Capital Allowances Lecture Summary (Third) 2020

TAX LAW & PRACTICE(CUAC
212)
PROG: BSCAC
LEVEL: 2.2
YEAR : 2020
CAPITAL ALLOWANCES(S15(2)(c)a.r.w 4th Schedule
Recoupment(s8(1)(j))
Similar to accountant’s profit on disposal.
It should be included in gross income.
It is a recovery of capital allowances previously
granted.
Calculated as: Sales Proceeds less Income Tax Value
(ITV) of an asset.
Restricted to capital allowances previously granted.
If no capital allowances were granted, no recoupment is
calculated.
Calculate capital allowances over the life of the asset.
Grant full capital allowances in the year of acquisition,
none in the year of disposal.
Calculate Potential recoupment (Sales proceeds-ITV)
The lower of (i) capital allowances and (i) potential
recoupment=Actual recoupment.
Example
• Moon Company has been trading for the past 10 years.
The company had purchased furniture for $1 450 in the
year 2012 on which wear & tear had been granted. It
sold the furniture for $1 670 during the year 2015.
• Calculate recoupment.
Moon
Capital Allowances Schedule-Furniture
$
Cost(2012) 1 450
W&T 2012(10%X1 450) (145)
ITV 1 Jan 2013 1 305
W&T 2013(10%X1 305) (131)
ITV 1 Jan 2014 1 174
W&T 2014(10%X1 174) (117)
ITV 31 Dec 2014(a) 1 057
Sales proceeds(b) 1 670
Potential recoupment(b-a) 613
Moon
Total capital allowances=145+131+117=$393
Actual recoupment =lower of $613 and $393
=$393
For assets with restricted costs, also restrict selling
price as follows;
• Deemed Selling price =Deemed cost/Actual Cost

×Actual selling price.
Example
• Masawara Ltd acquired an S Class Mercedes Benz for its
Operations Director for $22 000 on 30 September 2013.
On 10 July 2015, the company sold the car for $18 000.
The company had elected for S.I.A on purchase of the
car.
• Calculate recoupment to be taxed in the hands of

Masawara Ltd.
Solution
Year 2013: S.I.A (25%* $10 000) $2 500
Year 2014: S.I.A (25% *$10 000) $2 500
ITV ($10 000 - $5 000) $5 000
Deemed selling price: (10 000 * 18 000)/22 000 $8181.82
Recoupment = ($8181.82 - $5000) $3181.82

Recoupment on damage of an asset
Recoupment should be calculated.
Compensation received is deemed to be sales proceeds.
However, no recoupment is calculated if;
A similar asset is acquired within 18months.
The asset is put to business use within 3 years.
Example
• MTC Communications had its factory building destroyed by fire
on 3 March 2015. The Income Tax Value of the building at the
date of destruction was $152 000, the company received
compensation of $230 000 from Eagle Insurance on 5 July 2015.
Calculate recoupment, if any, to be taxed in the hands of MTC
Communications in 2015 on the following assumptions:
(a) That the building was not replaced.
(b) That the building was replaced by February 2016 at a cost of
$240 000 and brought into use in May 2016.
(c) That the construction of a building was completed on 3 April
2017.
Recoupment on damage of an asset
Solution
(a) Recoupment: ($230 000 – $152 000) = $78 000, the
whole amount of $78 000 is taxed since the building was
not replaced.
(b) Recoupment: No recoupment, building completed
within 18 months and whole amount used.
(c) The whole amount of recoupment, i.e. (230 000 -152
000) = $78 000, will be taxed in full since the construction
exceeded 18 months.
Exam Tips:
If any of the following statements is included in a
question, it means that all the qualifying assets should
be granted S.I.A.
The taxpayer elected for S.I.A
The taxpayer was granted maximum allowances.
Calculate minimum taxable income/tax liability.
If the question is silent, it means Wear & tear was
granted on all the assets.
Exam Tips:
If the costs of the assets and their ITVs are given, you
should establish whether SIA or Wear and tear was
granted in the previous years.
Recalculate ITV assuming SIA was granted.
If it agrees with the given ITV, it means SIA was granted.
If it doesn’t agree, it means wear and tear was granted.
CHAPTER 7: CAPITAL ALLOWANCES(S15(2)(c)a.r.w
4th Schedule
Example
KM (Private) Limited is a Zimbabwean incorporated company based in Chinhoyi
industrial area. The company is in the business of manufacturing various plastic
products. On 1 January 2015, the following assets were shown in its asset register:
Assets Cost ($) Year acquired Month ITV($)
Industrial land 500 000 2013 January 500 000
Delivery truck 10 000 2014 July 9 000
Computers 4 000 2012 January 1 000
Warehouse 50 000 2014 January 48 750
Factory building 200 000 2012 February 170 000
Mercedes Benz 20 000 2014 December 7 500
Industrial machinery 30 000 2014 March 22 500
4th Schedule
Example
Additional information
1. The company disposed the existing machinery for $ 24 000 on 30 June 2015 and
replaced it with a new machinery which was bought for $ 50 000. The cost of
bringing the machinery to its useful state was incurred as follows:
• Import duty (Beitbridge border post) $2 500
• Installation $ 1 500
• Alteration of the factory building so as to fit the new machinery$ 2 000
2. The company bought a Nissan Primera for the finance director on 20 February
2015, for $14 000.
3. The delivery truck was involved in an accident on 30 October 2015, the
insurance company paid the company $9 000 in compensation. The directors have
since found a similar tuck for replacement.
4th Schedule
Example
• Required
• Calculate the maximum allowances and income to be included in the
computation of tax liability for KM. [20
marks]
4th Schedule
Schedule of Capital Allowances-MN
Asset Cost/ITV($) SIA or W&T rate Capital Allowance($) ITV($)
Delivery truck 9 000 W&T@20% 1 500 7 500
Computers 4 000 SIA@25% 1 000 -
Warehouse 50 000 W&T@2.5% 1 250 47 500
Factory Building 200 000 W&T@5% 10 000 160 000
Benz 10 000 SIA@25% 2 500 5 000
Machinery(old) 30 000 SIA@25% 7 500 15 000
Machinery(new) 56 000 SIA@25% 14 000 42 000
Nissan Primera 10 000 SIA@25% 2 500 7 500
40 250
4th Schedule
Recoupment on Old Machinery
$
Sales proceeds 24 000
Less ITV (15 000)
Potential recoupment 9 000(a)
Capital allowances granted 15 000(b)
Actual recoupment 9 000( lower of (a) and (b))

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TAX LAW & PRACTICE(CUAC

• Deemed Selling price =Deemed cost/Actual Cost

• Calculate recoupment to be taxed in the hands of

Deemed selling price: (10 000 * 18 000)/22 000 $8181.82

Recoupment = ($8181.82 - $5000) $3181.82

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