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BUSI 0018 – Hong Kong Taxation

Tutorial Questions

Unit 11 – Depreciation Allowance: Buildings

Answer 26(a) Better Investment Limited, which holds the relevant interest of the building, can claim industrial building allowance if the usage of the individual floors can qualify as an industrial building as defined in S.40(1). Under S.40(1), industrial building or structure means, among other things, any building or structure used for the purposes of a trade which consists of the manufacture of goods or materials or the subjection of goods or materials to any process. In the present case: Ground floor The owner is not entitled to any industrial building allowance because

the repairing activities were only incidental to the car distributing business of the tenant.

First floor The owner is entitled to industrial building allowance as goods were

manufactured in the premises. In addition, any building or structure used for the purposes of a trade which consists of the storage of goods or materials is also treated as an industrial building or structure, given that the said goods or materials are to be used in the manufacture or process, or the goods and materials are newly arrived into Hong Kong. In addition, it must be noted that the trade itself must be one of storage.

Second floor The owner is not entitled to industrial building allowance as the trade of the tenant is not one of storage since it is only a fashion trading company. The storage of goods is only incidental to its trade.

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Answer 26(b) Red Ltd

$ Cost of Construction 2,000,000 Less: Initial allowance (20% in 1999/2000) (400,000) Annual allowances

(4% for 6 years from 2000/01 to 2005/06)

(480,000) 1,120,000 Less: Notional allowance

(4% for 2 years from 2006/07 to 2007/08)

(160,000) Residue before sale 960,000 Less: Proceeds in 2008/09 2,500,000 Balancing charge 1,540,000 Restricted to allowances given 880,000

Blue Ltd

Residue before sale 960,000 Add: Balancing charge 880,000 Residue after sale 1,840,000 Year of first use of the building 2000/01 25th years thereafter 2025/26 Year of assessment in the basis period for which the sale to Blue Ltd takes place

2008/09

Annual allowance for 2008/09: 1 = $1,840,000 x ------------------------------------ 2008/09 to 2025/26 inclusive

= ×$1, ,840 000 118

= $102,222

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Answer 27 Hing Wong Ltd $ $ Cost 5,000,000 Less: IA @ 20% 1,000,000 AA @ 4% 200,000 1,200,000 (2005/06) 3,800,000 Notional allowance at 4% 200,000 (2006/07) AA @ 4% 200,000 (2007/08) Residue before sale (2008/09) 3,400,000 Notes: 1. For the year of assessment 2006/07, as the building was not used as an industrial

building, no annual allowance would be made to the company. Instead, commercial building allowance of $200,000 ($5,000,000 x 4%) would be made to the company.

2. Proviso to S.35(2) provides that no balancing allowance shall be made where the

industrial building is demolished for purposes unconnected with or not in the ordinary course of conduct of the trade or business for the purposes of which the building was used in circumstances qualifying for industrial building allowances. Hing Wong Ltd is a manufacturer. The redevelopment of property for resale to the public is clearly outside the normal scope of its business. Consequently, the aforesaid proviso would apply and no balancing allowance shall be made to it.

Tai Fat Ltd $ $ Cost 20,000,000 Less: IA @ 20% 4,000,000 AA @ 4% 800,000 4,800,000 (2009/10) WDV c/f 15,200,000 Note: 1. S.35B (b)(ii) provides that if the industrial building is not purchased from a person

whose business is the development and sale of properties, the allowances are based on the lesser of the purchase price for the building (excluding the value of the land) or the actual cost of construction to the vendor. Therefore, the allowances to Tai Fat Ltd are based on $20m. However, if it is successfully argued that Hing Wong has changed its main business into the development and sale of properties, then $30m could be used instead.

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Answer 28

Industrial building allowance on Factory in Shatin

Deemed qualifying expenditure 1,200,000IA (20%) – 2008/09 (240,000)AA (4%) – 2008/09 (48,000)W.D.V. as at 1 January 2009 912,000Additions re extension – 2009/10 300,000 1,212,000IA (20%) – 2009/10 (60,000)AA (4%) – 2009/10 (1,200,000 + 300,000) x 4% (60,000)W.D.V. c/f 1,092,000 Notes: (1) Payments to existing tenants do not quality as capital expenditure on construction -

D5/79. (2) As the Shatin factory was purchased before use from the developer (whose main

business was developing properties for re-sale purpose), the deemed qualifying expenditure as per S.35B should be the purchase price of the building. However, the purchase price of $4 million comprising both the amount paid for the building as well as the land. As a practice, such price will be apportioned (in this case by the cost of construction in proportion to the total costs) to get the price paid for the building as follows:

$4,000,000 x $900,000 / $3,000,000 = $1,200,000 (3) The lower floor is also an industrial building. There is a qualifying use because the

trade of the lessee is one of storage. (4) The cost of replacing the roof qualifies for deduction as a repair. The roof is prima

facie part of the building and not an entirety in itself. Furthermore, the new roof should not be classified as an 'improvement' even though different material was used.

Industrial building allowance on Factory in Tuen Mun Cost of construction 900,000IA (20%) – 2009/10 (180,000)AA (4%) – 2009/10 (36,000)W.D.V. c/f 684,000 Total I.B.A. = 60,000 + 60,000 + 180,000 + 36,000 = $336,000