What are capital allowances? If you know what is depreciation, you know what are capital allowances. However, the distinct difference is the timing of claim, amount of claim, right to claim.
Depreciation rates expressed in years or a percentage are determined by the management of the company.
For example,
A Computer is deemed to have useful life of 3 years, therefore...
Cost - $1,200 Useful life - 3 years
Depreciation per year is $400.
What about IRAS?
Under Section 19A, computers has to be written off in ONE year.
So, a Company will claim $1,200 deductions rather than a deduction of $400.
Or in the case of a machine,
Cost - $3,600
Depreciation - $720 per year (over 5 yrs)
Capital allowance - S19A - $1,200 (over 3 years)
So, what's the loophole?
You are allowed to DEFER the use of capital allowances. IF you decide to START using it, you CANNOT defer capital allowances that you have started claiming.
For example,
Net profit as per accounts $800
Add back:
Depreciation $400
Adjusted profit $1,200
Less: Capital allowance
S19A - current (1,200)
Chargeable income S$Nil
*********************************************************
What if there was a loss of $400 for the year?
Net loss as per accounts ($400)
Add back:
Depreciation $400
Adjusted profit $Nil
Less: Capital allowance (Optional)
S19A - current ($1,200)
Unutilised capital allowance carried forward $1,200
You can opt NOT to claim your capital allowance and defer the claim to another year.
Why?
Although you can claim unutilised capital allowances in the following year, you are subjected to what IRAS calls a shareholders test. Whereby the present shareholder must maintain a 51% shareholding for BOTH the relevant period of claim.
If this test fails, all unutilised capital allowances brought forward are WIPED OFF!
Most new companies need new injection of funds, that means more shareholders in different tax periods and having these tax allowances disallowed can be a major tax disadvantage.
What if you have accumulated $50,000 worth of capital allowances brought forward? That is worth $10,000 (20% of $50k) worth of tax write off THROWN AWAY!!
End of part one...
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