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

TA_U11_DA_Bldgs

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.

Answer 26(b)
Red Ltd
Cost of Construction
Less: Initial allowance (20% in 1999/2000)
Annual allowances
(4% for 6 years from 2000/01 to 2005/06)
Notional allowance
(4% for 2 years from 2006/07 to 2007/08)
Residue before sale
Less: Proceeds in 2008/09
Balancing charge

$
2,000,000
(400,000)
(480,000)
1,120,000

Less:

Restricted to allowances given

(160,000)
960,000
2,500,000
1,540,000
880,000

Blue Ltd
Residue before sale
Add: Balancing charge
Residue after sale

960,000
880,000
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
= $1,840,000
18
= $102,222

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Answer 27
Hing Wong Ltd
$
Cost
Less:

IA @ 20%
AA @ 4%

1,000,000
200,000

Notional allowance at 4%
AA @ 4%
Residue before sale (2008/09)

$
5,000,000
1,200,000
3,800,000
200,000
200,000
3,400,000

(2005/06)
(2006/07)
(2007/08)

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
Less:

IA @ 20%
AA @ 4%

4,000,000
800,000

WDV c/f

$
20,000,000
4,800,000
15,200,000

(2009/10)

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
IA (20%) 2008/09
AA (4%) 2008/09
W.D.V. as at 1 January 2009
Additions re extension 2009/10

1,200,000
(240,000)
(48,000)
912,000
300,000
1,212,000
(60,000)
(60,000)
1,092,000

IA (20%) 2009/10
AA (4%) 2009/10 (1,200,000 + 300,000) x 4%
W.D.V. c/f

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
IA (20%) 2009/10
AA (4%) 2009/10
W.D.V. c/f
Total I.B.A.

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900,000
(180,000)
(36,000)
684,000

= 60,000 + 60,000 + 180,000 + 36,000

= $336,000