Capital allowances

Definition
Capital allowances, otherwise known as depreciation of assets is the spreading of an asset’s cost
through its enter useful life in the business.

The depreciations are treated as an expenses in the income statement. Likewise, the capital
allowances are allowable deductions from the business income. Capital allowances are calculated
using the prescribed tax rates and methods is allowed as a deduction.

For the purpose of calculating depreciation allowance, depreciable assets are classified into four
groups with depreciation rate set out below;

Group 1 (25%)

auto mobiles, taxis, light general purpose trucks, tractors for use over the road, special tools and
devices.

Group 2 (20%)

Office furniture, fixtures and equipment, computers and peripherals, data handling equipment,
buses, heavy general purpose trucks, trailers, trailer mounted containers, construction equipment.

Group 3 (10%)

Any depreciable asset not included in the other groups

Group 4 (5%)

Rail road cars and locomotives and railroad equipment, vessels, barges, tugs, and similar water
transportations equipment, industrial buildings, engines and turbines, public utility plant

Methods of calculating capital allowances

Similar to accounting, in taxation capital allowances can be calculated using different methods

1. Single asset method

2. Pooling of assets method

Single asset method

This is the default method of calculating capital allowances and is considered the most reliable
method as it takes into account timing (the date at which an asset was bought and sold) when
calculating the depreciation of an asset.

In this method assets are not grouped; every asset is depreciated individually and follows a similar
approach to the reducing balance method of calculating depreciation for account.

Calculating the allowance

Each asset is depreciated on its own and follows a similar approach to the reducing balance method
of accounting.
Example of layout
March 2013: cost XXX

Capital allowance (1 month) (XX)

April 2013: ACB XXX

Capital allowance (XX)

April 2014: ACB XXX

Capital allowance (XX)

April 2015: ACB XXX

Disposal proceeds XXX

Gain/loss on disposal XX

Pooling method
This method is elected for by the taxpayers to claim capital allowances. Once the election has been
made for this method it cannot be reversed. Assets of a similar group are all depreciated together as
a group no separation of individual assets happens. The pulling method cannot be applied to group 4
assets.

In this method, only assets that are used fully in the business are allowed to be pulled and it is
assumed that all assets are purchased half way through the year so the purchase dates do not
matter.

Calculating the allowance

Year ended 31 March 2014 Group 1 Group 2 Group 3

Opening balance XXX XXX XXX

Half current year acquisitions XXX XXX XXX

Half past year acquisitions XXX XXX XXX

Less: disposal (XX) (XX) (XXX)

Balance of the pool XXX XXX XXX

Capital allowance @ 25% (XX)

Capital allowance @ 20% (XX)

Capital allowance @ 10% (XX)

ACB XXX XXX XXX

Gains or losses on disposal of assets
Gains on disposal form part of gross income and losses on disposal are allowable deductions
Single method assets: The gain or loss on the disposal of the assets is calculated as the sales
proceeds less the adjusted cost base of the asset at the date of disposal.

Pooling method: Gains or losses on disposal is only recognised when the whole pool is disposed of.
It is calculated as the sales proceeds less the balance of the pool in the year the disposal took place.

Where the balance of the pool at the end of a year is less than M500 and no assets have been
acquired in that year, the balance becomes an allowable deduction