Question

Capital Allowance

1. Section 13 of the Income Tax Act in Jamaica layout 2 main criteria used to determine is an expense is allowable for tax purposes. Identify and explain these criteria.          

1. Distinguish between Depreciation and Capital Allowance and state the reason(s) which one is allowable or not. (1 mark)   
2. A business bought new equipment for $1,250,000 in year one and over three years capital allowances of $750,000 had been allowed. In year four (4) the equipment was sold for $375,000.

Calculate the balancing allowance or balancing charge of the business.           

Answer 1

As per Section 13 of the Income Tax Act in Jamaica, below the the details of two scenerio A & B:-

A. While preparring the Final and annual Income tax return capital allownces are used to contrast the tax liability of company, Capital allowances are the expenses done by company in tangable assets and and using to redue the tax liablity, while depreciation are the expenses for a company, becuase the every assets have their in life in future and will bacome nil in coming year. But deprecitaion is not allowed to reduce the tax liability and must be added back to net profit for tax purposes.

To get the benefit of capital allowances in tax liability, it is necessary that capital expenture must qualify as per rules to get the relief on tax.

B. Business bought new equipment for $ 12,50,0000 and used capital allowances for $ 7,50,000 in three year. Following are the working for situation mentioned in B Scenerio:-

Value of Equipment	A	$1,250,000
Total Capital Allowance in Three years	B	$750,000
Balance value of Equipent on 4th year	(A-B)	$500,000
Sale Value of Equipment in 4th Year	C	$375,000
Loss on Sale of Equipment	(A-B-C)	-$125,000

As the equipment was sold in 4the year and there is a capital loss on sale of equipment. But this loss is allowed as deduction, because it is a capital loss. However the capital allowance of 4th year can be use to redue the tax liability till the date of sold.