UNIVERSITY OF LAGOS

Faculty of Management Sciences

Department of Accounting

ACC 312/315 TAXATION I 300 Level

CAPITAL ALLOWANCES

By
Dr. G. D. Ifarajimi

INTRODUCTION
Capital allowances are allowances claimable by traders or self-employed persons in
respect of capital assets which they use in their businesses, trades, or professions in
earning their business income and which have suffered diminution in value during an
accounting period.
These allowances have been described as repayments of the cost of assets by the
Government to the traders in order to encourage automation in industry, with a resultant
decrease in the taxes paid by them. The higher the rates of capital allowances the lower the
tax liability and vice versa.
Capital allowance is granted in lieu of depreciation as an allowable deduction in arriving
at the chargeable income of an individual, trade or business. Capital allowances are
claimable at varying rates in respect of qualifying expenditure on:
Plant, machinery and fixtures
Buildings, structures or works of a permanent nature
Mines, oil wells or other sources of mineral deposits of a wasting nature
Plantations
Research and development
Agricultural plant
Public Transportation motor vehicles
Public Transportation (inter-city) Mass Transit Coach

QUALIFYING EXPENDITURE
Qualifying expenditure means capital expenditure incurred in a basis period in connection
with the assets listed above. Any expenditure which is allowed to be deducted in computing

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the gains or profits of a trade or business in accordance with the provisions of section 20 of
CITA, shall not be treated as qualifying expenditure.
The following should be carefully noted:

i) Capital allowances are usually granted on assets owned on the last day of the basis
period for a year of assessment and used for the purposes of a trade or business.
ii) The ownership and usage should be on the last day of the basis period for a year of
assessment. For this purpose a period of temporary disuse is ignored.
Also when an asset is still under construction and usage has not commenced on the
last day of the basis period, capital allowances can be claimed in so far as the assets
will eventually be used in the trade or business.
iii) The grant is for a year of assessment and is usually against the profit of the basis
period for that year of assessment.
iv) The relief is granted as a deduction from assessable income in computing the
chargeable income of individuals, trade or business.
v) A claim must be made by the taxpayer before any capital allowance can be granted.
Though if no claim is made, the relevant tax authority might grant some allowance
where the authority is of the opinion that it would be reasonable and just so to do,
especially with BOJ assessment.
vi) With regard to Land and Buildings, no capital allowance is available on the cost of
Land. In tax computations therefore, the cost of land must be excluded from the
total cost of land and Buildings such that the capital allowance would be claimed
only on the cost of the buildings.

CONDITIONS FOR GRANTING CAPITAL ALLOWANCES

i) The assets on which allowances are being claimed must be used in producing the
income of the business, profession, trade, or vocation.
ii) The allowance shall be made only to the person on whom the burden of wear and
tear falls. When an asset is leased, the burden will fall on the lessor.
iii) The deductions to be made in computing the assessable profits of any periods of
income are the amounts of the wear and tear of the assets concerned during the
year of assessment.
iv) Where the asset is bought second-hand, the capital allowance should be given at
the approved rates by reference to the price paid by the new owner.
v) Where an additional asset is acquired during a period of income, a capital
allowance may be given as regards that part of the period during which the asset
was actually in use in the business.
vi) The general principle is that the allowance will normally be given to a trader in
respect of assets owned by him. However, if the asset is acquired under a lease, the
allowance will be granted if:
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 (a) The terms of the lease are established to the satisfaction of the Revenue;
(b) The lessor agrees in writing to forgo any claim to a capital allowance in respect
of the same asset.

BASIS PERIOD
The granting of capital allowances depends upon incurring of the capital expenditure for the
business. These allowances will be granted in the basis period; that is, the period of the
profits or loss on which the assessment for that year is computed. The deduction to be
allowed in respect of the wear and tear is the wear and tear of the assets during the year of
assessment, and where there is an overlap in two basis periods, the period common to the
two will be regarded as falling in the first basis period only.
The general principle is that in the case of employees, the basis period is the year of
assessment, and in the case of lessor of plant and machinery, where hiring is not their trade,
the assessment year is also the basis period.

Assessment Basis Period for Capital Allowances

YEAR ENDING BASIS PERIOD
31st Dec., 2012 1/1/2011 – 31/12/2011
31st Dec., 2011 1/1/2010 – 31/12/2010
31 Dec., 2010
st
1/1/2009 – 31/12/2009
Note that annual allowances are still claimable for every year of assessment irrespective of
when the asset was purchased during the year but the annual allowance depends on the
period of use and will be pro-rated accordingly.
CAPITAL ALLOWANCES RATES
The rates, as contained in Schedule 5 of the Personal Income Tax (amendment) Act 2011
are applicable to Companies Income Tax.
These are the rates of applicable capital allowances:
2011 to Date
Qualifying Expenditure Initial allowance Annual allowance
In respect of: (Straight line)
% %
Non industrial buildings 15 10
Industrial building 15 10
Mining 95 nil
Plant (excluding Furniture and Fittings) 50 25
Plant (Manufacturing, Construction) 50 25
Furniture and Fittings 25 20
Motor Vehicles 50 25
Motor Vehicles (Public transport – Min. of 3 Buses) 95 nil
Plantation equipment 50 25
Housing Estate 50 25
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Ranching and Plantation 30 25
Research and Development 50 25
Others 50 25

Annual allowance in respect of plant is 25%. This indicates that allowances for the cost of
an item of plant are to be claimed over four assessment years.

The following assets do not qualify for capital allowances:

 Stocks
 Shares
 Business Preliminary or pre-operation expenses
 Goodwill
 Patents and Copyrights.

ASSETS USED ONLY PARTIALLY FOR TRADE OR BUSINESS

Where assets are used partly for trade and partly for private purposes, the allowances and
charges are restricted to take account of the private use. The allowances and/or charges will
first be calculated as though the assets were fully used for the business. The proportion that
is considered to be just and reasonable by the Revenue as relating to business use shall be
allowed by the Revenue.
Usually this proportion is arrived at by negotiation between the taxpayer and the Revenue.

Certain expenses having the appearance of a capital expenditure are allowed as deductions
in computing income and, under the Fifth Schedule, are excluded from the scheme of capital
allowances. Such expenses are:
(a) sums expended on the renewal, repair or alternation of any implement, utensil, or
article employed in acquiring the income;
(b) sums expended on the replacement of parts of machines or repair of machines as
opposed to the cost of renewal of complete machines, which does qualify for capital
allowances;
(c) sums expended on collections of loose tools (e.g. hammers, spanners, jacks, jigs,
patterns, picks and shovels), which are usually valued in the same way as trading
stock, and if such valuation is reasonable, the cost of ‘consumption’ is allowed as a
deduction in computing income.

EXPENDITURE INCURRED PRIOR TO COMMENCEMENT

Where qualifying expenditure is incurred by an individual on an asset for the purposes of
trade or business which he is about to commence, the expenditure is regarded as incurred on
the day the trade or business commences, that is, in the first basis period.
The owner of an asset has to incur capital expenditure in order to qualify for capital
allowances. The general rule is that if expenditure of the types defined is incurred for the

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purposes of a trade or business in a basis period of that trade or business, then the
expenditure gives rise to the right of capital allowances in the assessment year.
Expenditure is incurred when the bill becomes payable – not when the asset is ordered, and
not when payment is made. Expenditure becomes payable on the date on which it becomes
due for payment, whether or not payment is actually made.

TYPES OF CAPITAL ALLOWANCES

Initial allowances.
Where in the basis period for a year of assessment, a trader incurs a qualifying
expenditure on an asset which is to be used wholly and exclusively for the purpose of
trade or business, an initial allowance will be granted to the taxpayer for the year of
assessment in his basis period in which the asset is first used.
Annual allowances
These are given to a taxpayer every year in respect of assets wholly and exclusively used
by him in his business. Annual allowance is claimable on straight line basis, taking into
consideration, the life span of the asset or the number of years the asset is going to be put
to use. These allowances are in addition to the initial allowance. In the first tax year of
the capital asset, Annual Allowance is usually calculated using either of the following two
formulae:
(i) Where the asset is used for the 12 calendar months in the business year
Annual Allowance (AA) = (Cost of Capital Asset – Initial Allowance)/AA Rate.
(ii) Where the asset is used for a period less than 12 calendar months,
AA = (Cost of Asset – I. A) x M/12 x 1/AA Rate.
Where M is the number of months the asset was put to use in the first year of
acquisition.
** The WDV of an asset used for less than 12 months in the first year of use will be divided
by the remaining useful life in the second year and the annual allowance will now be based
on straight line basis for the rest of the useful live of the asset.

The Act provides that an asset shall be ‘deemed to be in use during any period of temporary
disuse’.

At the end of the useful life of a qualified capital asset, a value of N10.00 must be retained
in the book of account as Scrap value or Tax Written Down value. This amount is provided
per asset.

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Example 1

Gilbert Plc purchased the following assets in 2012 for use in its business:

(i) Furniture on January 3rd, 2012 at a cost of N2,500,000

(ii) Machinery on July 1st, 2012 at a cost of N1,800,000

(iii) Industrial Building on October 2nd, 2012 at a cost of N6,000,000

If the company maintains a January to December accounting year, determine the Initial
and Annual Allowances clamable in the first and second years of acquisition.

Solution 1

Gilbert Plc
Determination of Initial and Annual Allowances for the Relevant Y.o.A
2013 YoA Initial Allowance:
Furniture N2,500,000 x 25% = N625,000
Machinery N1,800,000 x 50% = N900,000
Building N6,000,000 x 15% = N900,000
Total Initial Allowance for 2010 = N2,425,000
2013 Annual Allowance
Furniture (Cost – I.A)/1/r x M = (N2,500,000 – N625,000)/5 = N375,000
Machinery (Cost – I.A)/ 1/r x M = (N1,800,000 – N900,000)/4 x 6/12
= N112,500
Building (Cost – I.A)/ 1/r x M = (N6,000,000 – N900,000)/10 x 3/12
= N127,500
N615,000
Total Capital Allowance for 2013 = N2,425,000 + N615,000 = N3,040,000

2014 YoA Annual Allowance:

Furniture TWDV = [2,500,000 – (635,000 + 375,000)]/N-1
A.A = N1,500,000/(5-1) = N375,000
Note that this is the same as (2,500,000 – N625,000)/5 = N375,000 because the furniture
was put to use for the 12 calendar months.
Machinery TWDV = [1,800,000 – (900,000 + 112,500)]/N-1
A.A = 787,500/(4-1) = N262,500
Building TWDV = [6,000,000 – (900,000 +127,500)] /N-1
A.A = N4,972,500/(10-1) = 552,000 Total
Annual Allowance for 2014 = N1,193,000
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Where the number of months in the first year of usage is less than 12 , the calculation
of Annual Allowance for Year 2 and subsequent years is done as follows:
A.A for Year 2 and beyond = [Cost – Inintial Allowance - Year 1 Allowance)]/N-Y
Where N = Number of years the asset will be put to use (in line with applicable C.A. rate)
Y = The number. of years the asset has been previously used.

Balancing allowances/balancing charge

An asset which has been attracting capital allowances may be sold before the asset is fully
written off. The sale price may be less than the written-down value of the asset. The
difference will be given by way of a balancing allowance to reduce profit on which tax will
be calculated. Where an asset is demolished, the cost of demolition comes into computation
before arriving at the balancing allowance.

Balancing charge is the amount by which the total assessable income of an individual for a
year of assessment is increased by the amount of any difference between the residual value
of an asset at the time of its disposal and the value at which it is disposed of by the owner.
Balancing charge is not to be deducted from total allowances in arriving at net capital
allowances but it is to be added to the total assessable income in accordance with the
provisions of CITA. Balancing charge is not to exceed the aggregate capital allowances
already granted in respect of such an asset.
For the purpose of making balancing allowances or charge, the words ‘disposed of’ means:
(a) in relation to a building, structure or works of a permanent nature, that:
(i) the relevant interest is sold; ends or is destroyed
(ii) the building, structure or works of a permanent nature are demolished or
destroyed or without being demolished or destroyed, cease altogether to be
used for the purposes of a trade or business carried on by the owner thereof;
(b) in relation to plant, machinery or fixtures, that they are sold or discarded or cease
altogether to be used for the purposes of trade or business carried on by the owner
thereof;
(c) in relation to the assets in respect of which qualifying mining expenditure is incurred,
that they are sold or they cease to be used for the purposes of the trade or business. .

Residue of an asset at any date is the total qualifying expenditure incurred on or before that
date by the owner in respect of the asset, less the total of any initial or annual allowances
made to such owner in respect of the asset before that date. (Total Qualifying Exp. – Total
Allowances Received).

The value of an asset at the date of its disposal is either the proceeds of the sale of the asset
or, if it was disposed without being sold, the market value of the asset as may be determined
by the relevant tax authority.
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COMPUTATITON OF BALANCING ALLOWANCE
Example 2
Changeover Plc, a Real Estate company, built a house yielding some rental income on 2nd
July 2001 at a cost of N2,000,000.00. The house was sold to Democracy on 31st March,
2006 for N850,000.00. The company’s year end is 30th June. Compute the Balancing
Charge/Allowance.
Solution 2.
Changeover Plc.,
Computation of Balancing Charge/Allowance
N
Cost 2,000,000.00
Less Initial Allowance (15%) 300,000.00
1,700,000.00
Less 2002 capital allowance 10% x 1,700,000. 170,000.00
Written-down value or residue 1,530,000.00
2003 annual allowance 10% x 1,700,000. 170,000.00
Written-down value or residue 1,360,000.00
2004 annual allowance 10% x 1,700,000. 170,000.00
Written-down value or residue 1,190,000.00
2005 annual allowance 10% x 1,700,000. 85,000.00
Written-down value or residue 1,020,000.00
2006 annual allowance 10% x 1,700,000 x 3/4 127,500.00
Written-down value or residue 892,500.00
Sales price 850,000.00
Balancing allowance due to Changeover Plc 42,,500.00

Investment Allowance
In order to hasten the pace of development, some key sectors in the economy are granted Investment
Allowance. Investment Allowances have the following characteristics:
(a) They are usually granted once in the life time of an asset.
(b) If the company’s profit in the year the investment allowance is granted is not enough to
utilize the allowance, the Investment Allowance claim cannot be carried forward.
(c) Investment Allowance cannot be used when computing annual allowance, that is, the
Investment allowance is not deducted from the value of the asset in arriving at both Initial
and Annual Allowances.

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(d) Where an asset is granted Investment Allowance, the asset must be put to use for a minimum
of five years before it could be disposed of or transferred.

Rates of Investment Allowances:

1. Plant and Machineries of businesses in the Agric Sector 10%
2. Machineries used by Manufacturing businesses 10%
3. Plant and Machineries bought to replace obsolete ones 15%
4. Locally fabricated tools and machineries 15%
5. Companies engaged in the local fabrication of small tools 25%

Rural Investment Allowances

These are granted to businesses established in the rural areas that are at least 20 kilometers away
from where there are specific social amenities.
The amenities and rural investment allowance rates are as follows:
(a) Where there is no electricity, 50% of the value of the qualified capital assets incurred.
(b) Where there is no water supply, 30% of the value of the qualified capital assets incurred.
(c) Where there is no tarred road, 15% of the value of the qualified capital assets incurred.
(d) Where there is no telephone, 5% of the value of the qualified capital assets incurred.

Restriction on Capital Allowance.

Some business entities, especially those that are newly commencing operations and hence have
the need to acquire many qualifying capital assets may not have any profit left to be charged to
tax after taking care of the values of their capital allowances from their assessable profits. To
overcome this possibility, restriction has been placed on the ratio of the profit of a company or an
individual that can be applied to absorb capital allowances.
Effective 1995, all businesses except those in Agriculture and Manufacturing companies are
expected to pay tax on at least one-third of their assessable profits. Consequently, where the
amount of capital allowance claimable is greater than two-third of the assessable profit of an
individual or organisation, capital allowance would be restricted to at most, two-third of the
assessable profits generated by the entity while tax would be applied to the remaining one-third.
In such cases, the unclaimed capital allowance can be carried foward and be claimed in
subsequent years when the assessable profit of the individual/company could accommodate such
allowance without infringing on the two-third rule.
In essence, restriction will apply at the rate of 2/3 or 66.67% of the Assessable/Adjusted profit of
the taxpayer in the assessment year.

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Example 3.
Exam Success Ltd has been in business for many years. The company’s year end is 31st December
of each year. Proper books of accounts were kept and capital allowances have been agreed with the
relevant tax authority.
From the information provided below, compute the tax payable by Exam Sucess Ltd for 2011 to
2014 years of assessment.
Dec., 2010 Assessable Profit N600,000 Capital Allowance N667,355
Dec., 2011 Assessable Profit N960,000 Capital Allowance N537,203
Dec., 2012 Assessable Profit N900,000 Capital Allowance N308,370
Dec., 2013 Assessable Profit N1,200,000 Capital Allowance N340,150

Solution 3 EXAM SUCCESS LTD

COMPUTATION OF COMPANY INCOME TAX LIABILITY
=N= =N=
2011 Assessable Profit 600,000
Less Capital Allowance 667,355
Capital Allowance Relieved 2/3 of 600,000 (400.000) (400,000)
Capital Allowance c/f 267,355
Taxable Profit 200,000
Tax @ 30% 60,000
Education Tax (2% of Assessable Profit) 12,000
Total Tax Liability 63,000

2012 Assessable Profit 960,000

Less Capital Allowance b/f 267,355
Capital Allowance for the year 537,203 804,558
Capital Allowance Relieved 2/3 of N960,000 (640,000) (640.000)
Capital Alloance c/f 164,558
Taxable Profit 320,000
Tax @ 30% 96,000
Education Tax (2% of Assessable Profit) 19,200
Total Tax Liability 115,200

2013 Assessable Profit 900,000

Less Capital Allowance b/f 164,558
Capital Allowance for the year 308,370 472,928
Capital Allowance Relieved (472,928) (472,928)
Capital Allowance c/f Nil
Taxable Profit 427,072
Tax @ 30% 128,121.6
Education Tax (2% of Assessable Profit) 18,000.0
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 Total Tax Liability 146,121.6

2014 Assessable Profit 1,200,000

Less Capital Allowance b/f Nil
Capital Allowance for the year 340,150
Capital Allowance Relieved (340,150) (340,150)
Capital Allowance c/f Nil
Taxable Profit 859,850
Tax @ 30% 257,955.0
Education Tax (2% of Assessable Profit 24,000.0
Total Tax Liability 281,955.0

Terminal Capital Allowance

A Capital Allowance is said to be terminal where as a result of business cessation, the yet to be
absorbed capital allowance cannot be carried forward for relief again.
When this happens, the unrelieved Capital Allowance can be carried backward for absorption for a
period of five years. If after these five years, there are still some capital allowances to be relieved,
they become permanently lost.
The implication is that where taxes had been paid in these previous periods, the taxes paid must be
refunded to the company or individual, and where the taxes are not yet paid, they become
extinguished to the extent of the unrelieved capital allowance.

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