Capital allowances under the icome tax act : an accounting perspective

Abstract

Purpose: This study highlights the differences between capital allowances and depreciation. Consequently it examines the feasibility of introducing depreciation as a deduction by abolishing capital allowances rules. This study also examines the adequacy of the Deduction for Wear and Tear of Plant and Machinery Rules in Malta as well as any possible amendments to improve such rules. Design: The objectives of this study were obtained through a comparative study between Malta's capital allowances rules and five other tax jurisdictions namely, Australia, Cyprus, Ireland, United Kingdom and Singapore's. Interviews with local tax practitioners were also conducted to help the researcher achieve the objectives of the study. Findings: From the study it emerged that the 2001 amendments improved the effectiveness of the system although some inefficiencies still exist. The major issues highlighted were the list of asset categories which is not exhaustive enough and the useful life of certain assets which does not reflect reality. After comparing Malta's capital allowances rules with regulations of other tax jurisdictions, it was concluded that it is healthier to change the system drastically rather than amending fundamentals of the system. Conclusion: Conformity between capital allowances and the accounting policy of property, plant and equipment, is not easy but should still be studies since it is considered as the way forward for improving our current system. Malta's capital allowances rules have remained unchanged since 2001. Innovating capital allowances rules to align with current trends is necessary. In depth studies should also be carried out on an ongoing basis in order to bridge the gap between book and tax depreciation. Implications: This study recommends that the analysis of the possible expansion of capital allowances rules to cater for other aspects including intangible assets, the possible modification of useful lives of certain assets including computer hardware and software and the setting up of a technical committee to explore developments in rules of foreign tax jurisdictions.