lorries)
|Capital Allowances for Motor Vehicles
|Private cars and specific business cars are eligible only if registered as ‘private hire cars’ or used for driving instruction as part of your business.
|COE expenses can be included if they are part of the cost of eligible motor vehicles.
How to Determine Capital Allowances Calculation?
Different Methods can be used to Determine how much you can Deduct as Capital Allowances. You can spread the cost of an Asset over one year, three years, or even the time the Asset is Expected to work. If you have Assets in the Years of Assessment (YAs) 2021, 2022, or 2024, you also have the choice to spread the cost over two years.
Remember to keep good records. In your Capital Allowance Schedule, make it clear which assets you claim deductions for and the method you’re using. Then, include these deductions when you file your Corporate Income Tax Return.
The table below summarises the eligibility criteria and calculation methods for various capital allowance options.
|Method for Writing Off Assets
|Assets Eligible for Write-Off
|100% Write-Off in 1 Year
|Computers, Prescribed Automation Equipment, Low-value assets
|– For assets purchased with cash: Annual Allowance (AA) = 100% of asset cost – For assets purchased under hire purchase: AA = 100% of principal payment (and deposit if applicable)
|Write-Off Over 2 Years
|All assets acquired during specified basis periods
|– 75% of cost in the first year <br> – 25% of cost in the second year <br> (No deferment allowed)
|Write-Off Over 3 Years
|All assets eligible for capital allowances
|– For assets purchased with cash: AA for each year = 1/3 of asset cost – For assets purchased under hire purchase: AA = 1/3 of principal payment (and deposit if applicable)
|Write-Off Over Prescribed Working Life
|All assets with prescribed working life based on Sixth Schedule
|– Initial Allowance (IA) in the first year (if applicable) = 20% of asset cost – Annual Allowance (AA) for each year = (80% of asset cost)/number of years of working life
|Prescribed Working Life Options
|Assets with prescribed working life up to 12 years: Choose 6 or 12 years Assets with prescribed working life of 16 years: Choose 6, 12, or 16 years
|– Make an irrevocable election for the number of years at the time of tax filing
Can Companies Defer Capital Allowances?
Companies have the option to defer capital allowances under certain circumstances.
Typically, they may choose to defer capital allowances when facing financial losses or when they qualify for specific tax exemptions designed for new startup companies.
However, it’s important to note that companies in a loss position still have the choice to claim capital allowances instead of deferring them.
Any unused capital allowances can be carried forward for future Years of Assessment, subject to meeting specific criteria such as the shareholding and business continuity tests.
This table summarises the calculation methods for capital allowances and whether deferment of the claim is allowed, along with the option to claim consecutively or deferred:
|Method of Calculation
|Claim Consecutively or Deferred
|Over working life of asset [Section 19]
|IA must be claimed in the YA of capital expenditure. If not claimed, AA is computed over the prescribed working life, and AA can be deferred and claimed non-consecutively.
|3-year write-off [Section 19A(1)]
|Capital allowance claim can be deferred and does not need to be claimed consecutively over 3 YAs.
|2-year write-off [Section 19A(1E)]
|No deferment of capital allowance claim is allowed under this option.
|1-year write-off (for specific assets) [Section 19A(2)]
|Capital allowance claim can be deferred to subsequent YAs.
|1-year write-off (only for low-value assets) [Section 19A(10A)]
|Capital allowance claim can be deferred to subsequent YAs.
How to Claim Capital Allowances?
To claim capital allowances for your company, consider the following when filing your Corporate Income Tax Return for the relevant Year of Assessment (YA). Ensure that your tax computation includes the following supporting schedules. If you’re using Form C-S or Form C-S (Lite), retain the tax computation and provide it only upon request from IRAS.
- Fixed Assets Additions: Provide a concise description and the cost of newly acquired assets during the accounting year.
- Fixed Assets Disposals: Detail the brief description, cost, sale proceeds, and any profit or loss on disposals for fixed assets sold or written off during the accounting year.
- Capital Allowances: Present your methodology for calculating the total capital allowance claimed. Offer a breakdown of the cost or tax written-down value brought forward, the capital allowance amount and the tax written-down value carried forward for each asset category.
If you require assistance preparing the capital allowance schedule, you can utilise our Basic Corporate Income Tax Calculator.
What is the Tax Treatment in Case of Sale/ Disposal/ Conversion/ Transfer of Fixed Assets?
When a fixed asset is sold, converted to trading stock, or written off, it’s necessary to calculate BA or BC if previous capital allowances were claimed on the asset’s cost. BC is taxable income, and BA is tax-deductible.
- Balancing Allowance (BA):
- When you sell an asset for less than its value (cost minus claimed allowances), you get a tax refund (BA).
- Example: You bought a machine for $10,000, claimed $7,000 in allowances, and sold it for $2,000. BA is $1,000.
- Balancing Charge (BC):
- When you sell an asset for more than its value (cost minus claimed allowances), you have additional income (BC).
- BC is limited to the total allowances previously claimed for that asset.
Note: BC is like extra income, and BA is like a tax refund.
What are the Tax Implications of Transferring Fixed Assets to Related Companies?
When a company acquires fixed assets from a related company with 50% or more common shareholders, both companies can choose to transfer the assets per Section 24 of the Income Tax Act 1947. This means the transaction is seen as a transfer of assets and not a sale.
Implications of a Section 24 Election
- The asset is considered sold for its tax written down value (TWDV) before the transfer.
- The seller does not need to calculate a balancing allowance (BA) or balancing charge (BC).
- The buyer doesn’t receive an initial allowance (IA).
- The buyer claims an annual allowance (AA) based on the asset’s TWDV over its remaining working life.
- If the buyer later sells the asset, BC/BA rules apply.
Company A bought a machine in 2018 for $30,000, claimed $7,000 in allowances, and sold it to Company B in 2020 for $25,000. Consider the following two scenarios:
Scenario A: Section 24 Elected
- No need for BA/BC for Company A in 2021.
- Company B claims AA based on the asset’s remaining working life (1 year), which is $10,000.
Scenario B: Section 24 Not Elected
- BA/BC is needed for Company A, resulting in a BC of $15,000.
- Company B can choose its method of capital allowance claim.
How to Elect for Section 24
- Both parties prepare a ‘Section 24 Notice of Election’ with asset details.
- File the Notice and asset details with Form C.
- For Form C-S/Form C-S (Lite), prepare and retain the documents for IRAS’ request.
Section 24 Notice of Election
- Include buyer and seller names, confirming Section 24 election.
- Sign the letter.
Details of Transferred Assets
- Document asset details for both buyer and seller, including description, cost, TWDV, and remaining working life for each asset category.
In conclusion, understanding and effectively managing capital allowances is crucial for businesses to optimise their tax positions. Companies must navigate these tax considerations strategically when choosing the suitable method for calculating capital allowances, handling the transfer of fixed assets under Section 24, or dealing with the implications of asset disposals. Making informed decisions about capital allowances can help companies minimise tax liabilities, utilise available tax incentives, and ensure compliance with tax regulations. By carefully evaluating their fixed asset transactions, companies can make the most of the tax benefits under the Income Tax Act 1947 and enhance their financial performance.
At Rikvin, we specialise in enhancing your capital allowances claim. With expertise in both tax and surveying, we offer a tailored approach to maximise your claim. Our detailed report forms the foundation of your capital allowances analysis, ensuring compliance with regulations and providing robust documentation. Our team’s dual qualifications enable us to identify qualifying items effectively and optimise allocations. By choosing Rivkin, you’ll benefit from our expertise while staying fully compliant with regulations.
FAQs on Capital Allowances
- Donors who gave computers to specific institutions before February 21, 2017, got tax deductions.
If you claimed full allowances for a computer and then donated it to one of these institutions, you might face a BC based on its assessed value.
- Absolutely. A website is considered an eligible asset, falling within the category of plant or machinery according to Section 19A(10).
Consequently, your company can claim capital allowances for a website’s development or purchase cost within a year.
Furthermore, during the Years of Assessment (YAs) spanning from 2014 to 2018, the website development expenses, including the one-time domain name registration, also qualify for Productivity and Innovation Credit (PIC) benefits.
- Your company can claim the entire expense of such equipment as a capital allowance within one year. This applies to equipment certified by an NEA-approved company and installed between January 1, 1996, and December 31, 2017 (inclusive).
- Indeed, your company can claim the entire cost of such equipment as a capital allowance in just one year. This applies if the equipment has been certified by an organisation approved by the Ministry of Manpower (MOM).
For further information regarding accelerated capital allowance for equipment used in Chemical Hazard Control or Noise Control, please refer to MOM’s official website.
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