As many nations in sub-Saharan Africa rely largely on tax revenues to fund spending, governments have been known to be displeased with businesses that delay recouping investments and consequently graduate into the income taxpayers’ group. However, imposing income tax on businesses yet to recoup their initial investment would deter investors. The Income Tax Act, 2004 allows businesses to recoup investments through systematic periodical amortisation of their investments, before they are eligible to pay income taxes.
Businesses can claim capital allowances when they buy plants, machinery and equipment that they keep to use in their businesses through the deduction of some or all of the value of these from its profits before they become eligible to pay income tax. This applies to expenditure of capital incurred in prospecting, exploration and the development of mining, oil and gas operations, agricultural development and other businesses. The Income Tax Act, 2004 describes the nature of qualifying classes 1-8 of capital expenditure and/or assets for allowance rates.
Class 1 of capital expenditure and/or assets has a capital allowance rate of 37.5%. It includes computers, other ICT and related equipment; motor vehicles and minibuses with seating capacity under 30 passengers; trucks, pick-ups, vans with under 7 tonnes of load capacity; and construction equipment.
Class 2 has a capital allowance rate of 25%. It includes buses carrying 30 or more passengers, heavy-duty general-purpose or specialised trucks, trailers and trailer-mounted containers; railroad carriages, locomotives and equipment; vessels, barges, tugs and similar water transportation equipment; aircraft; plant and machinery, including windmills, electric generators and distribution equipment used in manufacturing or mining; specialised public utility equipment; and machinery or other irrigation installations and equipment.
Class 3 has a capital allowance rate of 12.5%. It includes office furniture, fixture and fittings; and any other asset/equipment not included in other classes. Capital expenditures and/or assets in classes 1-3 should take note that depreciation on plant and machinery is generally written off on a reducing-balance basis at rates for each category of the asset.
Class 4 has a capital allowance rate of 20%. It includes exploration of natural resources, rights and assets derived from natural resources prospecting, and expenditure incurred on exploration and development.
Class 5 has a capital allowance rate of 20%. It includes construction structures, buildings, water reservoirs and dams, fences, and similar works of a permanent nature used in agriculture, livestock, fishing, forestry or other farming-related activities.
Class 6 has a capital allowance rate of 5%. It includes construction structures, buildings and similar works of permanent nature other than those mentioned in Class 5. For capital expenditures and/or assets in classes 5-6 the cost of buildings is normally isolated from total capital expenditure and qualifies for a depreciation allowance of 5% per year on a straight-line basis.
Class 7 capital allowance is spread over the asset’s useful life, and includes intangible assets not in Class 4.
Class 8 has a capital allowance rate of 100%. It includes plant, equipment and machinery, including windmills, electric generators and distribution equipment used in agriculture operations; electronic field devices purchased by a non-VAT registered trader; equipment for prospecting and exploration for minerals, gas and petroleum. There is an immediate 100% write-off on these expenditures. In addition, there is an immediate write-off of agricultural improvement expenditures. Buildings, structures, dams, water reservoirs, fences and similar works of a permanent nature used in agriculture, livestock or fish farming are written off on a straight-line basis over five years.