UNDERSTANDING CAPITAL ALLOWANCES

What are Plant and Machinery?

In Singapore, plant and machinery are fixed assets that meet these criteria:

They’re not inventory (i.e. not meant for resale).
They’re tools or equipment used in your business activities.
They’re not part of your building or premises.

Common examples include office furniture, manufacturing equipment, electronic devices, and commercial vehicles like trucks or vans.

Since plant and machinery are considered capital expenditures, they don’t qualify for direct tax deductions or accounting depreciation. However, you can still claim tax deductions in the form of capital allowances for the wear and tear of these assets.

What are Capital Allowances?

Capital allowances are tax deductions for the wear and tear of your fixed assets used in business. Instead of deducting accounting depreciation, you calculate capital allowances based on rates specified in the Income Tax Act.

Capital Allowances vs. Accounting Depreciation

Income taxes are levied on the income of individuals and corporations. They are typically progressive, meaning that the tax rate increases as the taxable amount increases. Key components of income taxes include:

• Useful life:Accounting depreciation is based on estimates, which vary by business. Capital allowances use standard rates set in the Income Tax Act.
• Consistency: The tax rules are standardized so businesses can claim capital allowances without needing specialized knowledge for every asset type.
• Encouragement: Capital allowances incentivize businesses to invest in certain types of assets.

How to Qualify for Capital Allowances

To claim capital allowances, you must meet these conditions:

• Be running a trade, business, or profession.
• Have incurred the capital expenditure for business purposes.
• Have incurred the expenditure during the relevant financial year.

The eligible costs include:

• The purchase cost of the asset (e.g., Certificate of Entitlement for vehicles).
• Delivery and installation fees.
• Any modifications to house the asset (e.g., building alterations).

Types of Capital Allowances

There are two main methods to claim capital allowances:

1. Normal Claims (S.19)
   Initial Allowance (IA): A one-time deduction of 20% of the asset’s cost. Annual Allowance (AA): Spread out over the asset’s useful life, calculated on a straight-line basis.
2. Accelerated Claims (S.19A)
   This option lets you write off the asset cost faster:
   3-year write-off: Equal deductions over three years.
   2-year write-off (for YAs 2021, 2022 and 2024.): 75% in the first year, 25% in the second year.
   1-year 100% write off: For Computers and Prescribed Automation Equipment
   1-year write-off for small assets: For assets costing $5,000 or less, capped at $30,000 per year.

Choosing Between S.19 and S.19A

You can claim either normal (S.19) or accelerated (S.19A) allowances for a specific asset but not switch between them later.

Pro Tip:

For small, low-value items under $5,000, the 1-year write-off under S.19A is a quick and simple way to claim your deductions.

Why Capital Allowances Matter

Capital allowances aren’t just a tax technicality—they’re a smart way to manage your tax bill while reinvesting in your business. By understanding the rules, you can maximize your claims and keep your business growing.