CAPITAL ALLOWANCE

This is the allowance that is granted to a business in any year of assessment (YOA), it incurs
qualifying capital expenditure (QCE). It replaces depreciation i.e. it is a standardized depreciation
because depreciation varies from business to business. Capital allowance is to be deducted from
assessable profit of a business before subjecting the balance to tax.

QUALIFYING CAPITAL EXPECDITURE

This is the expenditure that capital allowance is claimable upon by a business in any particular
year of assessment (YOA). They include the following:
1 PLANT & MACHINERY
2 BUILDING
(a) Non industrial building (b) Industrial building
INDUSTRIAL BUILDING: - These are structure use in connection with port, wharf, dock, jetty
or structure use for railway transportation
3 MINING: - There are structure in connection with quarry, mines, oil & gas well, or mineral
deposit of exhaustive nature
4 PLANTATION: - This is expenditure in connection with plantation i.e. initial clearing of plant,
seeding, planting & harvesting & for structure which will no more be put to use if the plantation
is on more worked
5 RESEACH & DEVELOPMENT: - There are expenditure in connection & expenditure which
does not bring into existence any asset
6 MOTOR VEHICLE [Those for Public Transportation]
7 PLANTATION EQUIPMENT
8 RANCHING / FARMING
9 EQUIPMENT

TYPES OF CAPITAL ALLOWANCE

(1) INITIAL ALLOWANCE: - This is also refers as first year allowance. It is the allowance that
is granted to a business for incurring qualifying capital expenditure (QCE) in deriving its
income in the first year the asset is put to use. It is once in the life of an asset. It is also granted
on second hand asset excluding second hand building. It is not prorated base on the number
of months in the basis period. However, it is prorated where there is element of private use.
Initial allowances is obtained by multiplying initial allowance rate by the cost of the asset (I.A
rate X cost of asset)

(2) ANNUAL ALLOWANCE: - This is the allowance that is granted to a business every year an
asset is put to use. It is prorated based on the number of month in the basis period. It is also prorated

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 1
 CAPITAL ALLOWANCE
where is element of private use. Annual Allowance is not prorated based on the date of purchase
of an asset or period of use. Annual Allowance is obtained as follows:

First year = Cost – I.A

N
First year proration = Cost – I.A × Y
N 12
Subsequent year = TWDV
UN

Final year = TWDV – N10X

1
Where:
Cost = Cost of asset
I. A = Initial allowance
X = Number of assets
N = Useful life of the asset which obtained by 100/AA
Y = number of months
TWDV = tax written down value
UN = unexpired useful life of the asset
10 = residual value of the asset
For exam purpose leave the N10 till the last year in the life of the asset. It represents the existence
of an asset for the purpose of disposal. Where AA is prorated in the 1st year AA for subsequence
year will be obtained by dividing the TWDV brought forward by the unexpired life
Where AA rate is altered or changed. AA for the year of change & subsequent years will be
obtained by dividing TWDV brought forward to the year of change by the new unexpired life.
(3) INVESTMENT ALLOWANCE: - This is the allowance on qualifying plant expenditure such
as plant & equipment, tools, equipment. It is granted once in the life of an asset and must be in the
first year the asset was first put to use for the purpose of the business. Effective from 1991 tax

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 2
 CAPITAL ALLOWANCE
year, investment allowance is available to all tax payers that acquire qualifying plant expenditure
at the rate of 10%. It is not taken into consideration in arriving that the TWDV of an asset. It is
granted provided that:
1. The asset must not be sold or transferred within 5 years of its acquisition
2. The asset is exclusively used for the purpose for which it was acquired
3. The asset was not acquired solely for the purpose of obtaining capital allowance but for the bona
fide business transaction of the company.
(4) RURAL INVETSMENT ALLOWANCE: - This is the allowance that is granted to a business
that is located at least 20kilometers from normal facilities provided by the government. If a
company incurs capital expenditure on electricity, water, tarred road, for the purpose of trade or
business. the allowance is granted at the following rate.
No facility at all – 100% in the 1st year only
No Electricity – 50% in the 1st year only
No Water - 30% in the 1st year only
No Tarred road – 15% in the 1st year only
Rural investment allowance cannot be enjoyed that together with investment allowance

CONDITION FOR GRANTING CAPITAL ALLOWANCE

(1) The ownership of the asset must not be in dispute i.e. asset must be owned by the biz claiming
capacity allowance
(2) The asset must be in “use” as at the end of the basis period (BP). It therefore means that any
asset disposed during the year will not be entitle to capital allowance, and is said to be in use even
during period of installation, strike or temporary use.
(3) The asset must be use for the purpose of the business. Where there is element of private use
capital allowance will be prorated accordingly.
(4) An application for claim for capital allowance must be made writing
(5) The tax authority will require certificate of acceptance for qualifying capital expenditure (QCE)
above # 500,000 this certificate is issued by inspectorate division of federal ministry of commerce
and industry.
DISPOSAL OF ASSET
There is a disposal of asset when a capital sum is received on sale of an asset. Disposal also include
the following
(1) When an asset is destroyed by fire or flood

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 3
 CAPITAL ALLOWANCE
(2) When an asset was supposed to be use for particular period & the period has expire
(3) When an asset become obsolete due to e.g. change in technology
(4) In the case of a building on lease hold has expire
(5) In the case of mineral deposit when the mineral is exhausted.
Whenever any of the above happens, it is necessary to determine Balancing Adjustment. This
could rather be Balancing Allowance or Balancing Charge and or Capital Gain.
BALANCING CHARGE: This arises where the sales period from the disposal of an asset is greater
than the TWDV. It is an income that is to be added back to assessable profit of the business. The
result is usually in negative.
BALANCE ALLOWANCE: This arises where the sales proceed from disposal of an asset is less
than the TWDV. It is an allowance and therefore deducted from the assessable profit of a business.
The result is usually in position.
CAPITAL GAIN: this is the excess of balancing charges over capital allowance claimed on the
asset disposed. It is liable to tax under capital gain tax act Cap C1 LFN 2004
BASIS PERIOD FOR CAPITAL ALLOWANCE
It necessary to determine the basis period for capital allowance in addition to basis period for
assessable profit, where capital allowance is involve. This is to enable us known when an asset
will be qualified for capital allowance. For an ongoing business the basis period for capital
allowance is the same as the basis period for assessable profit. However, in other situation basis
period for capital allowance will be determine as follows:
(1) OVERLAP: Where there is an overlap between two periods the period common to both is
deemed to belong earlier year of assessment (YOA). It is the period of overlap that belongs to the
latter year of assessment (YOA).
E.g. Shovel limited commence business on august 1, 2009 and makes up account to October 31
every year. What will the basis period for capital allowance for the first four year of assessment?
(2) COINCIDENCE: Where two periods coincident the period common both or common period
is deemed to belong to earlier year of assessment (YOA)
E.g. Jigger limited commences business on January 1, 2011 and makes up account to October 31
every year. Show the basis period for capital allowance for the first four years
(3) GAP: Where there is gap between two periods usually during cessation. The gap period is
deemed to belong to the later year of assessment (YOA), provided the later year is not the year of
cessation. Where the later year of assessment (YOA) is the year of cassation in that case it will be
deemed to belong to the earlier year of assessment (YOA).

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 4
 CAPITAL ALLOWANCE
Fork limited commenced business on August 1 2004 and makes up account to July 31 every year.
In 2007, the accounting year was changed to 30 November, and it was agreed with the tax authority
that assessment for the period affected by the change in date will be based on the new date. On
April 30 2011, the business ceased trading. Show the basis period for capital allowance for all
relevant years.

SECOND HAND BUILDING

Where a second building is acquired by a business, the business will not be entitled to claim initial
allowance on the building. For the purpose of claiming annual allowance on the second building,
the cost of the building shall be taken as the lower of original cost by the vendor and the purchase
price to the acquiring business.
Where the building has not been put to use by the vendor or capital allowance has not been claimed
on the building before, the business is entitled to both initial and annual allowance at the cost of
purchase price to the acquiring business.

EXPORT PROCESSING ZONE ALLOWANCE

A company which has incurred expenditure in its qualifying building and plant expenditure in an
approved manufacturing activity in an export processing zone shall be granted 100% capital
allowance in any year of assessment.

INVESTMENT TAX CREDIT

Where a company has incurred expenditure for the replacement of an obsolete plant and
machinery, the company shall be granted investment tax credit at the rate of 15%

RESTRICTION ON CAPITAL ALLOWANCE

Prior to 1985 capital allowance was only restricted to the amount available as assessable profit.
WEF 1985 the restriction was as follows
(1) Manufacturing business - 75%
(2) Agricultural business – No restriction
(3) Other business – 66 2/3 %
WEF 1990 restriction from manufacturing business was abolished; it therefore means that it is
only restriction for other business that is applicable. The restriction is applicable where capital
allowance is greater than assessable profit. It therefore means that, is the lower 662/3% or 2/3 of
assessable and actual capital allowance that be deducted from assessable profit
TERMINAL CAPITAL ALLOWANCE
Where a business has permanently ceased to trade and there is still some unutilized capital
allowance which can no longer be carried forward as a result of the cessation, such unutilized
capital allowance is referred to as terminal capital allowance.

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 5
 CAPITAL ALLOWANCE
Terminal capital allowance is available to be carry backward to be recouped or absorbed from
available profit up to 5 years of assessment preceding the year of cessation. Any amount not
recouped at the end of the fifth year is lost. The effect of the carry back allowance is a refund of
tax.
HIRE PURCHASE/ FINANCE LEASE TRANSACTON
The nature of hires purchase is such that the hirer of an asset makes a down payment called deposit
and the balance of the hirer purchase price is paid over installment. The hire purchase price usually
include interest which is revenue expenditure and is not allowance for tax purpose, it is therefore
to be deducted.
The following are peculiarity of hire purchase transaction
(1) Capital allowance is granted only on the deposit & capital portion of installment payment
(2) Because installment payment is involve, the expected life of an asset may be longer than the
useful life of the asset to solve this problem we reduce the expected life of the asset as we approach
the end of the life of the asset.
(3) Each installment & deposit is regarded as an asset & treated as such i.e. compute I.A, AA, &
INV.A [if any] on it.

STEP TO FOLLOW
(1) Determine the interest element i.e. HP price – cash price
(2) Determine the amount payment by installment i.e. HP price – deposit if any divide by number
of installment
(3) Determine the interest payable by installment i.e. total interest divided by number of
installment
(4) Determine the capital portion per installment i.e. No 2- No 3
(5) Prepare payment schedule showing the date installment were paid
(6) Determine basis period for capital allowance
(7) Compute capital allowance

Rates of Capital Allowance

INITIAL ALLOWANCE ANNUAL

ALLOWANCE
Qualifying capital expenditure in respect of: - % %

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 6
 CAPITAL ALLOWANCE
Building expenditure 15 10
Industrial building expenditure 15 10
Manufacturing industrial plant expenditure 50 25
Mining expenditure 95 NIL
Plant expenditure (excluding Fixture and Fitting) 50 25
Construction plant (excluding Fixture and Fitting) 50 25
Fixtures and fitting expenditure 25 20
Motor vehicle expenditure 50 25
Public transportation motor vehicle 95 NIL
Plantation equipment expenditure 95 NIL
Agricultural plant expenditure 95 NIL
Housing estate expenditure 50 25
Ranching and plantation expenditure 30 50
Research and development expenditure 95

QUESTION
1. Apex incorporated acquired the following assets during the year ended 30th June 2000
Extension to office building 2,500,000
Furniture and fitting (13) 2,175,000
Motor vehicle (2) 2,950,000
The tax written down value of the old assets of the company were as follows
ASSET DATE ACQUIRED COST TWDV
Building 12/09/1997 600,000 231,860
Motor Vehicle (3) 18/11/1998 1,350,000 647,600
Furniture and Fitting (25) 19/07/1998 340,000 138,560
Generator 29/04/1999 560,000 378,900

You are required to compute the taxable profit of the company given that the assessable
profit for the relevant tax year was 3,950,775

2.OJC Enterprises whose accounting year end on 31st December has the following assets
as 31st December 1999 at TWDV viz: -
No of years to end the useful life TWDV
Office furniture 2 240,000
Factory building 5 750,000
Motor vehicle 3 250,000
Additions during the accounting year ended 31/12/2000 were as follows: -
Office Furniture 2,230,000
Factory Building 4,240,000
Motor vehicle 2,380,000
Required: - Compute the capital allowance for the relevant year of assessment and the
TWDV carried forward (ATS MARCH 2001)

3.Consider the following information for Allied trader limited in respects of some asset
disposes.

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 7
 CAPITAL ALLOWANCE
a. land and building purchased for N750,000 in 1990 and disposed with a tax written
down value of N3,478,750 was disposed of for N1,250,000
b. Motor vehicle with a tax written down value of N259, 650 was disposed of for
N500,000. The original cost was N650,000.
c. A set of office furniture and equipment was sold for N150,000. it originally cost
the company N300,000 and the tax written down value at the time of disposal was
N179,500.
Compute the balancing charge/balancing allowance

4.Alhaja Sarah limited normally makes up it account to June 30 each year, acquired the
following assets
DATE ASSET PURCHASED COST (N)
31/12/2001 Building 5,000,000
15/5/2002 Jeep motor vehicle 3,000,000
30/7/2002 Machinery 2,000,000
13/3/2004 Furniture 1,500,000
Required: - Determine the basis period and compute the capital allowance for all the
relevant assessment years.

5.Pastor Kareem limited is a company engaged in the entertainment business. It

commenced business on 1/9/2001 and made up account as follows: -
9 month ended 30/6/2002
Year ended 30/6/2003
Required: - Determine the basis period for assessment of profit and capital allowance for
the first five years

6.Justin Case Nig limited commenced business as a textile manufacturing company on June
1st 2001 even though it was incorporated on March 15,2001. It accounts for the first few
years of its operation showed the following adjusted profits: -
10-month period ended 31/3/2002 7,500,000
Year ended March 31, 2003 12,000,000
Year ended March 31, 2004 18,000,000
The company incurred the following qualifying capital expenditure
March 25, 2001- Factory building 3,500,000
May 18, 2001- Machinery 2,800,000
October 15, 2001- Furniture 750,000
February 28, 2002- Delivery van 500,000
May 20, 2002- Motor car 1,200,000
January 21, 2003- office equipment 600,000
Required: -
a. Determine the basis period for assessment and for capital allowance for the first
five assessment years
b. Compute the capital allowance due for the first five years of assessment in respect
of the qualifying capital expenditure incurred by the company.
c. Compute company tax liability for the first five year of assessment.

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 8
 CAPITAL ALLOWANCE

7.SPAL Stock Nigeria limited is engaged in catering business. Its recent account showed
the following adjusted profits
Year ended 30/9/2001 280,000
Year ended 30/9/2002 360,000
15 months to 31/12/2003 525,000
Year ended 31/12/04 728,000
You are required to:
a. Compute the company assessable profit for relevant year of assessment
b. State the final basis of assessment and capital allowance after determining the final
assessable profits for 2002-2005 assessment years.

8.ABIPLAST Nigeria limited is the manufacturer of Iplast and other industrial products.
The company was incorporated on 5 March, 2002 but commenced business on 1
September, 2003. Prior to commencement the company acquired the following asset:
Factory Complex 68,500,000
Production Plant 26,520,000
Office Furniture 9,750,000
The company makes up account to 31 March every year and acquired the following
additional asset:

ASSET DATE COST PROCCED

Generating sets (3) April, 2004 4,600,000
Official Cars Sept, 2004 11,500,000
Generating set disposal (1) Feb, 2005 810,000 837,000
Office building May, 2005 25,400,000
Official Cars Oct, 2005 16,900,000
The company did not exercise its right of election; compute the capital allowances
claimable for all relevant tax years.

9.Kazeem Ltd commenced trading on April 2002 and prepared its first set of accounts for
the period to 31 January 2003.The following Capital expenditure was incurred in the first
trading period:

(i) 2 April 2002: New Plant costing N972,000, second hand plant costing
N1,003,260 second hand factory and land costingN15,000,000 (including land
N4,500,000) which had been purchase new by the original owner on July 5 1992 for
N3,000,000 (Including Land N750,000) and had always been used as a factory
(ii) 1 June 2002: New motor car costing N4,800,000, second hand motor car costing
N1,500,000
(iii) 31 October 2002: Extension to the factory building for N660,000
(iv) 30 January 2003: New plant cost N3,600,000
Required to calculate the maximum capital Allowance which can be claimed by Kazeem
Ltd

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 9
 CAPITAL ALLOWANCE
10.Eskay limited normally acquires its machinery on hire purchase. On 1 September, 1993
it entered into hire purchase agreement with Abuja limited. Ten of the machines are to be
acquired with 2,000,000 paid as initial deposit on that date. This is to be followed by 24
equal monthly installments of 200,000 commencing from 30th November, 1993.
It was reported that if cash were to be paid immediately, only 5,600,000 would have been
required. Eskay limited normally prepares it account to 30 June, every year and it is not
expected to have a change in date in the next 4 years. Compute capital allowance up to the
end of 1998 YOA.

11.(a) what are the conditions for granting of capital allowances when a building is
purchased by a company for the purpose of its business?
b) A company permanently ceased trading in 2002 year of assessment. In revising the
income tax and capital allowance computation for year of cessation, you found that the
company has unabsorbed capital allowance of N3,000,000 out of which N2,000,000 is
represented by unabsorbed balancing allowance
What option is available to enable your client to recoup the unabsorbed balancing
allowances of N2000,000

12.(a) What do you understand by the term capital allowance?

(b) List five categories of capital expenditure that qualify for grant of capital
allowances?
(c) List the various categories of fixed assets classified as Industrial Building or
Structure for capital Allowances purposes as contained in Companies Income Tax Act,
CAP C21 LFN 2004 (8marks)

13.Telecom Services Limited has been in business for year and make up its accounts to
30th June each year. The company normally acquires new assets new for use in its business
on hire purchase.
On 1st July, 2002, it acquired trailers on the following terms
Deposit on purchases N250,000 followed by three yearly payments of N270,000 each
payable on 30th September, of every year. The first installment was due on 30th September,
2003.
The cash price of the trailers when newly purchased was N945,000. The tax written down
value of the existing assets at end of 2002 tax year was N490, 000. The assets were acquired
on 17th of August, 2001.
You are required to compute capital allowances for 2002 to 2006 years’ assessment,
assuming that the installments were paid on their due and that the capital allowances were
claimable at 50% initial and 25% annual

14.Brand first commenced business on 1 august, 1993 making up account to 30th July each
year. In 1997 the accounting year end was change to 31 January and it was agreed with the
tax authority that assessment for the period affected by the change will be based on the new
date. The following assets were acquired by the business:
DATE OF ACQUISITION ASSET AMOUNT
1/7/93 Motor vehicle #200,000

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 10
 CAPITAL ALLOWANCE
1/12/93 Fixture & fitting #70,000
1/8/94 Plant #120,000
1/12/94 Fixture & fitting #40,000
1/2/98 Equipment #125,000
3/1/99 Building #700,000
Included in the Building is land costing 200,000.
You are required to compute capital allowance for all years up to year 2000
15. Ray-Mart Liberia Ltd commenced business on 1 June 2006 and make up it account
every 30 September each year. Ray – Mart Liberia Ltd incurred capital expenditures as
follows:
Computer 28/4/2006
Generator 15/9/2006
Tractor 9/5/2006
Building 30/10/2007
Plants 20/02/2007
Required Determine the year when initial allowance was claimed on each of the qualifying
capital expenditure.

16.Ballo Nigeria limited purchased a qualifying capital expenditure on hire purchase with
an initial deposit of 300,000 on 15 July 2004 and an annual installment payment of 120,000
payables every November, over 4 years. This amount includes annual interest of 20,000.
The first installment payable in the 2004.
Required to compute the capital allowance for assuming initial allowance of 15% and
annual allowance of 20%

FAZL-MUHIB-TEMILEKAN261@GMAIL.COM 11