Capital Allowances vs Accounting Depreciation

Understanding the distinction between capital allowances and accounting depreciation is crucial, as it directly impacts tax planning, financial reporting, and decision-making. Whilst depreciation affects company profits, capital allowances impact a company’s tax liability. 

What’s the difference between the two? 

Although both concepts relate to the allocation of the cost of assets over time, they serve different purposes and are governed by different rules.

• Capital Allowances relate to the tax treatment of asset cost deductions and serve as a tax relief mechanism. Instead of deducting the full cost of an asset upfront, businesses can claim a portion of the asset's cost over several years, as specified by the Maltese Income Tax Act.

• Accounting Depreciation is an accounting method used to allocate the cost of an asset over its useful life in financial statements. It reflects the asset's gradual reduction in value due to wear and tear, obsolescence, or usage. Depreciation ensures that the expense of an asset is matched against the revenue it generates, in line with accounting standards. Unlike capital allowances, depreciation does not directly affect a company’s tax position but significantly impacts profitability.

Why does this matter?

Capital allowances reduce taxable income and improve cash flow, offering opportunities for strategic reinvestment. On the other hand, accounting depreciation ensures financial statements accurately reflect the gradual consumption of asset value ensuring compliance with accounting standards. 

Tax depreciation rates in Malta

Depreciation rates vary by asset category and are calculated using the straight-line method. The table below outlines the minimum number of years over which assets must be depreciated. 

Category	Years
Computers and electronic equipment	4
Computer software	4
Motor vehicles	5
Furniture, fixtures, fittings and soft furnishings	10
Equipment used for construction of buildings and excavation	6
Catering equipment	6
Aircraft airframe, aircraft engines, aircraft engine or airframe overhaul and aircraft interiors and other parts	4
Ships and vessels	10
Electrical and plumbing installations and sanitary fittings	15
Cable infrastructure	20
Pipeline infrastructure	20
Communication and broadcasting equipment	6
Medical equipment	6
Lifts and escalators	10
Air conditioners	6
Equipment mainly designed or used for the production of water or electricity	6
Other machinery	5
Other plant	10

Additional considerations

• The wear and tear rate on industrial buildings and structures, including hotels, car parks and offices, may not exceed 2% per year. 

• Capital allowances do not apply to the value of the land.

• Start-up expenses, such as marketing, staff training and wages, are subject to depreciation but only if they are incurred 18 months prior to the commencement of business.

• No deductions are provided for the consumption of natural resources.

• Oil and shipping companies have special capital allowance rates. 

  
  

Common Misconceptions

Despite their importance, capital allowances and accounting depreciation are often misunderstood. Here are some common misconceptions:

1. Capital allowances and accounting depreciation are the same

2. Depreciation methods can be used for tax calculations

3. Both concepts are optional. 

4. Capital allowances cover all assets

Where we come in

Navigating these complexities can be challenging, which is why businesses should seek professional advice from financial consultants. Expert guidance ensures that both capital allowances and accounting depreciation are applied correctly, aligning with legal requirements while maximizing financial and operational benefits for business growth and stability.

For further information or assistance, please contact Quazar at quazaroffice@quazar.mt

Get in Touch:

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Martina Vassallo

mvassallo@quazar.mt / +356 2388 4600