MSAF 606

TAXES & BUSINESS STRATEGY

Lesson 3 – Capital Allowable

College of Humanities
University of Ghana Business School
Department of Accounting
 Session Overview

Lesson Objectives:
▪ By the end of this session, you should be able to:
• explain the concept of capital allowances
• discuss the rational for capital allowances
• outline conditions for claiming capital allowances
• classify business assets for capital allowances
• methods of computing of the capital allowances
• adjust business income including capital allowances
 Session Outline
▪ The key topics to be covered in this session are as follows:
• The concept of capital allowance
• Condition for granting capital allowance
• Classification of capital allowance
• Computation of capital allowance
 Lesson Outline

The key topics to be covered in this session are as follows:

▪ Concept and Condition of Capital Allowance
▪ Classification of Depreciable Assets
▪ Methods of Computing of Capital Allowances
▪ Leasing Assets, Capital Allowance of Petroleum and Mining
Operations
▪ General Provisions on Capital Allowances
▪ Summary and Conclusions
 Reading List
▪ Amidu, M. (2019), Principles and Practice of Taxation, First
Edition, Digibooks, Accra. Ghana Chapter 4, (pages 113-139)
▪ Ali-Nakyea A. (2016), Taxation in Ghana-Principles, Practice
& Planning, Black Mask Ltd., 3rd Edition. Chapter 5, (pages
135-150)
▪ Income Tax ACT, 2015 (ACT 896), Ghana Publishing
Company Limited, (Assembly Press), Accra, Ghana, Sections
18, 19 and 20
 Topic One

CONCEPT OF CAPITAL ALLOWANCE

 Concept of Capital Allowances
▪ Capital allowance is the equivalence of depreciation of assets
used in the production of income that is subject to tax.
▪ That is an allowance granted to taxpayers to assist them recoup,
at an accelerated pace, the capital expenditure incurred in
acquiring chargeable or qualifying assets.
▪ It is an allowable deduction granted to taxpayers in place of the
disallowed depreciation
▪ It is calculated like depreciation on all depreciable assets
wholly, exclusively and necessarily used during the basis
period.
▪ Thus capital allowance is allowances granted to taxpayers for
the use of depreciable assets
 Conditions for Claiming Capital Allowances
▪ That the capital allowances are to be granted to a person (not in
vacuum).
▪ The asset must be a depreciable asset
▪ Asset must be owned by the person
▪ The asset must be wholly, exclusively and necessarily used for
the business
▪ The asset must be owned and in use at the end of the basis period
▪ That the capital allowances are an annual affair and not granted
once for many years to follow
▪ Capital allowances, according to the ACT are not transferable
either separately or together with the depreciable asset
 Depreciable assets
▪ A depreciable assets is “an asset to the extent to which it is used
in carrying on a business, which asset is likely to lose value
because of wear and tear, obsolescence, or the efflusion of time,
but does not include trading stock.”
▪ The depreciable assets are assets which:
• Are expected to be used during more than one basis period
• Have a limited useful life
• Are held by an enterprise for the used in the production or
supply of goods and services, for rental to others or for the
administrative purposes.
 Classification of Assets CA
▪ Assets are classified into five (5) classes
▪ Each class is a pool
▪ An asset looses it nature the moment it forms part of a pool
▪ However, memoranda accounts are kept to track each asset in
a pool
 Classification of Assets CA
Class One Assets (or Assets in Pool 1)
▪ This is made up of computers and data handling equipment. Besides
computers which are specifically named in the Act, other assets that
can belong here are only described as data handling equipment.
▪ These can include adding machines, calculators, time recording
machines, typewriters, etc.
▪ The act provides for 40% as the rate for capital allowances on class
one assets.
 Classification of Assets CA
Class One Assets (or Assets in Pool 1) Cont.
▪ The rate is applicable to the book value or written down value of
the asset. What it means is that, reducing balance method is
applicable to the pool 1 assets.
▪ However, in the year of assessment, that the first basis period of the
use of the asset, it is the cost base that the rate would be applied to.
 Classification of Assets CA
Class Two Assets (or Assets in Pool 2)
▪ This class has the capital allowances rate of 30% applied to the
book value (or, in the case of the first basis period of the use of the
asset, 30% of cost base).
▪ Class two assets are made up of the following:
• Automobiles, buses, minibuses, goods vehicles;
• Construction and earth moving equipment
• Heavy general purpose or specialized trucks;
• Trailers and trailer mounted containers;
• Plant and machinery used in manufacturing;
• Cost of capital nature incurred on business of timber, concern,
large scale rubber, oil palm, or other long-term crop plantation.
 Classification of Assets CA
Class Three Assets (Pool 3)
▪ This group has a rate of 20% applied to the cost base or written down
value as the case may be
▪ That is, cost base in the basis period which the asset is first used, and
▪ Written down value in subsequent basis periods.
▪ The categories of depreciable assets placed in this class are as follows:
• “Railroad cars, locomotives, and equipment;”
• Vessels, barges, tugs and similar water transportation equipment;”.
• “Aircraft” Any business involving the use of aircraft owned by the
person carrying on the business is catered for here.
• “Specialized public utility plant, equipment and machinery”.
• “Office furniture, fixtures and equipment”
• “Any depreciable asset not included in another class”
 Effects of the Pooling System on Capital
Allowances
▪ Assets loose their identity
▪ Cumulative written down value form the basis for the depreciation
▪ Consideration received from sales of asset is deducted from the written
down value
▪ But not more than the WDV of the pool. i.e. value in excess credited to the
income
▪ If all the assets in the pool are realised, then capital allowance is granted for
any residual WDV
▪ If at the end of a basis period the written down value of a pool is less than
GH¢500.00 after granting capital allowance for the year, the balance is
granted as Additional Capital Allowance to reduce the written down value of
that pool to zero.
▪ The cost base of a road vehicle, other than a commercial vehicle, shall not
exceed GH¢75,000.00
 Classification of Assets CA
Class 4 Asset (or Assets in Pool 4)
▪ Asset class 4 is made up of buildings, structures and works of a
permanent nature.
▪ This means that buildings, structures and works of a permanent
nature that fall into class 4 are those that, irrespective of the kind of
industry they are used in, are of perpetual economic usefulness.
▪ Shops, factory buildings, office buildings, warehouses and stores
together with residential estates fall into this category.
▪ Capital allowances on class 4 assets are based on the formula
A x B x C / 365,
where:
A = the cost base of the asset;
B = the rate of 10% per annum;
C = the number of days in the basis period
 Classification of Assets CA
Class 5 Assets (or Assets in Pool 5)
▪ Intangible fixed assets constitute class 5 depreciable assets.
▪ Examples of these are copyright, patent right, trade mark, etc.
▪ Like class 4 assets, capital allowances are based on the straight line
principles but with a different formula.
▪ The formula is:
A x D x C / 365
where:
A = the cost base of the asset;
D = the estimated life span of the asset in whole years.
C = the number of days in the basis period.
 Illustration 2.1
Man Ltd. began business of fruit juice canning on 1st January 2016 and
decided to prepare accounts to 31st October. The following were among
depreciable assets acquired for the business
GH¢
Factory buildings 240,000
Raw materials store 160,000
Trademark 135,000
The trademark was for a period of 15 years.

You are required to determine capital allowances for all relevant years.
 Solution to Illustration 2.1

Man Ltd
Factory Trade Mark Capital
YOA Basis Period GH¢ Store GH¢ GH¢ Allowance
2016 1/1/16
31/10/16

Cost 240,000 160,000 135,000

Capital Allowance 19,989 13,326 7,496 40,811

WDV 220,011 146,674 127,504

2017 1/11/16
31/10/17

Capital Allowance 24,000 16,000 9,000 49,000

WDV 196,011 130,674 118,504

2018 1/11/17
31/10/18

Capital Allowance 24,000 16,000 9,000 49,000

WDV 172,011 114,674 109,504

 Commentary
Some Commentary on the Illustration:
• The basis period January 2001 to 31 October, 2016 is
obviously less than a full year and therefore required
apportionment of capital allowances. The number of days in
the said basis period is 304.
• Thus the calculations were:
• Factory 240,000 x 10/100 x 304/365;
• Store 160,000 x 10/100 X 304/365;
• Trademark 135,000 /15 x 304/365
 Commentary
• The second and third basis periods were full years so the
computations were:
• Factory 240,000,000 x 10/100;
• Store 160,000,000 x 10/100;
• Trademark 135,000,000/15
 Classification of Assets for Capital
Class
Allowance Rate
Assets Method

1 Computers and ICT Equipment 40% Reducing

2 Automobiles, buses, manufacturing and 30% Reducing
heavy equipment, earth-moving
equipment, trailers and trucks, assets
associated with long-term cropping (non
commercial car limit is GHC75,000)

3 Railroad cars, aircraft, vessels, barges, 20% Reducing

PPE not in other classes

4 Buildings, structures and works of 10% Straight-line

permanent nature

5 Intangible assets Useful life Straight-line

 Special Practical Problems with the pool System

❑ If the basis period is less than 365 days, the person is not
granted full depreciation for this period.
❑ The capital allowance has to be calculated according to the
following formula:
▪ A x B x C/365
Where:
A= 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 Allowances:
Petroleum and Mining Operations
▪ If a person incurs capital allowance expenditure in respect of a separate
petroleum or mining operations, the treatment of capital allowance shall be
as follows:
• Capital allowance expenditure to be placed in a separate pool
• Rate of depreciation is 20% using the straight line method
• Consideration received in respect of disposal of an asset shall be included in
assessable income
• Where an asset is partly used in separate petroleum or mining operation, the
Commissioner- General shall apportion the capital allowance.
• Where a person assigns petroleum or mining 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.
• Where a person assigns part of the petroleum or mining right to another
person, the Commissioner- General shall apportioned WDV of the capital
expenditure in proportion to the percentage of the interest retained and the
percentage of the interest assigned.
 Example
Mr A commences business on 13/9/2010. He bought a
computer valued at GH¢2000 for use in his business on
11/10/2010. Compute the capital allowance for 2010 year of
assessment
YOA 2010
BP 13/9/10-31/12/10
A x B x C/365
Pool 1 (2000x40%x110)/365 = 241
 Activity 1
Kaywuo commenced business operations on 1/ 1/ 2015 preparing
accounts to 31/12 each year. In 2015 year of assessment, he
acquired the following assets for use in the business.
ASSETS GH¢
Furniture & fittings 7,500
Computers 15,000
Motor vehicle 28,000
Building 50,000

He also secured a trademark for his business at the cost of

GH¢100,000
 Activity 1 cont.
▪ The following transactions took place in 2016 year of
assessment:
• He traded in his motor vehicle for GH¢9,000 and purchased a
printer for GH¢2,000
• He purchased additional office furniture for GH¢3,000 and
sold the old fittings for GH¢1,000.
• The useful life of the trademark is estimated to be 100 years.

Required:
Compute the capital allowance for 2015 and 2016 years
of assessment
 Activity 2
Opeele, an astute businessman managing Opeele ventures Ltd.
submitted the following information to GRA for purposes of the
correct determination of his capital allowance for the years 2015 and
2016.
He purchased the following assets in the year 2015:
ASSETS GH¢
Generator 3,500
Refrigerator 1,500
Laptop 6,000
Building (Warehouse) 12,000
Toyota corolla 35,000
 Activity 2 cont.

It was also found out that the Goodwill of his company was valued
to be GH¢25,000 with an estimated useful life of 25 years.
In 2016, the engine of the car was replaced at a cost of GH¢5,000.
The warehouse was also extended at a cost of GH¢6,000. The
laptop was stolen and received compensation of GH¢2,500 from
Dabidabi Insurance Ltd.
Required:
Compute the capital allowance for 2015 and 2016 years of
assessment.
 Summary
▪ In this session, you have able to:
• Explain the concept of capital allowances
• Discuss the rational for capital allowances
• Outline conditions for claiming capital allowances
• Classify business assets for capital allowances
• compute the capital allowance for each class
Thank you