If there’s one topic in the CITG tax papers where students leave marks on the table for no good reason, it’s capital allowances. Not because the mechanics are difficult — they’re not — but because the topic is treated as a footnote to “the real computation” instead of what it actually is: a structured, schedule-based exercise that the marking scheme rewards step by step. This article walks through the full mechanism under the Third Schedule to the Income Tax Act, 2015 (Act 896), so you can build the schedule correctly every time, under exam pressure, without hesitation.
Why Capital Allowance Exists
Accounting depreciation is a policy choice — different companies, different useful-life estimates, different methods. Tax law can’t run on something that inconsistent, so Act 896 disallows depreciation entirely for tax purposes and substitutes a single, standardised mechanism: capital allowance. Crucially, this is compulsory under Ghanaian tax law — where a taxpayer owns a depreciable asset in use for the production of income, capital allowance must be computed and granted. It is not something a taxpayer can choose to skip to manage their tax position.
Depreciable Assets and Classes
A depreciable asset is one that is used in the business and that loses value over time through wear, tear, or obsolescence. The Third Schedule organises these into classes. Movable business assets — plant and machinery, computers and equipment, vehicles, furniture and fittings — are grouped into pooled classes. Immovable assets — buildings, structures, and other works of a permanent nature used in the business — are treated separately from the pooled classes.
Pooling and the Reducing-Balance Mechanism
This is where most of the marks live, and where most of the errors happen. For pooled classes, you do not track each asset separately for allowance purposes. Instead, each class operates as a single pool: the cost of qualifying additions during the year is added to the pool, and the allowance for the year is computed on the resulting written-down value of the whole pool, at the class’s prescribed rate, on a reducing-balance basis. The written-down value carried forward becomes the opening balance for the following year’s computation.
Buildings: The Separate Lane
Buildings and other immovable business assets don’t follow the pooled reducing-balance approach. They are typically written off on a straight-line basis over a prescribed number of years — the same deduction each year until fully written down.
Additions, Disposals, and Balancing Figures
Three events drive the year-on-year movement in a capital allowance schedule:
Additions — assets purchased and brought into business use during the year are added to the relevant class pool at cost.
Disposals — assets sold, scrapped, or otherwise disposed of reduce the pool by the lower of the asset’s original cost or the disposal proceeds received.
Balancing allowances and balancing charges — these arise when a pool (or, for a building, a single asset) is fully disposed of and the amount received doesn’t match the tax written-down value. If proceeds exceed the written-down value, the excess is a balancing charge — effectively clawing back allowance already granted, and it’s added to chargeable income. If the written-down value exceeds proceeds, the shortfall is a balancing allowance — an additional deduction.
Private-Use Apportionment
Where an asset is used partly for the business and partly for private purposes — extremely common for sole proprietors and owner-managers — the capital allowance must be restricted to the business-use proportion. Claiming the full allowance on a mixed-use asset is one of the most consistent errors examiners see.
Exam Tip: Build the schedule, don’t skip to the answer. Marks are awarded for correct classification, correct pool movements, correct written-down value carried forward, and correct treatment of balancing allowances/charges — not solely for the final figure. A candidate who sets out a clean schedule with one wrong number still earns the bulk of the marks available; a candidate who states only a final answer, right or wrong, earns almost nothing.
Conclusion
Capital allowances reward structure. Learn the class system, master the pooling mechanism, treat additions and disposals correctly, and never forget to check for a balancing allowance or charge on full disposal. Do that consistently, and this becomes one of the most reliable mark-banks in the entire CITG tax paper.
Ready to Go Deeper?
This topic — and the full worked capital allowance schedule with numeric examples — is covered inside the Profs Tax Academy self-paced course. Enrol in the course at profstudyhub.com and turn this into one of your most reliable mark-banks in the CITG paper.
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