Tax Education: How to compute Balancing Adjustments for tax purpose

In accounting, when a non-current asset is disposed, a gain/loss is calculated by comparing the sales proceed from the disposal with the carrying value of the asset as at the time of disposal. Both gain and loss on disposal of an asset are not taxable/tax-deductible in Nigeria. In lieu of the two, the Companies Income Tax Act Cap C21 LFN 2004 (as amended) – in the Second Schedule to the Act, and the Personal Income Tax Act Cap P8 LFN 2004 (as amended) – in the Fifth Schedule to the Act, provide for the following:

  • Balancing  Charge
  • Balancing Allowance
  1. BALANCING CHARGE

Balancing charge is simply the excess of the sales proceed from the disposal of a qualifying expenditure over the Tax Written Down Value (TWDV) of the qualifying asset as at time of the disposal. In the words of the extant tax laws:

“where in his basis period for a year of assessment the owner of an asset, who has incurred in respect thereof qualifying expenditure wholly and exclusively for the purposes of a trade or business carried on by him, disposes of that asset, a charge (hereinafter called ―a balancing charge) shall be made on that individual for that year of the excess of the value of that asset, at the date of its disposal, over the residue of that expenditure at the date.”

The residue of a qualifying expenditure, which is defined as costs of the expenditure less initial and annual allowance, is also referred to as TWDV.

The following are the other provisions for balancing charge:

  • A balancing charge shall only be made in respect of the asset if immediately prior to its disposal it was in use by the owner in the trade or business for the purposes of which the qualifying expenditure was incurred.
  • The balancing charge to be subject to tax must not be more the total allowances claimed on the qualifying expenditure as at the time of disposal.

ILLUSTRATION ON BALANCING CHARGE

Business Nigeria Limited acquired a building in November 2017 for a sum of N5million. The asset was disposed for a value of N7.5million in November 2018. As at the time of disposal, the company had already claimed the following allowances:

Initial Allowance      –           N750,000

Annual Allowance (1 year)            –           N425,000

                                                            N1,175,000

From the above, the excess of the sales proceed from the disposal over the residue of the asset (balancing charge) is:

N7,500,000 – N3,825,000 = N3,675,000

However, since the balancing charge of N3,675,000 is greater than the total allowances of N1,175,000 already claimed by the company, the balancing charge will be restricted to the total allowances (N1,175,000).

  • BALANCING ALLOWANCE

Balancing allowance is the excess of the residue of a qualifying expenditure over the sales proceed from the disposal of the qualifying asset as at time of the disposal. The Acts provides that:

“where in his basis period for a year of assessment the owner of an asset, who has incurred in respect thereof qualifying expenditure wholly and exclusively for the purposes of a trade or business carried on by him, disposes of that asset, an allowance (hereinafter called ―a balancing allowance‖) shall be made to that individual for that year of the excess of the residue of that expenditure, at the date the asset is disposed of, over the value of that asset at that date.”

Like the balancing allowance, the extant laws provides that a balancing allowance shall only be made in respect of the asset if immediately prior to its disposal it was in use by the owner in the trade or business for the purposes of which the qualifying expenditure was incurred. This however has no restriction like the balancing charge.

ILLUSTRATION ON BALANCING ALLOWANCE

Idea Nigeria Limited acquired a Plant in January 2018 for a sum of N2million. The asset was disposed for a value of N500,000 in January 2020. As at the time of disposal, the company had already claimed the following allowances:

Initial Allowance       –            N1,000,000

Annual Allowance (1 year)            –           N   250,000

                                                            N1,250,000

The residue of the asset as at the time disposal was N750,000.

From the above, the excess of the residue over the sales proceed from the disposal of the asset (balancing allowance) is:

N750,000 – N500,000 = N250,000

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