BALANCING DEDUCTION OR BALANCING CHARGE

I had difficulties understanding the concept of BALANCING DEDUCTION and BALANCING CHARGE. These were my class notes below. I hope they will help in your case. The rates used refers to Kenya case only. In case of queries, you know how to get me.

This will happen where a person ceases to carry on the business for the purpose of which machinery was used or bought for and the machinery also ceases to be owned by him (Disposal of an asset). This deduction is to be adjusted from his taxable income from the business. However, two rules may be followed:

i)         In case no sale moneys are received by the person owning the machinery, or the written down value at the time of the cessation exceeds selling price, the balancing deduction shall be the written down value at the time of cessation, or the excess of written down value over selling price i.e. loss on sale of the machinery be reduced from taxable income

ii)       In case the sale moneys exceed the written down value the balancing charge shall be the amount of the excess or, where the written down value is nil, the selling price. i.e. profit on sale of machinery be added on taxable income

Examples

Arable Ltd commenced trading on 1^st April 2009 as a manufacturer of farm equipments. The following information was available for nine month period ended 31^st December 2009.

1.       The tax adjusted profit is Kshs. 20,889,000. This figure is before taking account of capital allowances and related expenses.

2.       Arable Ltd had a new factory constructed at a cost of Kshs. 4,000,000 that the company brought into use on 1^st May 2009. The cost was made up as follows:

Land	1,200,000
Site Preparation	140,000
Professional fees	60,000
Drawing office serving the factory	400,000
Showroom	740,000
Factory	1,460,000
	4,000,000

3.       Arable Ltd purchased the following assets in respect of the nine-month period ended 31^st December 2009

15th April 2009	Machinery	310,000
18th April 2009	Building alterations necessary for the installation  of machinery	37,000
20th April 2009	Lorry	220,000
12th June 2009	Used Saloon car	112,000
14th June 2009	Pick - up	200,000
17th June 2009	Office Furniture	130,000
29thOctober 2009	Computer	54,000

4.       On 1^st November 2009 Arable Ltd acquired a leasehold factory building that was built in 2005 and used for manufacturer of cosmetics by another firm for Kshs. 1,000,000 and Kshs. 750,000 for machinery in the building. Arable continued using this machinery and building immediately

5.       On 5^th December 2009 Arable Ltd sold the pick-up at Kshs. 250,000

Required

a)       Calculate the amount of capital allowance

b)      Calculate the amount of tax to be paid by Arable Ltd

Suggested solution

a)       Capital Allowance

COST OF INDUSTRIAL BULDING	Kshs.
Site Preparation	140,000
Profesional fees	60,000
Drawing Office	400,000
Factory	1,460,000
	2,060,000
COMPUTATION OF INVESTMENT ALLOWANCE
ASSET	Q.E	I.D 100%
Built Factory	2,060,000	2,060,000
Lease Hold Factory	0	0
Machinery in Leasehold	0	0
Machinery Bought	310,000	310,000
Building Alterations	37,000	37,000
TOTAL	2,407,000	2,407,000
COMPUTATION OF WEAR AND TEAR
WEAR AND TEAR ALLOWANCE	CLASS II	CLASS III	CLASS IV	TOTAL
	30%	25%	12.5%
Lorry		220,000		220,000
Saloon Car		112,000		112,000
Office Furniture			130,000	130,000
Computer	54,000			54,000
TOTAL WRITTEN DOWN VALUES	54,000	332,000	130,000	516,000
WRITTEN DOWN ALLOWANCE	16,200	83,000	16,250	115,450
BALANCING CHARGE	Kshs.
Disposal proceed of pick-up	250,000
Cost (WDA)	200,000
	50,000

b)      Tax Payable

ARABLE LTD
Computation of Income tax Payable for the 2009 year of income
			Kshs.
Tax adjusted profit			20,889,000
ADD: Balancing Charge			50,000
LESS: Capital allowances:-
Investment allowance			2,407,000
Wear and Tear			115,450
Taxable Income			18,416,550
Tax	30% of Kshs.18,416,550		5,524,965