Memo
To: Finance Manager, APC Ltd
From: Tax Manager, Akwaaba and Associates
Date: November 8, 2023
Subject: Residual Deduction Rule and Allowable Deductions for Repairs and Improvements

Introduction:
In response to your inquiry regarding the treatment of major repair works on your warehouse, I would like to clarify the residual deduction rule and outline the conditions under which repairs and improvements may be considered allowable deductions.

1. Residual Deduction Rule:
The residual deduction rule is a principle in tax administration that allows for the deduction of expenses that are:

• Wholly,
• Exclusively, and
• Necessarily incurred in the production of income.
  This rule applies to expenses that do not fall into any specific deduction category but are essential for the business operations. It ensures that all necessary and reasonable business expenses are deductible, provided they meet the criteria of being non-capital in nature.

2. Conditions for Allowable Deductions for Repairs and Improvements:
The following conditions must be met for repairs and improvements to be considered allowable deductions under the residual deduction rule:

• a. Identification of the Asset or Pool:
  • The specific depreciable asset or pool of assets related to the repair or improvement must be clearly identified. This is crucial for determining whether the expense is capital in nature or qualifies as a repair.
• b. Written Down Value (WDV):
  • The Written Down Value (WDV) of the asset or pool of assets at the close of the tax year must be calculated. This value is used to assess whether the repair and improvement expenses exceed a certain percentage of the WDV.
• c. Expense Limitation:
  • Repairs and improvements that exceed 5% of the WDV of the asset or pool of assets at the close of the tax year may not be fully deductible and could be subject to capitalization.
• d. Non-Capital Nature:
  • The expenditure must not result in the creation of a new asset or the enhancement of an existing asset’s life beyond its original condition. If the expenditure is deemed to be capital in nature, it must be capitalized and depreciated accordingly.

Conclusion:
By ensuring that the repair and improvement expenses meet the above conditions, APC Ltd can maximize its allowable deductions while remaining compliant with tax regulations.

Please feel free to contact me if you require any further clarification or assistance.

Best regards,
[Your Name]
Tax Manager, Akwaaba and Associates

(10 marks)