CHAPTER 4
CAPITAL ALLOWANCES
CAPITAL ALLOWANCE
The depreciation provided in accounts is always
disallowed for tax purposes. It is replaced by a
standard deduction available for most types of capital
expenditure.
The reason for this is that taxpayers can adopt a
range of different depreciation percentages and
accounting policies.
Cont..
Capital allowances are granted for most but not all types of
business capital expenditure. It must be emphasized here
that capital allowances are only given to the person who
has incurred the capital expenditure.
The main categories of qualifying expenditure are listed
below.
1. Plant and machinery
2. Industrial buildings
3. Commercial buildings
Capital allowances
Initial allowance – claimable on the construction of a new
industrial building and on additions and alterations to the
buildings.
Also claimable on new industrial buildings purchased by
the taxpayer.
Only new and unused buildings qualify
Annual allowance – claimable on all qualifying assets at the
prescribed rates as shown in the next slide
Based on the cost of the assets i.e. on a straight line basis.
Claimed every year until the asset is written off or disposed
of.
Capital allowances
Claimed in full in the year of purchase or construction.
Not claimable in the year of sale.
Capital allowances
Capital allowances The annual allowance on plant and machinery is
between 10% and 25% of the cost incurred.
The following are the rates fixed by the Commissioner General of
Taxes as fair and reasonable having regard to the expected lives of
the assets listed.
Capital allowances
Furniture and fittings 10%
Office equipment and machinery 15%
Plant and machinery including farming 15%
Motor vehicles, boats and aircraft 25%
Heavy plant and machinery 25%
Computer hardware 25%
Capital allowances
Industrial and commercial buildings
Industrial building – initial allowance 25%
Industrial building – annual allowance 2·5%
Commercial building – annual allowance 2·5%
Plant and Machinery
“Plant includes whatever apparatus is used by a
businessman for carrying on his business, not his
stock in trade which he buys or makes for sale; but all
goods and chattels, fixed or moveable, live or dead,
which he keeps for permanent employment in his
business”
Industrial Buildings
An industrial building is defined as any building which:
Contains and is used solely or mainly for the purposes
of operating machinery
Cont..
In the Commissioner General’s opinion, it suffers
depreciation through the use of chemicals, corrosive
substances, furnaces or the use of any substance or
thing in the business of which the building forms an
essential and integral part
Is erected for industrial and scientific research into
new or improved methods of manufacture.
The CG is satisfied, by reason of the nature of the
business, that it is used for industrial purposes;
Cont..
Is erected and used as a hotel and includes
permanent structures attached to the hotel.
An “Approved Industrial Building” is defined as:
A hotel business
Any business, the main activity of which is a process
of manufacture; or
The letting of any industrial building or plant or
machinery for use by the lessee in any business
Initial allowance for Industrial
Building
When a new industrial building is brought into use for the
first time, an initial allowance of 25% of the cost may be
deducted from a person’s business assessable income. This
allowance is only given once. An expenditure qualifies for
the initial allowance for:
The construction or purchase of any new industrial
building, or
Any improvements, other than repairs, to any industrial
building, if the building was used solely for business
purposes in an approved industrial business
Cont..
The I.A is deductible in the tax year in which:
a. The building was first used or
b. When the improvements were completed
Separate computations must be made in respect of
(a) and each set of (b) above that are completed.
NB: in addition to the once-off 25% initial allowance,
an industrial building also attracts a 2½% annual
allowance for each year the building is in use but not
in the year of sale.
Basic computation rules
All allowances are computed as a percentage of the
original cost of the asset
The sum of allowances given in respect of an asset
should not exceed the original cost of the asset
Give full allowance during the year of purchase and
no allowance during the year of sale.
Cont..
Where an asset is used for both private and business
use, only the proportion of the allowance which
relates to business use is deducted from the
taxpayer’s profits.
Where a sole trader has transferred his personal
assets to his business as a way of raising capital, the
cost of the assets for capital allowance purposes is
deemed market price on the date of transfer.
Commercial buildings
These are all the other buildings that do not fall within
the definition of industrial building and residential
buildings.
These will include buildings that are used by
wholesale and retail businesses.
Commercial buildings do not claim Initial Allowance
They are given an annual allowance of 2.5%
Example
Onneetse owns two buildings in Gaborone which are
rented out to Tsoonana Superstores (pty). Relevant
extracts of his fixed asset register are as follows:
Cont..
Date of Description Cost
acquisition
August 2010 Grocery shop-Game 500 000
City
December 2010 Warehouse G-west 735 000
industrial
Cont..
The warehouse is used by Tsoonana Superstores as a
manufacturing depot for the furniture they sell in
their stores.
Required:
Compute capital allowances for the 2010/2011 tax
year, assuming that all the buildings were acquired
new in that tax year.
Residential Building
These are buildings that are used as dwelling houses, whether
on a lease basis or not. They do not claim capital allowances
Exception
The only time that residential property claims allowances is
when an employer has erected the house for residential
accommodation of his employees.
He is given a one-off allowance of up to P25 000 per house
provided it is used for the same purpose for at least 10 years,
otherwise 1/10th of the P25 000 is added back to gross income
during each year if it is used for other purposes
Example
Oteng runs a successful farming project in the
outskirts of Gaborone. He built four staff houses for
P19 000 each during the 2007 tax year.
Required
Compute the capital allowances for the tax year.
Example
Moabelo started trading as an approved
manufacturer of watches in April 2008. The following
are the facts for his accounting year ending 31st March
2009.
Land and buildings built P2 180 000 of which P180 000
is cost of the land
Heavy plant and machinery (industrial)
P1 500 00
Cont..
Computers P40 700
Furniture P10 000
Required:
Calculate the tax allowance for 2019 tax year.
Motor cars and station wagons
The word ‘motor car’ in taxation can be defined to
include all passenger vehicles that have nine seats or
fewer. A twin cab is a commercial vehicle for tax
purposes.
These vehicles are not always used as commercial
vehicles. They are business assets but given to
members of staff to use for other purposes other
than as commercial vehicles.
Cont..
Commercial vehicles in the motor car category will be
those that are used to generate income for the
business such as cabs or cars for taxi rental.
These cars claim the annual allowance of 25% on the
whole cost.
The other cars can only claim annual allowances on a
cost restricted to P175 000
Disposal of buildings (&other assets)
When a building that were granted capital allowances
are disposed of, the taxpayer has to compute
balancing charge or balancing allowances and
account for them in the computation of his
chargeable income.
Cont..
Formula
Disposal proceeds xxx
Less WDV (xx)
Balancing charge/ allowance xxx
Cont..
Balancing charge (BC) arises when proceeds exceed
written down value (WDV)
Balancing charge is income and should be added to
assessable income
Balancing allowance arises when proceeds are lower
than the written down value
It is a loss, and such given as a deduction.
Example
Abia carries on business as a building contractor in
Gaborone. During the 2015 tax year, he sold the
following assets.
Date of Description Cost Proceeds
acquisition
August 2010 Industrial building 187 000 243 750
December Commercial building 135 000 450 000
2008
December Residential building 95 000 155 000
Cont..
Required
Compute BC/BA on disposal where necessary. Assume
that all these buildings were acquired new, and the
residential building was rented out.
Example
Botsile is a successful meat distributor in Gaborone.
During the 2019 tax year, he sold the following
business assets:
Date of Description Cost Proceeds
acquisition
August 2015 Honda Ballade 87 000 43 750
December Office equipment 11 000 3 000
2014
Cont..
Required:
Compute BC/BA on disposal
