Computing depreciation allowance using pooling method

This article explains how the depreciation allowance is computed where a taxpayer has elected for the pooling method to apply. It is relevant for candidates studying for either FTX-LSO or TX-LSO and is based on prevailing legislation applicable to tax years 2025 and onwards.

Firstly, candidates must know the conditions which are applicable for the pooling method to be used. The pooling method can only be used if a taxpayer makes an election. If an election is made it:

• applies only to assets which are wholly used in the production of income subject to tax
• applies to all assets acquired during the year of assessment for which the election has been made and subsequently, and
• is irrevocable.

The election can be made for assets in Groups 1, 2 and 3 only and each group of assets are placed into separate pools on which depreciation is calculated.

Secondly, understanding the formula which is used to compute the depreciation allowance is very important. According to the Income Tax Act, for each group of depreciable assets, the depreciation is calculated by multiplying the appropriate rate of depreciation by the balance on the pool at the end of the year of assessment.

The appropriate rate for each group of assets is given in the Tax Tables provided in the exam.

The balance on the pool at the end of the year of assessment is calculated by taking:

• Opening balance (if any). In a question the opening balance would be provided, if relevant. It could be referred to as the adjusted cost base (ACB) at the beginning of the year
• Add ½ of the cost assets acquired in the preceding year of assessment
• Add ½ of the cost of assets acquired in the current year of assessment
• Less the consideration received from the disposal of any assets from the pool in the current year of assessment (if any). (Although this deduction cannot take the pool balance below zero.)
• If no assets have been added to the pool during the year of assessment, and the closing balance of the pool is less than M500, the taxpayer is permitted to write off the balance of the pool as a deduction. This rule is provided for administrative convenience so that taxpayers do not have to carry forward small amounts.
  
  In addition, where the consideration received on disposal of assets in the pool during the year of assessment exceeds the closing balance (before deduction of the consideration), the excess is treated as business income.        

Multiple choice question examples showing how these rules could be tested are provided below:

1). Jomo, an electrician, has elected for the pooling method to compute depreciation allowance. Jomo sold most of his assets as he was migrating to South Africa, there were no acquisitions made in the preceding year and in the current year of assessment.

Details of Jomo’s group 2 depreciable assets are given below:

What is the depreciation allowance claimable by Jomo for the year ended 31 March 2025?

Options:

A. M300
B. M60
C. M0                                                                                                              

Solution:
The correct answer is option C. There is no depreciation allowance where the balance is less than M500.

Option A calculates the closing balance on the pool as M300 but then claims this as depreciation allowance where it is actually a tax deduction. As the balance is less than M500 it cannot be depreciated.
    (25,900 – 25,600) = 300

Option B calculates the closing balance on the pool as M300 but then wrongly applies 20% depreciation to this figure.
    ((25,900 – 25,600) x 20%) = 60

2). Bongi, an entrepreneur, has elected for the pooling method to compute his depreciation allowance. 

The following are Bongi’s delivery vans which are depreciable at 25%:

What is Bongi’s depreciation allowance claimable and business income on the disposal of his delivery vans for the year ended 31 March 2025?

Options:

Solution:
The correct answer is option A. There is no depreciation allowance, but the excess of the consideration received over the closing balance of the pool (before deduction of the consideration) is treated as business income.
((360,000 + (50%x120,000) – 450,000)) = 30,000.

Option B is incorrect as it incorrectly calculates depreciation on the closing balance before considering the disposal proceeds and also ignores he business income arising from the disposal.
((360,000 + (50% x 120,000)) x 25%) = 105,000

Option C is incorrect as it ignores the business income arising on disposal.

A more complicated example showing how pooling method rules could be tested in a long form question is provided below: 

The following depreciable assets were held by Temba on 1 April 2024:

• The ACB of the light general-purpose trucks includes one light general-purpose-truck which was purchased for M130,000 in the year ended 31 March 2024.
• On 1 May 2024, Temba purchased a new light general-purpose truck at a cost of M180,000.
• On 1 September 2024, Temba purchased a motor van for M105,900, which is used for both private and business purposes in a proportion of 25% and 75% respectively. In addition, Temba purchased office equipment worth M55,700 on the same date.
• On 30 November 2024, Temba sold one light general-purpose truck for M120,000; and additional office equipment for M72,300.
• Temba has elected for the pooling method of depreciation to apply for tax purposes.

Required:
Calculate the depreciation allowances claimable by Temba for the year ended 31 March 2025.                 

Solution:
Year of assessment ending 31 March 2025
Group 1 assets

Note:

1). The closing balance of M724,425 will be the opening balance on 01 April 2025 when calculating depreciation allowance for the year ending 31 March 2026.

2). The motor van purchased for M105,900 on 01 September 2024 also falls under group 1. But it cannot be depreciated using pooling method because it is not wholly used for business purposes. The single asset method will be used even though the taxpayer has made an election.

The depreciation on the van for the year ending 31 March 2025 will be as follows:

3).

Group 2 assets

Capital allowance questions often contain a lot of information including dates and figures. It is vital that candidates spend time practising these questions to ensure they are confident in picking out the correct information.

Written by a member of the TX-LSO examining team