Commentary: Tax relief on capital expenditure and the Riverton Dump
There is an active 'volcano' in Jamaica located on the southeastern coast in the capital city.
Its recent eruption saw smoke, smug and ash across the skies for days, crippling commerce, causing disruption of schools and creating medical problems.
We are at a loss as to how to tame this man-made natural disaster. One thing is for sure: Whatever the solution, an engineered, sanitary land-filled site to manage the waste that the city generates daily - whether through private enterprise or otherwise - will need substantial capital investments in not only building and structures but in plant, machinery, equipment and 'intellectual property' as well.
Under the Fiscal Incentive Act, there are now new rules and tax write-offs for plant and machinery.
Assets of a lasting nature are not immediately deductible as an expense when calculating taxable profits. The general scheme is that relief is granted in the form of an allowance called 'capital allowance'.
There is no difficulty with the term 'machinery' but significant problems have been encountered with the term 'plant', which has acquired a special meaning in taxation.
In essence, plant is 'any apparatus used to carry on the business'. While it can include brute beast, it does not include the human body. Therefore, in one court case, slaves were not qualified nor did expensive surgery done on a professional guitarist's thumb. In essence, while the proprietor and employees may be a business' greatest assets, no capital allowance can be granted on them.
As a rule, buildings are not plant but things such as indoor swimming pools can be plant. While doors and gates are buildings, motors, machinery and other mechanisms controlling or operating doors can qualify as plant, as would power circuits, wiring, control panels and other equipment specifically installed to supply machinery or plant. This includes any lighting specifically designed to encourage the sale of goods.
To qualify for relief, the asset must also be owned by the person who incurs the expenditure. This would bring the question of leasehold into the discussion.
Suffice only to say one must be very careful with partitions in offices, and so on. If they are walls, they are not plant, but if they are portioned walls that are movable and intended to be moved in the course of trade, this may be designated as plant.
Machinery is easier to identify than plant. Assets with moving parts are invariably seen to be machinery. Things such as guns, where used as a tool of the trade, are not items of 'foot ware' as described in a famous murder trial, but an item of machinery.
The fiscal incentive legislation while expanding the meaning of motor vehicle to include 'trade' also rectified the notoriously contentious issue of allowances on cars. Previously, no matter the cost of a car, only a miserly sum of $3,200 was allowed to be claimed over eight years. The amount now allowed is US$35,000 over the same period.
Manufacturing has been defined under the new regime, but addressing some issues has created others as well. Computers and assets used in manufacturing receive first year (initial) write-offs'; however all assets receive an annual write-off on a straight-line basis.
It is hard not to have noticed the ubiquitous mosquitoes at twilight - in a swarm - as they hold meetings planning the night's activities. If during their aerial dance one were to just find a way to enter their world, we could infiltrate these meetings and crack the code of their uncanny ability to organise - for example, the simultaneous infestation of the entire island with chikungunya - and put a patent on this secret, that would be worth a fortune.
This discovery would have a tax write-off as well since capital allowance is now available on a broader 'development of intellectual property rights'. This encompasses patent, scientific research, industrial design, copyright, trademarks and trade secret, know-how and brands.
Expenditure of up to US$10,000 will be claimable over five years, and greater amounts over 14 years.
One could conclude that the fiscal incentives legislation expands the reach of capital allowances, gives greater clarity and is more accommodating of capital reinvestment and the retooling of businesses. Readers are urged, however, to seek professional advice before making determinations on the matters discussed in this article.
Everald Dewar is Senior Taxation Manager at BDO Chartered Accountants in Kingston.