Depreciation allowance QUESTION & SOLUTION -TAXATION

Question.              

The Union Bearing manufacturing company Ltd. (UBMC) is a firm manufacturing UNIMOG trucks, bases and spare parts.  It has been in Tanzania as a branch of the Scania Ltd. of Kenya, for the past 20 years.  UBMC has the following classes of depreciable assets pools with their respective tax written down values as at 1^st January 2005:

Class I   :   2,550,000      Class II   :   6,000,000      Class III   :   2,583,700/=

In July 2004, the company had attended the International trade fair organized by the BET, which was held at Kurasini, Dar es Salaam.  UBMC won the 2^nd prize – a valmet tractor, worth by then 3,600,000/=. This tractor was ordered by the government from the Valmet plant in DSM.  However, the delivery of the tractor was delayed, pending a price review. 

Prices were reviewed to 10 mill/= per tractor during August 2005.  The UBMC received the tractor on 16/8/2005 and used it from the same date.  Part of the plant and machinery was sold for 3 mill/= on 3/2/2005.  UBMC decided to purchase a new aircraft on 3/3/2005 for 50 mill/= to enable it coordinate with the head office at Mombasa where its Board of Directors met since 2000 to-date.  It also purchased a new ship of 500 tons for 60 mill/=.  Both were used from the same date. 

A new boiler was purchased for 600,000/= for the glass manufacturing section.  A concrete foundation was constructed for 300,000/= to install the boiler.  This was used from mid December 2005. On the 15/8/2005, the ship, the market value of which was estimated at 20 mill/= was stolen at DSM harbour.

The company was using tyres manufactured by the General Tyre (EA) Ltd. of Arusha Tanzania and radiators manufactured by the Afro Cooling Company Ltd. (ACCL) of Pugu Road DSM. Since these major sources of raw materials had financial problems, the UBMC advanced a 6mill/= loan to the ACCL for purchase of plant and machinery; and 10mill/= loan to General Tyre (EA) Ltd. for the purpose of purchasing a lorry to transport rubber from Iringa rubber farms.  Part of the office furniture was sold during December 2005 for 1.2 mill/=.  While the purchaser took the furniture during the same month, payment was to be made during March 2006.  

Required: Calculate the depreciation allowance that UBMC is eligible to claim from TRA according to the ITA, 2004 as at 31^st December 2005.

Suggested Solution

Tax Payer: Union Bearing Manufacturing Company Ltd. (UBMC)

Year of Income: 2005

Computation: Depreciation Allowances

DEPRECIABLE ASSETS	DEPRECIABLE ASSETS POOLS
CLASS	I (Tshs.)	II (Tshs.)	III (Tshs.)

payable annually in advance.

Required: Compute depreciation allowances to be granted to ABC Co. Ltd. for the year of income 2006 under the Income Tax Act, 2004.      

Suggested Solution Tax Payer: ABC Co. Ltd.

Year of Income: 2006

DEPRECIABLE ASSETS	DEPRECIABLE ASSETS POOLS (‘000)
CLASS	I (Tshs)	II (Tshs)	III (Tshs)	VI (Tshs.)
RATE – A	37.5%	25%	12.5%	5%
COST:
2 lorries, P&M (initial allow.), AC	40,000		2,000
Saloon,OF,                        factory building	15,000		4,200	24,000
Factory building				15,000
Factory     building alterations				4,500
	55,000	0	6,200	43,500
Additions:                        exchanged lorry,godown	24,000			175,000

*(93,000,000/= + 900,000/=) less 23,700,000/= or (93,000,000 – 23,250,000) + 450,000