LECTURE 6

CAPITAL
ALLOWANCE
DR. ANDY
 INTRODUCTION
 Capital Allowance is tax allowance granted to taxpayers to assist
them recoup, at an accelerated pace, the capital expenditure
incurred in acquiring fixed assets.
 Capital allowance is a standardised deductible allowance in place
of accounting depreciation.
 Capital allowances are granted in respect of fixed assets
(depreciable assets), both tangible and intangible, acquired by
persons in businesses for each year of assessment. It is granted in
respect of depreciable assets owned and used in the production of
income of a person from business.
 Capital allowances granted to a person are to be taken in the year
granted and cannot be deferred.
 Unused capital allowance may be treated as part of business loss.
 DEFINITIONS
Depreciable asset
 (a) means an asset to the extent to which it is used in

the production of income from a business and which

is likely to lose value because of wear and tear,
obsolescence or the effluxion of time (passage of
time) ; and
 (b) does not include goodwill, an interest in land, a

membership interest in an entity and trading stock.

This means that Capital Allowance shall not be
granted on cost incurred in acquiring goodwill and
interest in land.
BASE RULE FOR GRANTING OF CAPITAL
ALLOWANCE
 1. Capital Allowance is granted for
Depreciable Assets
 2.The Depreciable Asset must be owned by

the business
 3. The Depreciable Asset must be used in

carrying on the business during the relevant

basis period.
 4. Capital Allowance in respect of a particular

year shall not be deferred by a person entitled

to the grant of that Capital Allowance.
OTHER CONDITIONS FOR CAPITAL
ALLOWANCE

 Other conditions necessary for the grant of capital

allowances:
1. Tax payer should have incurred qualifying capital
expenditure in the acquisition of the assets.
2. A claim should be made for the grant of the
allowance.
3. The Commissioner General is to be notified about
the acquisition within one month after it been put
into use.
CLASS OF DEPRECIABLE
ASSETS
 GENERAL RULES OF THE POOL SYSTEM

1. A Class 1, 2 or 3 depreciable asset is placed in a pool with all

other assets of the same Class.
2. All assets lose their identity the moment they enter into a pool.
3. A Class 4 or 5 depreciable asset is placed in a pool of its own
separately from other assets of that Class or any other Class.
4. Deduct the consideration received from the realisation of an asset
from the value of the pool.
5. The deduction in (4) above should not take the value of the pool
to zero. (Any excess consideration should be added to the income
for the year)
6. If all assets in the pool are realised, the capital allowance is to be
granted for any residual written down value.
7. Additional assets bought are added to the respective pools.
 GENERAL RULES OF THE POOL SYSTEM
(CONT’)
 8. Cumulative WDV of the assets from the basis for the depreciation allowance
 9. Where there is a private element in the use of a depreciable asset (asset used

partly to generate income and partly for private purposes), the cost base of the asset
should be apportioned accordingly before sending the value to the respective pool
 10. Upon the disposal of the asset so apportioned, the consideration received should

also be accordingly apportioned

 11. The cost base of a road transport vehicle (other than a commercial vehicle)

should be restricted to GHS75,000.00

 12. Where the basis period is less than 365 days, the person is not granted full

capital allowance for this period. The capital allowance has to be calculated
according to the following formula: A X B X C
365
 A is the value of the pool at the end of the basis period

 B. is the depreciation rate applicable to the pool

 C. is the number of days in the period.

CAPITAL ALLOWANCE FOR EXEMPT TAX

 Where a person uses depreciable assets in the

production of income which is exempt from tax:
(a) that person is granted capital allowance; and

(b) the allowances shall be deducted in ascertaining the

income, and where the assets are subsequently used by

that person in the production of income which is not
exempt from tax, only the written down value of the
pool or written down value of the asset, as the case
requires, shall be used in calculating capital allowance
granted to that person in respect of that subsequent use.
 DEPRECIATION BASIS OF A POOL OF
DEPRECIABLE ASSETS

 The depreciation basis of a pool of depreciable assets at the end of a basis period in
respect of a Class 1, 2 or 3 asset is
 (a) the total of

 (i) the depreciation basis of the pool at the end of the previous basis period, if any,

after deducting depreciation for that pool for that previous period; and
 (ii) amounts added to the depreciation basis of that pool during the basis period in

respect of additions to the cost of assets in or added to that pool; and

 (b) reduced, but not below zero, by consideration received for the assets in that pool

or that has been in the pool during the basis period.

 The depreciation basis of a pool of depreciable assets at the end of a basis period in

respect of a Class 4 or 5 assets is

 (a) the total of

 (i) the depreciation basis of that pool at the end of the previous basis period; and

 (ii) amounts added to the depreciation basis of that pool during the basis period in

respect of additions to the cost of assets in or added to the pool; and

 (b) reduced, but not below zero, by the consideration received for the assets in that
 REALISATION OF DEPRECIABLE ASSETS

 Realisation refers to consideration received for disposal of

depreciable assets.
 When an asset is realized for a consideration, the consideration

received is deducted from the sum of the written down value brought
forward and the additions if any before depreciation allowance is
computed and granted.
 The outcomes of realisation are;

 (1) A Gain on Realisation:

 Consideration received from realization of depreciable asset must

not be more than the written down value of the pool. (Exceeding
value must be added to income).
 (2) Loss on Realisation:

 If all assets in the pool are realized at a loss, then Capital Allowance

should be granted to any residual written down value.

TRIAL QUESTION 1
 Dosty Limited started business on 1st March, 2017
preparing accounts to 31st December each year. The
company acquired computers and accessories on 1st
March, 2017 valued at GHS 35,000.
 Required: Compute Capital Allowance for Dosty
Limited for 2017 year of assessment.
SOLUTION
 Dosty Limited
 Year of assessment: 2017
 Basis Period 01/01/2017 – 31/12/2017
 Depreciation allowance = A x B x C
 365
 Where A = GHS 35,000; B = 40%; C = 306 days
 = 35,000 x 0.40 x 306
 365
 = 11,736.98
 2016 Year of assessment
 Basis Period (B/P): 01/01/17 – 31/12/2017
 Details Class 1 (40%)
 Depreciable Basis 35,000.00
 Less: Depreciation Allowance 11,736.98
 Written down value to be carried forward 23,263.02
TRIAL QUESTION 2
 ABC Limited started business on 1st January 2016
and prepares account to 31st December each year.
The company bought computers and accessories on
1st January, 2016 valued at GHS 100,000. The
company purchased additional computers on 30 th
November, 2017 valued GHS 20,000 and sold 3
computers on 10th December, 2018 for a
consideration of GHS10,000.
 Required: Compute Capital allowance for ABC
Limited for 2017 and 2018 year of assessment.
 SOLUTION
 ABC Limited
 2016 Year of Assessment
 Basis Period: 01/01/2016 – 31/12/2016
 Depreciation allowance =AxBxC
 365
 Where A = GHS 100,000; B = 40%; C = 365 days
 = 100,000 x 0.40 x 365
 365
 = 40,000.00
SOLUTION (CONT’)
 2016 Year of assessment
 Basis Period (B/P): 01/01/16 – 31/12/2016
 Details Class 1 (40%)
 Depreciable Basis 100,000.00
 Less: Depreciation Allowance 40,000.00
 Written down value to be carried forward (WDV c/f) 60,000.00
  
 2017 Year of assessment
 Basis Period (B/P): 01/01/17 – 31/12/2017
 Details Class 1 (40%)
 WDV cf 60,000.00
 Add: Additional purchases 20,000.00
 Depreciable Basis 80,000.00
 Less: Depreciation Allowance 32,000.00
SOLUTION (CONT’)
 2018 Year of assessment
 Basis Period (B/P): 01/01/18 – 31/12/2018
 Details Class 1 (40%)
 WDV cf 48,000.00
 Less: Consideration received 10,000.00
 Depreciable Basis 38,000.00
 Less: Depreciation Allowance 15,200.00
 Written down value to be carried forward 22,800.00
 ISOLATED CASES UNDER CAPITAL
ALLOWANCE
 Where an asset is destroyed by natural disaster or accident and
theft or burglary
 Treatment: - If the person is able to show proof, the asset would be
considered to be realized at a Zero consideration. The person may be
granted additional capital allowance. However when the asset is
insured and compensation paid, the compensation received will be
considered as a consideration and deducted from the WDV before
depreciation allowance is granted.
 Where depreciable assets are used in the production of exempt
income or incomes of Firms on Tax Holiday:- Capital allowance
shall be computed and deducted in calculating the exempt income.
 Where Exemption/Tax Holiday Expires :-Capital allowances may
only be claimed with respect to the w.d.v. of the assets or pools of
assets at the time of expiration.
ASSETS ACQUIRED UNDER A HIRE
PURCHASE

 Treatment of assets acquired under a Hire Purchase

(Installment sales) /Annuities
 Under a hire purchase system the purchaser deposits an amount
and arranges to settle the balance over a period of time
 The Commissioner-General (CG) shall, in respect of the
purchaser, treat the capital portion as an asset and capital
allowance granted to the purchaser in accordance with the Third
Schedule to Act 896. The seller shall treat the interest receivable
for each year as income and treat the cost of the asset as cost of
trading stock disposed off.
 Regarding annuities, the CG shall treat the interest portion as
income in the hands of the payee and as expense made by the
payer.
 CAPITAL ALLOWANCE ON LEASED ASSETS

 Finance lease:
 The lessee of an asset shall deduct the interest portion payable as an

expense and treat the repayment of the capital as a repayment under loan
agreement. The lessee shall be entitled to capital allowance in respect of
the capital portion; and in respect of a lease of a road vehicle other than
commercial vehicle, the capital portion shall not exceed GHS75,000.
 Where the arrangement is a finance lease, the lessor does not qualify for

capital allowance. The amount of rent payment included in taxable

income for the year is reduced by capital amounts determined by the
Commissioner-General.
 Operating lease:

 In the case of the lessor, capital allowance is claimed under an operating

lease. The full amount of rent received is included in the lessor‘s income
for the year. The lease rent payment is deductible expenses in
 TREATMENT OF CAPITAL ALLOWANCE-
PETROLEUM OPERATIONS

 (1) Capital allowance expenditure to be placed in a separate pool

 (2) Rate of depreciation is 20% using the straight line method
 (3) Consideration received in respect of disposal of an asset shall be included in
assessable income
 (4) Where an asset is partly used in separate petroleum operation, capital allowance
shall be apportioned by the Commissioner – General.
 (5) Where a person assigns a petroleum right to another person, the written down
value (WDV) of any capital allowance expenditure is transferred to the assignee at the
beginning of that year.
 (6) Where a person assigns part of the petroleum right to another person, the WDV of
the capital allowance expenditure shall be apportioned by the Commissioner –
General in proportion to the percentage of the interest retained and the percentage of
the interest assigned.
 (7) Capital allowance expenditure that enjoys capital allowance shall not be granted
capital allowance in respect of other activities of the person eg. a Petroleum contractor
that has an Oil Marketing Company (OMC) as its other activities, the capital
allowance granted for the petroleum operation shall not be used by OMC.
 TREATMENT OF CAPITAL ALLOWANCE-
MINING OPERATIONS

 (1) Capital allowance expenditure to be placed in a separate pool

 (2) Rate of depreciation is 20% using the straight line method

 (3) a. Excess of consideration received over written down value of the asset is added
to assessable income
 b. Additional capital allowance shall be granted if the written down value of the
asset exceeds the consideration received for the disposal
 (4) Where an asset is partly used in separate mineral operation, capital allowance shall

be apportioned by the Commissioner – General.

 (5) Where a person assigns a mineral right to another person, the written down value

(WDV) of any capital allowance expenditure is transferred to the assignee at the

beginning of that year.
 (6) Where a person assigns part of the mineral right to another person, the WDV of the

capital allowance expenditure shall be apportioned by the Commissioner – General in

proportion to the percentage of the interest retained and the percentage of the interest
assigned.
 (7) Capital allowance expenditure that enjoys capital allowance shall not be granted

capital allowance in respect of other activities of the person.

 OTHER MATTERS
 (i) Intangible assets as stated under class 5 category of assets
entitled to capital allowance in the Third Schedule of the Act
do not include goodwill and interest in land. This is because
only depreciable assets are entitled to capital allowance and
depreciable assets exclude goodwill and interest in land.
 (ii) Although expenses of a capital nature incurred on

depreciable assets are ordinarily only deductible by way of

capital allowance, under Section 12 of the Act, repairs and
improvement costs of capital nature may be deducted from
income directly. The repair and improvement cost deductible
is however limited to five percent (5%) of the written down
value of depreciable assets of the pool at the end of that year
of assessment.
 OTHER MATTERS (CONT’)
 (iii) Where a person uses asset partly for business and realizes the
asset in a year of assessment, that person is required to include in
its capital allowance computation, the portion of the total
consideration received or receivable (arm’s length) which directly
relates to the extent that the realized asset is used in the business.
 (iv) Where a person realizes all the depreciable assets in the pool,
that person shall dissolve the pool and any consideration received
or receivable under the Act, which exceeds the written down value
of that pool is added to the income of that person for that year of
assessment.
 Conversely, where the written down value of the pool is less than
the consideration received or receivable for the asset(s) under the
Act, the excess costs is treated as additional capital allowance.
 TRIAL QUSTION 3
 Ericus Limited started business on 1st March, 2016 preparing
accounts to 31st December each year. The company acquired
data processing machines and accessories on 1 st March,
2016 valued at GHS 50,000. In the 2017 year of assessment,
the company purchased additional computers at a cost of
GHS12,000. In the 2018 year of assessment, thieves broke
into his premises and made away a laptop valued at
GHS10,000. He however received insurance compensation
from his insurers in the same year amounting to GHS8000.
 Required: Compute capital allowance for Ericus Limited for
the relevant years of assessment given that he was able to
provide all relevant documents.