Capital Allowances

by | Sep 26, 2018 | Income Tax, Tech News

On 19 September 2018, the Inland Revenue Authority of Singapore (IRAS) has updated content to provide clarity on when companies can claim capital allowances for assets purchased for use by subcontractors and other parties

Assets Purchased for Use by Subcontractors and Other Parties

Companies may also claim capital allowances for expenditure on plant and machinery used by its subcontractors in outsourcing arrangements. There must have commercial justifications for allowing their subcontractors to use the plant and machinery purchased by the companies and it must be done for the purpose of their business.

Documentation Requirements – the following documents are required for claiming the capital allowance on assets used by subcontractors:

  1. The business arrangement with the subcontractor;
  2. The connection between the cost of plant and machinery and the business trade;
  3. The level of control the business has over the plant and machinery; and
  4. Compliance with the arm’s length principle for sub-contractors who are also related parties.

 

Capital Allowances for Qualifying Fixed Assets

Capital allowances are deductions claimable for the wear and tear on qualifying fixed assets and are generally granted in place of depreciation, which is not deductible.

Qualifying fixed assets include carpets, machinery and office equipment. For tax purposes, the term “Machinery and Plant” has the same meaning as those defined under common law and by an IRAS issuance. The IRAS e-Tax Guide – Machinery and Plant” sets out the tests (i.e. business functional test and business premise or setting test) to be considered in determining whether an item can be treated as “plant” and therefore subject to section 19/19A of the Income Tax Act for claims of capital allowance.

Persons may claim capital allowances on expenditure incurred on the provision of “plant and machinery” are those who own and use the plant in its trade, business or profession. Those who use plant both for private and trade purposes will be required to apportion capital allowance between business and non-business use.

For leased plant and machinery, person who is entitled to claim capital allowance is the party who bears the burden of the wear and tear. In the case of hire purchases, the hirer is entitled to the allowances provided he becomes the owner of the plant and machinery.

The claim for the capital allowances is optional, i.e. a person has the option to claim or refrain from claiming initial or annual allowances. Balancing adjustments are computed when an asset is disposed of or ceases to be used for the trade.

For other details on capital allowances, please refer to the IRAS’s website.

Source: IRAS, 26 September 2018