Among the many tax benefits that businesses get on their capital expenditure in Singapore is what the IRAS (Inland Revenue Authority of Singapore) calls “capital allowance”.
To take advantage of it, though, you need to understand what it entails, what qualifies as capital expenditure, how to calculate your capital allowances in Singapore, as well as how to claim them.
Here’s a complete breakdown of everything...
What Are Capital Allowances?
Capital allowances, to begin with, are simply tax deductions that you get for the wear and tear of fixed assets that you purchased and used in your business or trade. The IRAS prefers to call the fixed assets “plant and machinery” - and they include stuff like office equipment, furniture, carpets, electronics, computers, etc.
The whole process of filing for capital allowance covering a period of time can be referred to as “writing off the asset”. The IRAS only allows you to include business fixed assets that have undergone “wear and tear” or depreciated over time.
It’s worth noting, however, that you cannot claim tax deductions for any depreciation that you’ve accounted for in your company’s financial statements.
Who Can Claim Them?
Capital allowance tax benefits are open to all companies in Singapore. The IRAS allows you to claim deductions on capital expenditure you’ve lost through “plant and machinery” used in your company’s businesses.
Not all forms of capital expenditure are covered, though. To do away with cases of double-incentivization, the government of Singapore announced in 2020 that capital allowance won’t cover government grants from the year 2021. That means you can’t include any capital grants you’ve received from the government or statutory boards as part of your capital expenditure.
To put it into perspective, consider a business that purchases equipment worth $300,000 and then proceeds to use it in its activities. If, say S$50,000 of that capital expenditure was acquired from a government grant on or after 1st Jan 2021, the company can only claim capital allowance on S$250,000.
It’s that simple and straightforward.
Assets that Qualify for Capital Allowances
Not all company assets qualify for capital allowances in Singapore. The IRAS only accepts fixed assets or “plant and machinery” that you’ve used in your profession, business, or trade.
For instance, if you happen to be running a milk processing plant in Singapore, you can go ahead and claim capital allowance on all the machines you use to handle and process the milk. But, you won’t be able to include assets that you purchase entirely for donation or other activities that are not directly related to your business or trade.
All in all, the fixed assets should meet the following conditions:
- They should not be part of the premises on which your business activities are being carried out. Otherwise, you could alternatively apply for a refurbishment or renovation deduction.
- They should have been used to perform your trade or business activities.
- They should not be part of your company’s trading stocks.
How to Calculate Capital Allowances
There are three primary methods of calculating your company’s capital allowances in Singapore.
You could either:
- Write off the cost of an asset over one year.
- Write off the cost of an asset over two years.
- Write off the cost of an asset over three years.
- Write off the cost of an asset over its prescribed working life.
100% Write-Off in One Year
The IRAS gives you the option of claiming capital allowance on the entire capital expenditure you’ve spent that year on:
- Prescribed automation equipment.
- Low-value assets that cost S$5,000 or less.
The calculation procedure here is pretty straightforward. If you’ve acquired the assets by cash, simply consider the total cost of the asset as your annual capital allowance.
As for fixed assets acquired via hire purchase, the IRAS requires you to claim annual capital allowance on the principal amount and deposits paid.
Write-Off Over Three Years
Since 2009, the IRAS has given companies the option of spreading their capital allowance claims over three years.
In that case, you simply establish each year’s capital allowance as a third of the total cost of the assets. Then when it comes to assets that you’ve acquired under hire purchase, each year’s annual allowance is simply a third of principal payments and deposits.
Write-Off Over Two Years
This option was introduced in the year 2020’s budget. It basically allows companies to expedite their write-offs over two years instead of the usual three years.
In the first year, you should simply calculate the annual capital allowance as 75% of the total cost of the asset. Then in the second year, you can proceed to claim the rest of the capital expenditure (25% of the asset cost).
Write-Off Over the Prescribed Working Life of the Asset
This method is a little bit complicated because, unlike the other three, it spreads the capital allowance claims over the prescribed working life of the fixed assets.
Motor vehicles, for example, have a prescribed working life of six years, while motorcycles stretch to eight years.
And to calculate the claims, consider the first year’s capital allowance as 20% of the total cost of the asset if it was purchased in cash, or 20% of the principal amount and deposits paid if it was acquired via hire purchase. The rest of the amount (80%) is then written off in equal annual allowances spread over the prescribed working life years.
In the end, companies are required to round off the prescribed working life years to either 6, 12, or 16 years. That means you get to claim allowances for 6, 12, or 18 years.
How to Claim Capital Allowances
To claim capital allowances in Singapore, the IRAS requires you to attach the following documents to your Form C. But, if you’re filing Form C-S, you can keep the documents until IRAS requests them.
- Fixed Assets Additions: This should list and describe all the new assets that you acquired in the accounting year, along with their respective costs.
- Fixed Assets Disposals: This should list and describe all the fixed assets that you’ve sold or written off in that particular accounting year, along with their costs, plus sale proceeds.
- Capital Allowances: This should demonstrate how you calculated and established the capital allowances you’re claiming. As such, you ought to include a breakdown of each asset’s written down amounts brought forward, the corresponding capital allowance amount, plus the values carried forward.
Over to You
We understand that calculating your capital allowances, claiming the deductions, and keeping track of everything over the years can be a complicated process. That’s why we’re here to help you with everything.
So, go ahead and get in touch with us for our corporate services. Our consultations are always free of charge.