Depreciation and the renewal fund
Depreciation converts the value of a fixed asset into expense over its useful life. The renewal fund defers taxation of the gain on disposal, provided a replacement is acquired.
Depreciation
Assets used in the business for more than a year and subject to wear are depreciated over their cost. Useful lives and rates follow the list published by the authority; where an asset is not listed, a period is set on application to the authority.
| Method | How it works | Note |
|---|---|---|
| Straight line | Cost is spread evenly over the useful life | Available for any asset |
| Declining balance | On the remaining value, at twice the normal rate | Balance sheet basis; subject to a rate cap |
| Pro-rata depreciation | For passenger cars, from the month of acquisition | First year by number of months |
- A change of method is permitted from declining balance to straight line; the reverse is not accepted.
- Depreciation begins once the asset is ready for use in the business.
- Assets below a threshold may be expensed directly; the threshold is updated annually.
- Expense and depreciation restrictions on passenger cars are assessed separately.
The renewal fund
A gain on the sale of a depreciable asset may be taken to a renewal fund with a view to acquiring an asset of the same kind. The gain is then not taxed in the period of sale; it is held in the fund and set off against depreciation of the new asset.
| Aspect | Rule |
|---|---|
| Scope | Gain on the sale of a depreciable asset |
| Purpose | Renewal with an asset of the same kind |
| Decision | A renewal decision must have been taken by the business |
| Period | To be used within three years |
| Use | Set off against depreciation of the new asset |
| At the end of the period | Any unused amount is added to that period's income |
Points to watch
- The requirement that the asset sold and the asset acquired be of the same kind should not be read loosely; buying a vehicle in place of machinery invites dispute.
- The fund must be followed in a separate account, with the time limit monitored at each period end.
- Where the business enters liquidation, the treatment of the fund must be assessed separately.
- In periods where inflation accounting is not applied, book values erode; the renewal fund does not remedy that erosion, it only defers tax.
- Where revaluation has been elected, depreciation runs on the revalued amount and the set-off is calculated accordingly.
Legal basis
- Tax Procedure Law No. 213, Articles 313–321 (depreciation)
- Tax Procedure Law No. 213, Article 328 (renewal fund)
- General Communiqué No. 333 on the Tax Procedure Law (useful life list)
This article is general information and does not replace professional assessment of a specific matter. Amounts and rates relate to the stated year; please verify the current provisions before acting.
