Capital Allowances for Tax: A Comprehensive Guide

Capital Allowances - Singapore Tax

Businesses must invest significantly in assets to run and expand their operations. These assets, such as machinery, equipment, and property, are typically not expensed immediately but depreciated over time. However, the government offers businesses a tax relief mechanism through capital allowances, which can help companies reduce their taxable income and lower their tax liability.

A business can claim various types of allowances for capital expenditure. In Singapore, the claiming of capital allowance is usually done for plant and machinery. Other allowances may include Mergers & Acquisitions (M&A) Allowance, Writing-Down Allowances for Intellectual Property Rights (IPRs), Land Intensification Allowance (LIA), and Industrial Building Allowance (IBA).

This article will explore capital allowances, the types of assets eligible for them, how to claim them, and key considerations for businesses in Singapore.

What Are Capital Allowances?

Capital allowances are a form of tax deduction available to businesses in Singapore. They allow companies to offset the costs of acquiring qualifying fixed assets against their taxable income. The concept is similar to depreciation, but instead of deducting the cost of assets over their useful life, businesses can claim capital allowances annually based on the asset's depreciation rate.

A business may claim capital allowances to account for the "tax depreciation" of qualifying fixed assets acquired and utilized in its trade or operations. This process of gradually claiming allowances over time is commonly referred to as writing off the asset.

Qualifying Assets for Capital Allowances

Not all assets qualify for capital allowances. For an asset to qualify, it must meet specific requirements laid out by IRAS. The general rule is that the asset should be used for the business's trade, profession, or vocation and must be a capital asset instead of a revenue expense.

Qualifying fixed assets must be a plant and machinery used in your company's trade, business, or profession. A detailed definition or list of qualifying fixed assets can be found on the Inland Authority of Singapore (IRAS) website. Some common examples of items that can be claimed under capital allowances include:

• Capital Expenditure on Plant and Equipment

• Industrial Machinery

• Motor Vehicle (Commercial Vehicles)

• Office equipment such as telecommunication on electronic equipment

• Furniture and Fixtures

• Electrical and electronic equipment

• Movable partitions

The above list is not exhaustive. There are also specific examples that IRAS had listed as business assets that do not qualify as plant or machinery. These include:

• Awning

• Business Cars (Private S-plated cars)

• Designer's fees for renovation

• Lighting and light fittings

  
  

It is worth noting that the list found on IRAS's website is more comprehensive, and it is strongly recommended to refer directly to the IRAS directive or consult a capital allowances specialist to assist with capital allowances claims. As you might have noticed, several restrictions and specific classifications exist regarding the tax treatment of renovation costs. Do refer directly to Section 14N deduction for a detailed explanation for renovation costs.

Claiming Capital Allowances: Computing the Right Amount

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. For assets acquired during the basis periods for the Years of Assessment (YAs) 2021, 2022 and 2024, your company has an additional option to write-off the cost over 2 years.

100% Write-Off in 1 Year

Write-Off Over 2 Years

Write-Off Over 3 Years

Write-Off Over the Prescribed Working Life of the Asset

Do note that the following examples are made on the assumption that the assets are purchased on a cash basis and not via any hire purchase term or hire purchase agreement.  

100% Write-Off in 1 Year

The 1-year write-off is a common application for small businesses. Most companies usually adopt this for their smaller or low-value qualifying assets. Under this method, the annual allowance of the assets is fully written down in its first year. Do note that this 100% capital allowance write-of is only applicable to:

Computers [Section 19A(2)]

Prescribed automation equipment [Section 19A(2)]

Low-value assets [Section 19A(10A)]

For low-value assets, the total claim for a 1-year write-off of all low-value assets must not exceed S$30,000 per YA. A single item of a low-value assets is also define as a cost not more than S$5,000.

Write-Off Over 2 Years

As announced in budget 2023, the company has the option to accelerate the write-off over 2 years instead of 3 years for assets acquired in YA2021, YA2022, and YA2024. This enhanced capital allowances of the 2-year write-off initiative support companies in investing and improving cash flow. The accelerated rates allow for an initial allowance of 75% in the first year and a balance of 25% in the next basis period.

Such accelerated capital allowance claims are usually welcome for smaller businesses as they will improve general cash flow and relief from a lowered tax return. Most companies will opt for enhanced rates for maximum benefits in relation to capital investment.  

Write-Off Over 3 Years

A company may write off all assets that qualify for capital allowances over 3 years. The initial allowance and annual allowance will be the same at 1/3 of the original cost of asset for every year for the course of 3 years. The three-year write-off covers the remaining asset category, which does not qualify for S19A.

Write-Off Over the Prescribed Working Life of the Asset

Under this method, capital allowances are given over an asset's prescribed working life based on the Sixth Schedule of the Income Tax Act 1947. This schedule has been simplified and streamlined to 6, 12, and 16 years for the prescribed working life of assets. Capital allowance under this arrangement will have an initial allowance of 20% of the asset's cost in the first YA. In subsequent YAs, the annual allowance will be 80% of the cost of assets divivded by the number of years of working life.

Deferment of Capital Allowance Claims

This option is generally explored by companies who are in a loss position or when a company qualifies for tax exemption. Apart from deferring the claims, companies also have the option to allow for any unutilized capital allowances to be carried forward. This will enable the unutilised capital allowances to be off-setted against future income in subsequent YAs, subjected to the shareholding test and business continuity test.

The same two tests are also used in cases of unutilised losses carry forward.

Concept of Deferred Tax Assets and Liabilities

The concept of a different tax base compared to carrying value will often lead to differences between an accounting financial statement and tax computation. In most cases, this difference can be a temporary difference or, in other cases, a permanent one. Assuming that an asset is depreciated in a company's accounting records and capital allowances are allowed for the full cost, it will be a matter of time before the same asset is fully depreciated or written down.

The mechanism of capital allowance for tax purposes and the concept of depreciation in accounting for business assets in an accounting period will give rise to a timing difference. Due to the varying rates, a timing difference between the tax base and carrying value will often be seen during the process. This gives rise to either Deferred Tax Assets/Liabilities.

However, over a period of time, temporary differences will eventually be zeroised.

Filing your Capital Allowance

A capital allowance supporting schedule will be required when filing your Form C Corporate Income Tax Return for the relevant Year of Assessment (YA). The schedule should indicate each asset's purchase cost or purchase price, the initial or annual allowance claimed, and the tax base. There should also be a clear indication of the sale proceeds and balancing charge for disposed items.

Companies who file their tax computation using Form C-S/ Form C-S (Lite), please retain the tax computation and submit it only upon IRAS' request.

Mechanism of Capital Allowance and How We can Help

Capital allowance is akin to a tax depreciation of qualifying assets. Capital investment costs are usually high, and expenditure on capital assets may be significant for certain companies.

Allowing companies to claim for capital allowances relieves pressure on capital investment costs and encourages firms to invest in eligible capital expenditures. By allowing the unabsorbed capital allowances to be carried forward, the companies are more willing to invest early and be assured that the unutilized capital allowance can be used to offset future profit.

The concept of capital allowance can sometimes be confusing, especially for a combination of plant and equipment and other capital asset expenditures. At OakTree, we assist clients in preparing tax forecasts, including corporation tax drafts, to illustrate and support certain business decisions. We also assist clients with income tax return filing, including capital allowance claims, and supporting schedules. Should you need assistance, we welcome you to reach out to us.  

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DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.

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