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1st October 1971, Page 50
1st October 1971
Page 50
Page 50, 1st October 1971 — it pays to understand
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Which of the following most accurately describes the problem?

yourtax by R. H. Grimsley BCom, FIAC

8. Allowances on plant and machinery

THE capital allowances on machinery are different from those on industrial buildings and being of wider application will be discussed first. There are two entirely separate scales of these allowances: 1 For assets bought before October 27 1970.

2 For assets bought since that date.

The pre-October 1970 scale is to continue in force indefinitely and is being extended to include items bought before November 1962 which until 1970 had been treated differently. Its main parts are: (a) In the year of purchase an initial allowance of 30 per cent plus a writing-down allowance of 15 or 20 or 25 per cent depending on the nature of the machine. Both these allowances were calculated on the cost price. There was no initial allowance on private cars nor on assets which had qualified for investment grants. Investment grants were deducted from the gross cost to find the starting figure for the calculation for the allowances.

(b) In the subsequent years a writing-down allowance based on the written-down value brought forward from the previous year. (e) In the year of sale no writing-down allowance but a balancing adjustment which could be either a charge or a further allowance to bring the total of all the allowances equal to the difference between the purchase price (net of investment grant) and the resale or scrap price.

Better equipment

The value in discussing the system from management's point of view lies in the balancing adjustments on disposal of the assets. If a vehicle or other machine has become obsolete, perhaps no longer fulfilling the purpose for which it had been bought, or a much better version has been designed, then the management may be faced with a choice between selling it at a poor price and replacing it with a new model, or continuing to use it and so finding their business not competitive with firms equipped with the more up to date versions.

These circumstances are not uncommon in specialist sections of road transport for which improved handling and vehicle facilities are constantly being devised and as a general (not invariable) rule, the right course is to face up to the sacrifice of the obsolete machine and make an early purchase of the new one.

The point being stressed is that taxation is no hindrance to this early replacement policy. It does not push the firm into pointless extravagance in the way of buying new assets but nor on the other hand does it in any way hold them back. If sound commercial policy prompts the early replacement, the balancing adjustments of capital allowances will support the management's decision.

Revised system The revised system for assets bought since October 1970 will be seen to be somewhat less helpful in this respect and the difference will be discussed in a later instalment. Meanwhile it is useful to examine the whole of the new system in some detail because it does offer some encouragement to the purchase and early renewal of vehicles and of plant generally. Its main components are: 1 A first year allowance in the year in which the asset is purchased. The chief exceptions to this are private motor cars and assets which have qualified for investment grant.

2 At the start of each year the written-down values of all the machines (cost price minus first-year allowance) brought forward from the previous year are combined together into a single total. From this total is deducted

proceeds of sale or scrap from disposa of any assets during the year. A writing down allowance is then calculated as 2: per cent of the remaining total. All asset! take this same percentage instead of havini different scales for those with longer averagi working lives.

Private motor cars have their own separatt system not being combined with the othe assets and will be discussed later.

Provisional claims

Commercial vehicles never did quaff) for investment grants but there must be 2 number of fleet managers in charge of own account fleets who were responsible foi various other kinds of assets which dic qualify for those allowances, such as works trucks and mechanical handling plant There will have been some instances in vvhicl new assets of this nature were ordered whet the grants were still in force but not dellverec until after October 27 1970. In these circum stances the assets would still be able to talo the grants which by this time should hav4 been claimed, or at least provisional claim lodged with the department.

The point here is that no first-year allow ance is available if there has been a gran but the grant is the more valuable option It would be wrong to neglect making a clain for the grant if it should be available merell because of missing the first-year allowance

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