CAPITAL ALLOWANCES

Accountants provide for depreciation in accounts to indicate the loss in value of assets as they are
being used in trade. Depreciation is not an allowable deduction. This does not mean that the tax
law does not recognise that assets lose their values as they produce income. Under s33 the Act
allows a taxpayer to deduct capital allowances determined in accordance with the Second Schedule
from his assessable income. This is a means of standardising depreciation.

A capital allowance is an expenditure a business can claim against its taxable profit. A certain
percentage of the cost of a capital asset is allowed as a capital allowance during accounting period
in which it was purchased.

The basic principle of allowing capital allowance in the tax incentive regime is based on the
understanding that capital items depreciate at the end of each year and the loss in value of capital
items needs to be take into account as a business expenditure.

DEFINITIONS

INDUSTRIAL BUILDING - Paragraph 8

A building is said to be an industrial building if it is used for any of the following:

a. The making of an article or part of an article;

b. the subjection of goods or materials to any process including the breaking up or demolition
of an article;

c. the adapting for sale of an article;

d. the generation of power,

e. transport, dock, inland navigation, water refrigeration, electricity hydraulic power tunnel
or bridge undertaking;

f. a hotel

g. Fish ponds and other buildings and structures used for fish farming

h. any activity which the Minister declares in writing to be making in important contribution
to national development.

Paragraph 8 specifically excludes dwelling houses, shops, showrooms, storehouses and offices
from the definition of industrial buildings.

NOTE:

Protective fencing enclosing any industrial building is also an industrial building.

BCOM/07/02/15/ MANZY SHABA Page 1

COMMERCIAL BUILDINGS

From 2005/2006 fiscal year, onwards, an annual allowance at 25% is available on new commercial
buildings whose construction cost is K100m or more.

BUILDINGS WITH INDUSTRIAL AND NON INDUSTRIAL ELEMENTS

Where a building comprises of both industrial and non-industrial elements and the cost of the non-
industrial element is not greater than 20% of the total cost of the building, capital allowances will
be available on the total cost otherwise; allowances can only be claimed on the industrial element.

EXAMPLE

A building part factory and part office cost K100, 000 to construct. How much of the cost
qualifies for capital allowances if the cost of constructing the part is used as an office is

i. K18, 000
ii. K25, 000
SOLUTION

i. K18, 000 is only 18% of K100, 000 which means allowances are available on K100, 000.
ii. K25, 000 is 25% of K100, 000; allowance can be claimed on K75, 000 only (i.e. K100,
000 less K25, 000)

STAFF HOUSING
Although dwelling houses are specifically excluded from the definition of industrial buildings,
“Staff housing” qualifies as industrial buildings.

STAFF HOUSING means any dwelling house erected for occupation by an employee engaged in
the business or farming operations of a taxpayer who is a manufacturer or a farmer.

If staff housing is occupied by an employee who is

a. not a full-time employee; and

b. able directly or indirectly to control more than 5% of the voting rights attaching to
all classes of shares of the company;
the allowances available will reduced to one-third.

MANUFACTURER
A manufacturer is the owner of a business carried on within industrial buildings and the owner of
a plantation growing tea, coffee, tobacco, sugar cocoa, or such other crop as the Minister may
approve.

FARM IMPROVEMENTS
Any building or structure or work of a permanent nature, including any water furrow which is used
in the carrying of farming operations but excluding staff housing, work of a permanent nature to
which s58 applies (e.g. drilling of boreholes and any building used as a dwelling house by the
taxpayer.

BCOM/07/02/15/ MANZY SHABA Page 2

FARM FENCING
This refers to fencing which is used in the carrying on of farming operations.

RAILWAY LINES
This means the, sleepers and equipment pertaining thereto of any railway track, but does not
include ballast, embankments, bridges, culverts and other railway constructions.

TYPES OF ALLOWANCES
There are three types of allowances namely: Investment, Initial and Annual. Investment and Initial
allowances could be referred as First Year Allowance because they are only claimable in the year
an asset is purchased and/or brought into use.

An annual allowance is given to a taxpayer is respect of all assets that are used by a taxpayer on
the last day of a year of assessment.

A. INVESTMENT ALLOWANCES

Investment Allowance is claimable by a taxpayer who is also a manufacturer at the rate of

100% of the cost of new and unused industrial buildings and plant and machinery;
and at 40% of used industrial buildings and plant and machinery which.
a. is brought into use by the taxpayer during the year of assessment ; and
b. Is used by the taxpayer for the purpose of his business as a manufacturer.

The changes in the investment allowance rates were made as a way of providing incentives
to promote investments in tourism, agriculture and manufacturing sectors.

For the purposes of investment allowance the expression ‘plant and machinery’ does not
include motor vehicles intended for or adapted for use or capable of being used on roads.

Staff Housing does not qualify for investment allowance.

An Additional 15% investment allowance used to be available to a taxpayer who was

eligible for investments allowance if the taxpayer invested in an area designated for the
purpose of the additional allowance by the Minister. This was removed in the tax year
2011/2012.

B. INITIAL ALLOWANCE

Initial allowance is claimable is respect of capital expenditure incurred by a taxpayer during

a year of assessment on assets purchased for the purposes of the taxpayer’s trade. Initial
allowance cannot be claimed on an asset on which investments allowance has been
claimed. No initial allowance shall be claimed on private passenger vehicles as from July,
1998 financial year.

The rates of initial allowance are as follows.

Farm improvements 10% of cost
Industrial buildings 10% of cost
Railway lines 10 % of cost
Articles 20% Implements of cost

BCOM/07/02/15/ MANZY SHABA Page 3

 Machinery e.g. motor vehicles, office equipment
Utensils e.g. furniture & fittings, computers etc

Farm fencing 331/3 Of cost

C. ANNUAL ALLOWANCES

Annual allowances are given to a taxpayer provided an asset is in use for the purposes of a
taxpayer’s trade at the end of the period of assessment regardless of when an asset was
purchased if it was purchased during that year of assessment. The allowances are given
on the reducing balance basis.

Those who qualify for both Initial and investment allowances are required to choose either
of the two but not both. Investment allowance is given to a taxpayer who is also a
manufacturer.

RATES OF ANNUAL ALLOWANCES

Farm improvements 5%
Industrial buildings 5%
Railway lines 5%
Farm fencing 10 %
Computers 40 %

For other assets the rates of annual allowances to be used are those determined by the
Commissioner as being appropriate in relation to the class of assets in question. Once the
rates have been determined they apply to subsequent years unless superseded by any other
determination by the Commissioner.

DISPOSAL OF ASSETS

If the disposal proceeds of an asset on which capital allowances have been claimed exceed
the tax written down value (i.e. the cost of the asset less capital allowances) - the “adjusted
basis’ there will be a CAPITAL GAIN which must be included in assessable income.

A CAPITAL LOSS occurs where the written down value (adjusted basis) is greater than
the disposal proceeds. A capital loss is deductible in full from assessable income (there
are no restrictions on the deductibility of capital losses realised on the assets on which
capital allowances have been claimed.

FORMAT FOR THE COMPUTATION OF CAPITAL ALLOWANCES

Asset pool 1 Asset pool 2 TOTAL

Tax written down
value at 1.4. x 0 A B A+B

Additions C D C+D

Disposals (E) - (E)

BCOM/07/02/15/ MANZY SHABA Page 4

Sub-total A +C – E B +D A+B+C+D+E

ALLOWANCES

Investment (%*C) - (%*C)

Initial (% *D) (%*D)

Annual (F) (G) (F+G)

------------ --------------- -----------------

Tax WDV at 31.3.x1 I J K
--------------- --------------- ----------------

SUMMARY OF CAPITAL ALLOWANCES

Investment %*C
Initial %* D
Annual F+G
Capital loss ?
xxxx
Capital gain (?)
Xxxx

EXAMPLE

Mr Chirwa has a manufacturing business and had the following balances in his claim for capital
allowances for the year ended 31 March, 2011:-

Annual allow Tax WDV as at

01.04.2011
K’000
Industrial building 5% 107,000
Plant and Machinery 10% 97,500
Car 20% 24,000
Lorries 20% 14,000
Office equipment 10% 10,000

During the year the following transactions took place:

a. He purchased plant for K30, 000,000 of which K10, 000,000 was second hand.
b. Sold the industrial building for K250, 000,000 original cost of the building was
K200,000,000.

c. He purchased a new industrial building for K300, 000,000.

d. A lorry purchased on 1 January 2010 for K20, 000,000 was involved in a road accident and
totally written off. The insurance company has settled the company’s claim for the loss of

BCOM/07/02/15/ MANZY SHABA Page 5

 K10, 000,000.

e. He purchased two new cars for K8, 000,000 and K10, 000,000. He trades in a car in part
exchange which cost K6, 000,000 new on 6 February 2010. The trade in value was K3,
000,000.

REQUIRED
Prepare Mr Chirwa’s claim for capital allowances for 2011/2012 assuming he claims all
allowances to which he is entitled.

SOLUTION
MR CHIRWA
COMPUTATION OF CAPITAL ALLOWANCES FOR THE YEAR ENDED 31.03.2012

Indust. Plant & Cars Office Totals

Build Machi Equip.
K’000 K’000 K’000 K’000 K’000
Tax WDV at
1.4.2011 107,000 97,500 38,000 10,000 252,500
Additions 300,000 30,000 18,000 - 348,000
Disposal (107,000) - (12,480) - (119,480)
Sub-total 300,000 127,500 43,520 10,000 481,020
ALLOWANCES
Investment (300,000) (24,000) - - (324,000)
Initial - - (3,600) - (3,600)
Annual - (12750) (8,704) (1,000) (22,454)
WDV at 31.3.2012 - 90,750 31,216 9,000 130,966

SUMMARY OF CAPITAL ALLOWANCES

K’000
Investment 324,000
Initial 3,600
Annual 22,454
Capital Loss -
350,054
Capital Gains (143,520)
Total Allowances 206,534

Workings
Disposals - WDV
CAR LORRY
K’000 K’000
Cost 2010 6,000 20,000
Initial Allow (1,200) ( 4,000)
Annual Allow (1,200) ( 4,000)
WDV at 31.3.2010 3,600 12,000

BCOM/07/02/15/ MANZY SHABA Page 6

Annual Allow (720) (2,400)
WDV at 31.3.2011 2,880 9,600

Capital Gains
Industrial Car Lorry
Building
K’000 K’000 K’000
Proceeds 250,000 3,000 10,000
Written Down value 107,000 2,880 9,600
143,000 120 400

MINING ALLOWANCES

A person carrying on mining operations who incurs mining expenditure is entitled to an allowance
of 100% of the mining expenditure in the year the expenditure is incurred.

What is Mining Expenditure?

Paragraph 11 of the Second Schedule - Mining expenditure is capital expenditure incurred in

Malawi by a person carrying on or about to carry on mining operations in Malawi. Such capital
expenditure includes:

a. Searching for or discovering and testing or winning access to deposits of minerals.

b. The acquisition of or of rights in or over such deposits other than from a person who has
incurred mining expenditure in relation to such deposits.

c. The provision of machinery which would have little or no use at all if the mine ceased to
be worked.

d. The construction of buildings or works which would have little or no value if the mine
ceased to be worked.

e. The development, general administration and management prior to the commencement of

mining operations.

A provision to paragraph 11 specifically excludes from the definition of ‘mining expenditure’ the
acquisition of the site of deposits or of the site of buildings or works connected with mining
operations. Mining expenditure incurred after 1 November 1969 before commencement of mining
operations is deemed to have been incurred on the day mining operations commence. No mining
allowances can be claimed in respect of expenditure incurred prior to 1 November 1969.

A person engaged in mining operations shall not be eligible to claim any export allowance or any
transport allowance for goods, materials or products exported from Malawi.

Companies engaged in mining operations will be liable to an additional resource rent tax of
10% on profits after tax, if the company’s rate of return exceeds 20 percent. This is in addition
to the normal income tax charged on profits.

BCOM/07/02/15/ MANZY SHABA Page 7

TRANSFER OF AN INTEREST IN A MINE

1. BEFORE MINING OPERATIONS COMMENCE

If a person who has incurred mining expenditure sells or transfers his interest in a mine
before commencement of mining operations the following are the tax implications:-

- the price paid by the purchase less any allowance expenditure is deemed to be
taxable income of the vendor;

- the vendor may request the Commissioner in writing to have such taxable income
apportioned over a period not exceeding six years.

- The purchaser is deemed to have incurred mining expenditure equal to the price
paid by him on which mining allowances will be given.

EXAMPLE

Robert burn incurred mining expenditure of K1, 500, 000 during 1995/96 expecting to
commence mining during 1997/98. Robertburn decided to transfer the interest in the mine
to Hamlet during 1996/97 because he thought mining would be too involving since he had
other matters to attend to. Hamlet bought the interest for K2, 700,000. Hamlet commenced
mining operations on 1 July 1997. What are the tax implications?
SOLUTION

ROBERTBURN
He is deemed to have assessable income of K2, 700,000 in 1996/97
He can apply in writing to have the income spread over 6 years i.e. over 1996/97 to 2001/02
- an assessable income of K450,000 each year.

HAMLET
He is deemed to have incurred mining expenditure of K2, 700,000.
He is entitled to mining allowances of K2, 700,000, being 100% of the mining expenditure
incurred.

2. AFTER MINING OPERATIONS COMMENCE

If an interest in a mine is transferred after commencement of mining operations, the seller

will have claimed mining allowances on prior mining expenditures incurred.

The buyer will also be eligible to claim future mining expenditures in full in the year in
which the expenditures will be incurred.
Mining allowances cannot be granted in respect of expenditure on which capital
allowances are due.

No capital allowances can be claimed on expenditure incurred on the acquisition or

provision of machinery, and industrial buildings, which would have little or no use if mine

BCOM/07/02/15/ MANZY SHABA Page 8

 ceased to operate; instead mining allowances will be given in respect of such expenditure.
SUMMARY

- Capital allowances are claimable by a taxpayer on ‘qualifying’ assets. Capital

allowances replace depreciation which is not a deductible expense.

- The Act defines certain terms for purposes of capital allowances such as Industrial
Buildings, Manufacturer, etc.

- The allowances available are:

- Investment - claimable on plant and machinery and

industrial buildings only (excluding motor vehicles, though
machinery and staff housing) in the year an asset is brought
into use in a manufacturing business.

- Initial - claimable in the year capital

expenditure is incurred.

- Annual - Available every year as long as the

asset is in use for business purpose at the end of that year on
the reducing balance basis.
- Disposal of an asset on which capital allowances have been claimed may give rise
to either a capita gain or a capital loss.

- Mining allowances are available to a person who has incurred mining expenditure
in Malawi. These are available in full at 100% of the expenditure in the year in
which they are incurred.

- Mining expenditure is capital expenditure incurred in Malawi by a person who is

carrying on mining operations or intends to carry on mining operations in Malawi.

- No mining allowances are available on assets on which capital allowance are due.

BCOM/07/02/15/ MANZY SHABA Page 9