Our previous article discussed the theory of capital allowance in Nigeria. Now, we shall consider four (4) examples on how to calculate capital allowance in Nigeria.
Question 1:
In January 2022, Company Bee bought plant and machinery for NGN 5,000,000. The financial year of Company Bee ends on 31 December. Calculate the capital allowance.
Solution 1:
The capital allowance rate for plant and machinery is;
10% – investment allowance
50% – initial allowance
25% – annual allowance
Please note that the initial allowance will be deducted from the cost of the asset before calculating the annual allowance. Investment allowance does not affect the amount used in computing the annual allowance. The calculation below gives more explanation.
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 to calculate the annual allowance while initial allowance reduces the cost of an asset.
Question 2:
In January 2024, Cool International Limited bought plant and machinery for NGN 20,000,000. The financial year of Cool International Limited ends on 31 December. What is the capital allowance?
Solution 2:
The capital allowance rate for plant and machinery is;
50% – initial allowance
25% – annual allowance
Please note that the provisions for investment allowance was deleted in the Finance Act 2023. Companies filing tax returns for accounting periods ending on or after September 1, 2023 can no longer claim investment allowance.
Initial allowance (IA) is the Cost of asset * IA rate
Annual allowance (AA) is the (Cost of an asset minus initial allowance) * AA rate
Initial allowance = NGN 20,000,000 * 50% = NGN 10,000,000
Annual allowance = NGN (20,000,000 – 10,000,000) * 25% = NGN 2,500,000
Total capital allowance = NGN (10,000,000 + 2,500,000) = NGN 12,500,000
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 3:
In April 2021, Company Bee bought furniture and fittings for NGN 1,000,000. The accounting year-end of the business is 31st December. Calculate the capital allowance.
Solution 2:
The capital allowance rate for furniture and fitting is
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 2021 is nine (9) months
Question 4:
Company ABC is a construction company with assessable profit of NGN 4,800,000 and capital allowance of NGN 5,600,000 in 2023 tax year. How much relief can Company ABC claim?
Solution 4:
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.