In Income tax computation, expenditure is deducted if it has been incurred in the production of income for the purpose of trade. Expenditure on acquisition or construction of fixed assets known as Property, Plant, and Equipment (PPE) is not deducted but claimed against taxable income in the form of capital allowances over the useful life of the assets.
Capital allowances can be claimed by all persons deriving income from trade and investments namely sole traders, independent contractors, non -executive directors, partners, companies, and trusts with taxable income irrespective of the type of business undertaken. However, miners and petroleum operators have their own method of claiming capital expenditure.
Capital allowances allow the taxpayer to obtain relief on capital expenditure by deducting it against pre-tax income. If an asset is constructed or acquired in one tax year then put into use in the following year, capital allowances are only claimed in the year the asset has been put into use.
Capital expenditure includes the cost of acquiring or construction of the asset and all costs related in acquiring the asset such as initial set up, installation, programming, travel cost to purchase the asset, freight charges, transit insurance, irrecoverable VAT, borrowing cost, foreign exchange losses in respect of the asset.
There are two methods of claiming capital expenditure namely Special Initial Allowance (SIA) and Wear & Tear (W & T). SIA is a capital allowance granted upon election on constructed buildings, additions, alterations or improvement to the said buildings and movable purchased.
The act provides for 90 percent de minimis use rule, meaning that property used for at least 90 percent in the production of income for purposes of trade to be granted SIA.
The current rate for SIA is 25 percent for annum for big business and 50 percent for SMEs in the first year. After the first year, accelerated wear & tear is 25 percent per annum for the next three years in the case of big business and 25 percent per annum for the next two years for SMEs.
SIA is never apportioned, either taxpayer qualifies or does not qualify for SIA at all and it is also computed based on cost. Assets under a finance lease also qualify for SIA in the hands of the lessee.
Wear and tear is granted in all cases where SIA has never been granted. It is computed on the cost of immovable assets purchased or constructed by the taxpayer, additions, alterations, and improvements made to immovable properties and on movable property including on computer software acquired or developed. The following are rates for wear and tear on;
- Commercial buildings – 2.5% per annum
- Immovable property – 5 %per annum
- Movable property and computer software -10% on written down values.
Wear and tear is apportioned in the case of movable property used partly for business and private by the owners of the business.
Accelerating capital allowances allow taxpayers to minimize their tax liabilities, making SIA a favorable method to claim wherever possible. However, it is not beneficial for taxpayer with assessed losses which are about to expire to elect SIA because it will result in increased assessed losses which may not be recovered.
Therefore, capital allowances are incentives on capital expenditure which taxpayers must take advantage of, but it is difficult to claim these when an individual is not a registered taxpayer or has no internal system for tracking capital expenditure.