1. When a business decides to purchase fixed assets, the intention is for it to be used in its operations to generate income/revenue for the long term. As with other type of assets, fixed assets will also suffer ‘wear and tear’ and depreciate over time. This ‘wear and tear’ and depreciation are accounted as depreciation expenses in the profit and loss account and it is deducted against the business income/revenue to arrive at profit/loss for the accounting period.
2. However, when it comes to tax computations, please do note that the depreciation expenses accounted for in the financial statements is not tax-deductible. What this means is that you have to add back the depreciation amount to your business profit/loss before tax figure. Instead, your company can claim capital allowances in place of depreciation expenses on qualifying fixed assets.
3. Your company can claim capital allowances on qualifying fixed assets. What this means that not all fixed assets can qualify for capital allowances. According to IRAS, qualifying fixed assets must be ‘plant and machinery’ used in your company’s trade, business or profession. For example, a company making glass bottles may claim capital allowances on the cost of a machine that packs these bottles into boxes.
4. Examples of fixed assets that capital allowances cannot be claimed are as follows:
- Fixed assets bought solely for donation purposes as they are not used in the trade or business.
- Fixed assets specifically prohibited under the Income Tax Act 1947 (e.g. S-plated private passenger car)
- Not a trading stock of your company
- Not part of the setting or part of the premises where your business is conducted
5. There are a few methods for calculating capital allowances. Your company may write off the cost of an asset over 1 year, 3 years or the prescribed working life of the asset as follows:
- Assets that qualify for 100% write-off in 1 year are computers, prescribed automation equipment, low-value assets
- Under the 3 years write-off, the annual capital allowance is 1/3 of the cost of asset
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Under the prescribed working life method, capital allowances are given over the prescribed working life of assets based on the Sixth Schedule of the Income Tax Act 1947 ( 6, 12 and 16 years)
6. You company must make the capital allowance claims in its Corporate Income Tax Return for the relevant Year of Assessment (YA) and prepare the following supporting schedules in its tax computation. The tax computation must be filed with Form C. If you are filing Form C-S/ Form C-S (Lite), you need not file it with IRAS. Instead, you just need to retain the tax computation and submit it only upon IRAS’ request.
7. The supporting schedules for capital allowances claims must include the following items:
- Fixed assets additions – a brief description and cost of the new assets purchased during the accounting year
- Fixed assets disposal – a brief description, cost, sale proceeds and profit/ loss on disposal in respect of fixed assets sold/ written off during the accounting year
- Capital allowance amount – Show your basis of calculating the total capital allowance claimed, giving a breakdown of the cost/ tax written down value brought forward, capital allowance amount and tax written down value carried forward for each category of assets
8. As you can see, there are a lot of work to be done when computing the capital allowances for the fixed assets. It is recommended that you engage a tax expert like us so as not to submit the wrong claim amount and be penalised by IRAS. Pleas contact us if you require help in preparing your company’s capital allowances claim. At PL Biz Consulting Pte Ltd, we have the tax experts with many years of experience to advise and help you to compute the correct capital allowances and make the claims in your Corporate Tax Returns filing to IRAS.
