In our previous article, we discussed the theory of capital allowance in Nigeria. Now, we shall consider three (3) examples on how to calculate capital allowance in Nigeria.
Question 1:
In January 2018, Company Bee bought plant and machinery for NGN 5,000,000. Accounting year ends on 31 December. Calculate the capital allowance.
Solution 1:
The capital allowance rates for addition to plant and machinery are
10% – investment allowance
50% – initial allowance
25% – annual allowance
Please note the following;
Initial allowance (IA) is the Cost of asset * IA rate
Annual allowance (AA) is the Cost of an asset minus initial allowance * AA rate
Investment allowance is the Cost of asset * Investment allowance rate
Investment allowance = NGN 5,000,000 * 10% = NGN 500,000
Initial allowance = NGN 5,000,000 * 50% = NGN 2,500,000
Annual allowance = NGN (5,000,000 – 2,500,000) * 25% = NGN 625,000
Total capital allowance = NGN (500,000 + 2,500,000 + 625,000) = NGN 3,625,000
Comments:
A taxpayer can claim initial allowance and investment allowance only once throughout the useful life of a plant and machinery. However, investment allowance does not reduce the cost of an asset in order to calculate the annual allowance while initial allowance reduces the cost of an asset.
Question 2:
In April 2018, Company Bee bought furniture and fittings for NGN 1,000,000. Accounting year ends on 31 December. Calculate the capital allowance.
Solution 2:
The capital allowance rates for addition to furniture and fittings are
25% – initial allowance
20% – annual allowance
Therefore
Initial allowance (IA) = NGN 1,000,000 * 25% = NGN 250,000
Annual allowance (AA) = NGN (1,000,000 – 250,000) * (9 / 12) * 20% = NGN 112,500
Total capital allowance = NGN (250,000 + 112,500) = NGN 362,500
Comments:
The capital allowance rate of plant and machinery differs from furniture and fittings.
The annual allowance will be prorated for the year. From April to December 2018 is nine (9) months.
Question 3:
Company ABC is a construction company with assessable profit of NGN 4,800,000 and capital allowance of NGN 5,600,000 in 2019 tax year. How much relief can Company ABC claim?
Solution 3:
When the amount of capital allowance calculated in any year of assessment is greater than or equal to the assessable profits, then the maximum amount that can be claimed is restricted to two-thirds (66 2/3%) of assessable profit. Therefore, Company ABC can claim capital allowance of NGN 3, 200,000 based on the restriction to two-third (2/3) of assessable profit (NGN 4,800,000). The balance of NGN 2,400,000 (5,600,000 – 3,200,000) will be carried forward to the next tax year. However, a company in the agro‐allied industry or a manufacturing company can claim the entire capital allowance.
A copy of the relevant provision is in the Second schedule of CITA.