You have recently been employed to join Kwame Adom Consult as a tax professional. Your partner has tasked you to present a paper on the circumstances under which “Repairs and Improvement” under Act 896 (Act 2015) are capitalised and capital allowance granted.
Required:
Submit a seasoned paper on the tax provision on “Repairs and Improvement” and the conditions under which capital allowance may be granted. (10 marks)
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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)