FINANCE LEASE ARRANGEMENT

• Finance lease arrangement is an arrangement where a lessor leases or transfers an asset to the lessee in return for a lease rental payment by the lessee. Risk and reward associated with the leased asset is transferred to the lessee. The lease term exceeds 75% of the useful life of the asset.
• Capital allowance is an incentive that is given to a person that acquires a depreciable asset and uses the depreciable asset in generating income for the business. The property under finance lease for accounting purposes is the property of the lessor but for the effect of substance over form, the asset belongs to the lessee for which depreciation is enjoyed and shown in the books of the lessee.
• For capital allowance purposes, the payment of the lease rental payment shall be apportioned between capital repayment and the interest component in accordance with section 31 of the Income Tax Act, 2015 (Act 896)and LI 2244 Regulation 17. The capital repayment shall be subject to capital allowance for the benefit of the lessee and the interest component shall be an allowable deduction for the lessee for tax purpose. In effect, the treatment of capital allowance and depreciation shall be the same except the amount that shall be different.            (Any 2 points for 4 marks)

In summary the following shall be the treatment:
Lessee shall be:
*Granted capital allowance on the principal repayment and the interest shall be allowable deduction.
*In the case of a vehicle which is not a commercial vehicle, the amount shall be restricted to an amount of GH¢75,000.
(1.5 marks)

Lessor:
*The lessor shall not be granted capital allowance but may be given granted capital amount to be determined in accordance with guidelines to be issued by the Commissioner-General.      (1.5 marks)

Sekyiwaa Annam Industries Ltd
Computation of Capital Allowance

Sekyiwaa Annan Industries Ltd
Computation of Chargeable Income for the Assessment year 2017

An improvement is any type of renovation that will extend the “useful life” of the property. The theory here is that it will add value to the property for years to come and not just in the current tax year. Improvements are generally considered adding something that was not previously there, upgrading something that was existing or adapting the asset to a new use. Improvements are usually more intensive than repairs and usually involve greater cost.
Examples of Improvements: adding an addition, adding central air conditioning, installing a security system, installing brand new carpet, replacing an entire roof etc.

A repair is maintenance that is necessary to keep the property in working condition. They are those that “do not add significant value to the property or extend its life.” They are reasonable in amount and are necessary to keep the property in habitable condition. Repairs are generally considered restoring an item to its previous good condition.
Examples of Repairs: refinishing a wood floor, repainting a room, repairing a roof, repairing existing plumbing, repairing existing appliances, replacing a doorknob, etc.                 (2 marks for Explanation)

Expenditure incurred whose benefits go beyond one accounting period qualifies to be capitalised and capital allowance granted provided it relates to depreciable assets in line with the third schedule under Act 896 Act 2015. The Act 896, however, provides a novel treatment of repairs and or improvement under section 12.

The provision of the requirement of section 12 of the Income Tax Act 896 is furnished as below.

• Repairs and improvement as expenditure in a tax provision of Act 2015 (Act 896) allows a person (Tax Payer) to deduct that expense relating to repairs and improvement of a depreciable asset of that person to the extent that it is wholly exclusively and necessarily incurred by the person in the production of the income for which deduction is required to be made against.
  The above means that it will be an allowable deduction for tax purposes irrespective of the fact that it may be of a capital expenditure.   (3 marks)
• The provision of the tax law allows for a deduction for a year of assessment with respect to a depreciable asset in a particular pool of a depreciable asset of a person. Such expenditures are, however, capitalized on some conditions.

Conditions on which repairs and or improvement is capitalised.
a) The expense does not exceed five percent (5%) of the written down value of the pool at the end of the year and
b) Is allowed in the order in which the expense was incurred
The excess of “a” above the 5% of the expenditure shall not be allowed to be deducted but added to the pool of that depreciable asset that relates to the repairs and improvement and granted capital allowance alongside any addition of that pool as a capital expenditure.                    (5 marks)

                                                                                                          (4 marks)

                                                                                                          (2 marks)

Conclusion:
Analysis:
The amount of GH¢167,500 constitutes income which should be added to business income and capital allowance of GH¢13,000.00 is claimable for 2015 year of assessment.   (1 mark)

Goodwill is an asset that qualifies as a capital expenditure for accounting purposes only. Capital allowance is not granted in respect of assets as such but on depreciable assets as defined by tax provisions. In accordance with section 133 of Act 896 Act 2015 on Interpretation, goodwill shall not be granted capital allowance.
Conclusion:
The expenditure of GH¢10,000 incurred by Sakote ltd cannot enjoy capital allowance as it is not depreciable assets.

i. Capital allowances are granted with respect to depreciable assets of a capital nature
ii. Capital allowances are only granted in respect of depreciable assets owned by the person making the claims
iii. The assets should be used in the generation or production of the income of the person
iv. The Commissioner General should be informed of the purchase and putting the asset into use within one month
v. It must be in the business in the last basis period of the business except in temporary disuse
vi. It must be acquired at a cost.                               (4 marks for any 4 points mentioned)