Depreciation allowance - plant and machinery - pooling system
Under this system, the
reducing value after initial allowance of all assets with the same rate of
annual allowance are put into the same pool. Then, from the reducing
value of this pool,
disposal proceeds of any asset belonging to that pool are deducted. Then, annual allowance at the proscribed
rate on the reducing value of the pool is deducted.
Initial allowance is 60%
on capital expenditure incurred --- capital expenditure means the purchase price plus
delivery and set-up cost. Then, the reducing value (that is the cost less
the initial allowance) is transferred to the pool for annual allowance.
of annual allowance is proscribed in
Inland Revenue Rule No. 2. Applying
this rate on the reducing balance gives the annual allowance which is to
be deducted from the reducing value of the pool. Annual allowance
will be granted if the asset has been used for the trade during the basis
period --- unlike the old system, the asset must be used at the end of
the basis period.
Clearly, this system dispenses with keeping record
for each asset and the frequent computing of balancing adjustments on
disposal of assets. If the business is going on, there will be no
balancing allowance. And balancing charge will only arise when the sales
proceeds exceeds the reducing balance of the pool --- this is obviously
very rare in practice.
On cessation of business, if the assets are
sold, there will be balancing adjustments --- that is to adjust the total
allowances to the total net cost of the assets (the total costs less
total sale proceeds). If the sale proceeds exceeds the reducing
balance, the difference being the adjustment will be a balancing charge --- a taxable receipt.
If the sale proceeds is less than the reducing
balance, the difference being the adjustment will be a balance allowance --- a further
When an asset bought for private use is
used for the trade, the notional reducing value of such asset will be
added to the pool for annual allowance. The notional reducing value is
computed by deducting from the cost of the asset by a notional allowance at the proscribed
rate of annual allowance for each complete year of not used for the
trade. No initial allowance will be granted for such asset.
If an asset of a pool ceases to be used for the trade, then the reducing
value (as determined by the Revenue) will be deducted like disposal
proceeds from the reducing value of the pool.
Press here for an illustration showing
how the pooling system works