Depreciation Allowance Industrial Buildings

Chapter 15 Depreciation Allowance – Industrial Buildings and Commercial Buildings

1. Learning Objectives

1.1       Identify a building/structure as an industrial building.
1.2       Identify expenditure qualifying for industrial building allowance.
1.3       Identify persons who are eligible to claim industrial building allowance.
1.4       Compute industrial building allowance.
1.5       Identify a building/structure as a commercial building.
1.6       Identify expenditure qualifying for commercial building allowance.
1.7       Identify persons who are eligible to claim commercial building allowance.
1.8       Compute commercial building allowance.

2. Industrial Buildings (工業建築物或構築物)

2.1

DEFINITION

An industrial building is defined in s 40(1) as a building or structure or, part of any building or structure used for the purpose of:
(a)       a trade carried on in a mill (工場), factory or other similar premises;
(b)       a transport, tunnel, dock, water, gas or electricity undertaking (企業使用) or a public telephonic or public telegraphic service (供公共電話服務或公共電報服務使用);
(c)       a trade which consists of the manufacture of goods or materials or the subjection of goods or materials to any process (供包括製造貨品或物料或將貨品或物料加工的行業使用);
(d)       a trade which consists in the storage of goods or materials (供從事貯存以下貨品或物料的行業使用):
(i)         which are to be used in the manufacture of other goods or materials;
(ii)        which are to be subjected in the course of a trade to any process; or
(iii)       on their arrival into Hong Kong;
(e)        buildings used fro farming;
(f)        buildings used for scientific research.

(A) Qualifying buildings

2.2       Once it has established that a trade is a qualifying one, all buildings or structure of that trade qualify, except the followings:
(a)        dwelling houses (other than for the housing of manual workers);
(b)        retail shops;
(c)        showrooms;
(d)        hotels; and
(e)        offices.

(B) Non-industrial parts

2.3 It is not essential that the whole of a building or structure should qualify as an industrial building. If the non-qualifying portion is not more than 10% of the capital expenditure on the whole, the whole is treated as qualifying expenditure (s 40(1) proviso). Otherwise an apportionment is made so as to bring in only the cost of the part which does qualify.

2.4

EXAMPLE 1

A Ltd purchases five floors (first floor to fifth floor) of equal size in a factory. The total qualifying expenditure of the five floors is $60,000,000. The first floor is used as a general office while the remaining four floors are used for manufacturing goods. As the non-qualifying portion is more than 10%, industrial building allowances can only be calculated by reference to 80% (i.e. second to fifth floor) of the whole qualifying expenditure.

2.5       Structures include:
(a)        roads,
(b)        walls,
(c)        bridges,
(d)        dams,
(e)        fish ponds,
(f)        concrete apron (窗臺, 護幹墻) to form a parking lot,
(g)        holes, wells (井), sewers (下水道) and tunnel linings,
(h)        wharves.

(C) Qualifying expenditure

2.6       Industrial building allowances are granted on the capital expenditure incurred on the construction of the industrial building or structure. Therefore expenditure not directly related to construction such as:
(a)        land cost,
(b)        cost of demolition of an old building,
(c)        payment to evict the existing tenants, and
(d)        preparation and leveling of land or expenditure on demolition of a previous building,
does not qualify.

2.7

EXAMPLE 2

XY Ltd carries on a manufacturing business in Hong Kong and prepares its accounts to 31 March annually. During the year ended 31 March 2009, it purchased a piece of land and built an industrial building thereon. Expenditures incurred are as follows:

	$
Land premium	50,000,000
Cost of leveling the land	2,000,000
Site investigation expenses	1,000,000
Cost of foundation	3,000,000
Cost of laying drain and water mains	2,500,000
Cost of building construction	6,000,000

The qualifying expenditure of the industrial building is calculated as follows:

	$
Site investigation expenses	1,000,000
Cost of foundation	3,000,000
Cost of laying drain and water mains	2,500,000
Cost of building construction	6,000,000
Total qualifying expenditure	12,500,000

2.8

EXERCISE 1

FGH Ltd has incurred the following costs in relation to a factory:

	$000
Cost of land	15,000
Leveling land	2,000
Factory construction (including $3,000,000 for the administration office)	29,000
	46,000

Required:

How much of the cost will qualify for IBAs?

2.9 Qualifying expenditure includes loan interest and commitment fees in respect of the financing of the building, but exclude those reimbursed by ways of grants or subsidies (s 40(1)).
2.10 Note that only interest incurred before the building is used should be capitalized. Interest incurred after the building is brought into use can be allowed in full as a revenue expense (if s 16(1) and s 16(2) are satisfied).

(D) Persons qualifying

2.11 Expenditure by an owner entitles the owner and the subsequent owners to claim annual allowances in relation to that expenditure. No allowances are due to a lessee because he does not acquire the relevant interest (有關權益) of the owner.

2.12

EXAMPLE 3

The landlord incurred expenditure of $4 million in the construction of the building. He leases the building to a tenant who uses it for a qualifying trade. The landlord can claim IA and AA in respect of the $4 million. The tenant is not entitled to IBA in respect of the $4 million. If the tenant constructs a cockloft (頂樓, 閣樓) in the building at a cost of $300,000, the tenant has a relevant interest in the $300,000 and can claim IA and AA in respect of this expenditure.

3. Industrial Building Allowances (IBA)

(A) Initial allowance

3.1       From the year of assessment 1965/66 onwards, IA is 20% of the qualifying expenditure and is granted to the year of assessment in the basis period of which the expenditure was incurred (s 34(1)).
3.2       Expenditure incurred before a trade is commenced is treated as if it were incurred on the day on which trading commenced (s 40(2)).
3.3       When any IA has been made before the building is completed and when it first comes to be used, it does not qualify as an industrial building. Any IA given would be withdrawn by additional assessment (s 34(1) proviso (b)).
(凡在任何建築物或構築物開始使用前，已根據本款就該建築物或構築物的資本開支而給予初期免稅額，而當該建築物或構築物首次使用時卻非工業建築物或構築物，則不得給予初期免稅額，並須作出任何因而需要的補加評稅。)

(B) Unused building

3.4       IA is based on the qualifying expenditure (i.e. cost of construction, loan interest, etc). It is not based on the purchase price except when a person purchases the building or structure unused. For an unused building, the allowances are based on the lower of:
(a)        the actual cost of construction, or
(b)        the net price paid by the purchaser for the relevant interest in respect of the cost of construction (s 35B(b)(ii)).
3.5       Where the building is sold more than once before the building is used, only the last purchaser is entitled to IBA (s 35(b) proviso (a) and (b)). Any IA given to the vendor shall be withdrawn by an additional assessment (s 35(b)(a)).

(C) Vendor developed property for sale

3.6       If the vendor of the building is the one who develops the building for the purpose of sale, the IBAs shall be computed on the net price paid by the purchaser for the relevant interest in the cost of construction (s 35B(b)(i)).
3.7       Where the building is sold more than once before the building is used, only the last purchaser shall be entitled to IBAs and the allowance shall be computed on:
(a)        the net price on the first sale; or
(b)        the net price paid by him,
whichever is less (s 35B(b) proviso (a)).

3.8

EXAMPLE 4

C Ltd purchases an unused industrial building from B Ltd, who is a developer for resale, for $50,000,000 (including land) and uses the building for manufacturing purposes. The cost of development to B Ltd is $40,000,000, comprising cost of land $25,000,000 and cost of construction $15,000,000. C Ltd is entitled to claim IBA based on the net price paid by it in respect of the cost of construction, which is calculated as follows:

Qualifying expenditure =
No IBA is due to B Ltd.

(D) Annual allowance

3.9 To qualify for AA, the building or structure must be in use for a qualifying trade at the end of the basis period (s 34(2)(a)).
3.10 From the year of assessment 1965/66 onwards, AA is 4% of the qualifying expenditure.

3.11

EXAMPLE 5

A Ltd in its accounting year ended 31 October 2008 constructed a building for use in its trade of machinery manufacturing. The land was purchased at a price of $1,000,000 during the year ended 31 October 2006. The building was completed in May 2008. The costs of construction were:

	$
Land premium (before 31 December 2006)	1,000,000
Architect’s fee (December 2007)	50,000
Foundation preparation (January 2008)	80,000
Building cost (before May 2008)	3,900,000
Loans interest (before May 2008)	120,000
Cost of lifts	800,000
Total cost	5,950,000

The interest of $120,000 was paid on following loans:	$
(a) Loan of $600,000 borrowed in 2005 to finance the land cost	50,000
(b) Loan of $840,000 borrowed in the year to finance the cost of construction	70,000
	120,000

After the completion of construction, the company will had an outstanding loan of $1,000,000 and interest of $20,000 was paid on this loan during the period from May 2008 to October 2008.

The building was completed on 1 May 2008 and used as a factory for manufacturing purposes.

The industrial building allowances for the year of assessment 2008/09 is computed as follows:
A Ltd
Year of assessment 2008/09
Basis period: year ended 31 October 2008

Qualifying expenditure:	$
Architect’s fee	50,000
Foundation preparation	80,000
Building cost	3,900,000
Loan interest	70,000
	4,100,000

Allowances:
Initial allowance (20% x $4,100,000)	820,000
Annual allowance (4% x $4,100,000)	164,000
Total allowances	984,000

Notes:
(a) Only the cost of construction qualifies for IBA.

The cost of land and the interest on the loan financing the land cost are excluded.
The cost of lifts does not come under the cost of construction of the building or structure, but the $800,000 can rank for depreciation allowance as plant and machinery in the 10% pool.
The interest on the loan financing the cost of construction is regarded as capital expenditure in the definition under s 40, but this only applies to that interest paid before completion. Interest paid after completion is revenue expenditure.

(b) Both the IA and AA are calculated on a percentage of the qualifying expenditure.
(c) For the year of assessment 2009/10 onwards, AA of $164,000 will be granted. If A Ltd owns and uses the building for a very long period, the last year of assessment in which AA will be granted is 2028/29.

3.12

EXAMPLE 6

Facts as in Example 5, except that the buildings is used for the following purposes:
10 % as general office
5% as showroom
5% as design office
10% as canteen for workers
70% as work place for manufacturing
The industrial building allowance for the year of assessment 2008/08 is computed as follows:
A Ltd
Year of assessment 2008/09
Basis period: year ended 31 October 2008

Qualifying expenditure	$4,100,000

Areas qualifying as industrial buildings:
Design office	5%
Workers canteen	10%
Work place for manufacturing	70%
Total	85%

Expenditure for IBA calculation (85% x $4,100,000)	$3,485,000

Allowances	$
Initial allowance (20% x $3,485,000)	697,000
Annual allowance (4% x $3,485,000)	139,400
Total allowances	836,400

Notes:
(a)       Offices do not qualify as industrial buildings except design office (CIR v Lambhill Ironworks Ltd (1950) 31 TC 93).
(b)       Showrooms do not qualify as industrial buildings.
(c)       Buildings used for the welfare of the workers employed in that trade (e.g. a canteen) can be regarded as an industrial building.

3.13

EXERCISE 2

B Ltd build a factory. The expenditure incurred in the construction is as follows:

Period	$
Year ended 31 December 2005	5,000,000
Year ended 31 December 2006	9,000,000

The factor was completed in August 2006 and has been used for manufacturing purpose since then. In June 2008, an additional cost of $2,000,000 was incurred. B Ltd has its accounts closed on 31 December each year.

Required:

Calculate the industrial building allowances for the years of assessment 2005/06 to 2008/09.

(E) Purchaser of used building – AA

3.14

KEY POINTS

Where a taxpayer purchased a used building which has been used at any time before, the AA to the purchaser shall be computed by reference to the residue of expenditure (ROE) (開支剩餘額) as follows (s 34(2)(b)):

1. For building used before the commencement of the basis period for the year of assessment 1965/66:

AA = ROE after sale x 2/Nx

Where Nx = number of years from the year of assessment in the basis period of which the sale takes place to the 50th year after the year of assessment in which the building was first use.

2. For building used after the commencement of the basis period for the year of assessment 1965/66:

AA = ROE after sale x 1/Ny

Where Ny = number of years from the year of assessment in the basis period of which the sale takes place to the 25th year after the year of assessment in which the building was first used.

The residue of expenditure (after sale) means the amount of the capital expenditure incurred on the construction of the building or structure reduced by:
(a)       the amount of any IA;
(b)       any AA;
(c)       any balancing allowance (BA);
(d)       increased by any balancing charges (BC) (s 40).

3.15

EXAMPLE 7

C Ltd purchased an industrial building for $60,000,000 from B Ltd, a developer who developed the building for sale during the year ended 31 March 2007. C Ltd used the building immediately for manufacturing purposes after purchase. The total cost of construction was $50,000,000 (including land cost $20,000,000).

Required:

(a) Calculate the net price relating to the cost of construction.

On 1 May 2008, C Ltd sold the building to D Ltd for $63,000,000 while the building was still an industrial building. D Ltd also used the building immediately for manufacturing after purchase. D Ltd prepares its accounts to 31 December each year.

Required:

(b) Calculate the residue of expenditure and industrial building allowance for D Ltd.

Solution:
(a) Net price =

(b) The ROE and IBA are calculated as follows:
C Ltd
Year of assessment 2006/07 (basis period: year ended 31 March 2007)

	$
Qualifying expenditure	36,000,000
Less: IA 20%	7,200,000
	28,800,000
Less: AA 4%	1,440,000
WDV	27,360,000
Year of assessment 2007/08
Less: AA 4%	1,440,000
Residue of expenditure before sale	25,920,000
Year of assessment 2008/09
Less: Sale proceeds relating to qualifying expenditure
$63,000,000 x $30,000,000/$50,000,000	37,800,000
Balancing charge (year of assessment 2008/09)	11,880,000

Balancing charge restricted to allowances given ($7,200,000 + $1,440,000 x 2)	10,080,000

D Ltd
Year of assessment 2008/09 (basis period: year ended 31 December 2008)

	$
Residue of expenditure before sale	25,920,000
Add: Balancing charge	10,080,000
Residue after sale	36,000,000

Annual allowance ($36,000,000 x 1/24)	1,500,000
WDV c/f	34,500,000

* Year of first use by C Ltd (first user) = 2006/07
25th year after year of first use = 2006/07 + 25 = 2031/32
Year of first use by D Ltd (purchaser) = 2008/09
Number of years from 2008/09 to 2031/32 (inclusive) = 24 years

(F) Notional annual allowance

3.16 In computing the ROE of a building/structure, a notional allowance has to be written off for any year of assessment in which no AA is made.

(G) Restriction on the amount of annual allowance

3.17 The amount of AA for any year of assessment should not exceed the ROE at the end of the basis period for that year of assessment (s 33A(3)).

(H) Balancing adjustments on sale/disposal/destruction of building

3.18 When a building or structure is sold, demolished, destroyed or ceased altogether to be used while it is an industrial building or structure, the owner is entitled to a balancing allowance if the residue of expenditure exceeds the sale, insurance, salvage or compensation moneys received.
3.19 If the reverse is true, the owner is subject to a balancing charge which however, cannot exceed the aggregate of all the allowances previously granted to him.

3.20

EXERCISE 3

Brightness Industrial Limited purchased a flat in a factory from a developer at a cost of $2,500,000 on 1 January 2004. It was agreed that 50% of the price related to the cost of construction. After spending $200,000 on decoration, the premises were let to Sunrise Limited on 1 February 2004 a monthly rent of $24,000. Sunrise Limited incurred $150,000 in the alteration of the premises and then used the premises for its manufacturing business from 1 March 2004.

On 15 January 2008 Brightness Industrial Limited sold the property to Sunrise Limited at a price of $1,600,000. 50% of the price related to the cost of construction. Sunrise Limited continued to use the premises for manufacturing after acquisition.

Brightness Industrial Limited closes its accounts to 31 March each year, whereas Sunrise Limited closes its accounts to 31 December annually.

Required:

(a) Compute the amounts of industrial building allowances that can be claimed by Brightness Industrial Limited for the years of assessment 2003/04 to 2007/08. (8 marks)
(b) Compute the amounts of industrial building allowances that can be claimed by Sunrise Limited for the years of assessment 2004/05 to 2008/09. (10 marks)
(Adapted HKIAAT Paper 5 Hong Kong Taxation December 2001 Q7)

4. Commercial Building Allowance (商業樓宇免稅額)

4.1	DEFINITION
	Any building or structure used by a person entitled to the relevant interest for the purpose of his trade, professional or business other than an industrial building or structure is a commercial building or structure (s 40).

(A) Person eligible to claim commercial building allowance

4.2       A person is entitled to an annual allowance (also called commercial building allowance (CBA) or rebuilding allowance (RBA)) if he:
(a)        is, at the end of the basis period, entitled to the relevant interest in relation to the capital expenditure incurred on the construction of a commercial building/structure; and
(b)        uses the building/structure for the purposes of his trade, profession or business (s 33A and s 40(1)).

(B) Qualifying expenditure

4.3 Similar to IBA, the qualifying expenditure for CBA is the capital expenditure incurred on the construction of the building or structure. Therefore, land cost is excluded.

(C) CBA as from 1998/99

4.4 Before 1998/99, there were no initial allowances or balancing adjustments. The rebuilding allowance was 2% of the qualifying expenditure from the year of assessment 1990/91 up to the year of assessment 1997/98 (0.75% pa before the year of assessment 1990/91).
4.5 As from 1998/99, there is no initial allowance. The rebuilding allowance is 4% of the qualifying expenditure for a new building or structure (s 33A(1)). On sale or disposal of the building while the building is a commercial building, balancing adjustments have to be made.

4.6

EXAMPLE 8

H Ltd carries on business in Hong Kong and operates its accounts to 31 March each year. During the year ended 31 March 2009, it purchased a new commercial building and used it as an office. The capital expenditure incurred on the construction of the commercial building was $100 million.

H Ltd is entitled to claim an annual allowance of $4,000,000 in respect of the commercial building for the year of assessment 2008/09, being calculated as follows:

	Commercial building	Allowance
Year of assessment 2008/09	$	$
Qualifying expenditure	100,000,000
Annual allowance (100,000,000 x 4%)	4,000,000	4,000,000
Residue of expenditure	96,000,000

If H Ltd continues to use the commercial building for the production of chargeable profits in the future, the capital expenditure will be completely written-off in the year of assessment 2032/33.

(D) Commercial building used before the year of assessment 1998/99

4.7 The building or structure is deemed to be first used in the year of assessment 1998/99. The qualifying expenditure as at the beginning of the year of assessment 1998/99 is deemed to be the cost of construction less the total amount of CBA that would have been granted prior to the year of assessment 1998/99. The AA for the years of assessment 1998/99 and thereafter are computed on the deemed qualifying expenditure.

4.8

EXAMPLE 9

J Ltd carries on business in Hong Kong and prepares its accounts to 31 December each year. It purchased a new commercial building at Causeway Bay during the year ended 31 December 1996 and used it as an office. The capital expenditure on the cost of construction of the Causeway Bay Building was $10 million. J Ltd has claimed rebuilding allowances of $200,000 (i.e. $10 million x 2%) for each of the years of assessment 1996/97 and 1997/98.

The Causeway Bay Building shall be deemed to be first used in the year of assessment 1998/99 and the capital expenditure incurred on the construction of commercial building will be deemed to be $9,600,000 (i.e. $10 million – $200,000 x 2). J Ltd will be entitled to claim an annual allowance of $384,000 (i.e. $9.6 million x 4%) for the year of assessment 1998/99 if the building is used for the production of chargeable profits at 31 March 1999.

	Commercial building	Allowance
Year of assessment 1998/99	$	$
Qualifying expenditure	9,600,000
Annual allowance (9,600,000 x 4%)	384,000	384,000
Residue of expenditure	9,216,000

(E) Balancing adjustment on sale/disposal/destruction of commercial building

4.9       With effect from 1 April 2004, where:
(a)        any of the following events occurs in relation to a building or structure
(i)         the building or structure is sold;
(ii)        the tenancy in the building or structure comes to an end and the tenant did not acquire the property from the owner; or
(iii)       the building or structure is demolished or destroyed or ceases altogether to be used; and
(b)        the building or structure has been a commercial building or structure or an industrial building or structure at any time before the occurrence of such event,
a balancing allowance, or a balancing change, shall be made to or on the person entitled to the relevant interest in the building or structure immediately before the occurrence of such event for the year of assessment in the basis period for which such event occurs (s 35(1)).

(F) Circumstances where no balancing allowance will be made

4.10     A BA will not be made to a person where:
(a)        a building or structure is sold and the building or structure was not a commercial building or structure or an industrial building or structure immediately before the sale; or
(b)        a commercial building or structure or an industrial building or structure is demolished for purposes unconnected with, or not in the ordinary course of conduct of, the trade, profession or business for the purpose of which the building or structure was used before the demolition in circumstances qualifying for AAs.
4.11     Where the sale, insurance or compensation moneys arising in respect of the occurrence of an event referred to in s 35(1)(a) exceed the residue of expenditure immediately before the occurrence of such event, a BC shall be made. The BC shall be an amount equal to the excess of those moneys over the residue of expenditure (s 35(3)(a)).

4.12

EXAMPLE 10

If J Ltd in Example 9 sold the Causeway Bay Building to K Ltd in April 2008 for $10 million (half of the amount being attributable to the cost of construction) while the building was used as a commercial building, a balancing adjustment has to be made as follows:

	Commercial building	Allowance
Year of assessment 1999/2000	$	$
Residue of expenditure b/f	9,216,000
Less: Annual allowance	384,000	384,000
Residue of expenditure	8,832,000
Years of assessment 2000/01 to 2007/08
Less: Annual allowance ($384,000 x 8)	3,072,000	3,072,000
Residue of expenditure	5,760,000	3,456,000
Year of assessment 2008/09
Less: Sale proceeds ($10m x 50%)	5,000,000
Balancing allowance	760,000

4.13

EXERCISE 4

If J Ltd in Example 9 sold the Causeway Bay Building to K Ltd in April 2008 for $20 million (half of the amount being attributable to the cost of construction) while the building was used for the production of chargeable profits, balancing adjustment has to be made.

Required:

Calculate the balancing adjustment for the year of assessment 2008/09 for J Ltd.

(G) Purchaser of used commercial building or structure – AA

4.14

KEY POINTS

Where the building or structure is sold and the building or structure has been used at any time before the sale, the AA will be computed as follows (s 33A(2)):

1. If a purchaser acquired the relevant interest in the building/structure prior to 1998 (change in the law relating to the computation of CBA):

AA = ROE after sale x 1/Nx

Where Nx = number of years from the year of assessment in the basis period of which the sale takes place to the 25th year after 1998/99.

2. If the purchaser purchased in or after 1998:

AA = ROE after sale x 1/Ny

Where Ny = number of years from the year of assessment in the basis period of which the sale takes place to the 25th year after the year of assessment in which the building/structure was first used.

The residue of expenditure (after sale) is the cost of construction reduced by:
(a)       any IA granted under IBA;
(b)       any CBA or AA granted under IBA;
(c)       any BA, whether granted under CBA or IBA; and
(d)       increased by any balancing charges (BC), whether granted under CBA or IBA.

4.15

EXAMPLE 11 – Purchased before 1998

Victory Ltd purchased a new commercial building for use as its office in Hong Kong on 1 October 1996 at a total cost of $5,000,000 (50% of the cost was attributable to land costs). On 1 July 2008, the building was sold to Ron Ltd at a total consideration of $3,800,000 (including land).

Both Victory Ltd and Ron Ltd prepare their accounts to 31 December each year.

Required:

In respect of the above commercial building, compute the respective commercial building allowances available to Victory Ltd and Ron Ltd for the year of assessment 2008/09. All workings must be shown. (9 marks)
(Adapted HKIAAT Paper 5 Hong Kong Taxation December 1999 Q7)

Solution:
Victory Ltd
Year of assessment 2008/09
Commercial Building Allowance

	$
Qualifying expenditure ($5,000,000 x 50%)	2,500,000
Annual allowance for 1996/97 to 1997/98 ($2,500,000 x 2% x 2)	100,000
Deemed cost of construction at the commencement of 1998/99	2,400,000
Annual allowance for 1998/99 – 2008/09 ($2,400,000 x 4% x 11)	1,056,000
Residue of expenditure before sale	1,344,000
Less: sales proceeds ($3,800,000 x 50%)	1,900,000
Balancing charge for 2008/09	556,000

Ron Ltd
Year of assessment 2008/09
Commercial Building Allowance

Deemed year of first use of commercial building:	1998/99
25th year after 1998/99	2023/24
Year of first use by Ron Ltd:	2008/09
No. of years from 2008/09 to 2023/24	16 years
	$
Residue of expenditure before sale	1,344,000
Add: Balancing charge	556,000
Residue of expenditure after sale	1,900,000
Annual allowance ($1,900,000 x 1/16)	118,750
Residue of expenditure c/f	1,781,250

4.16

EXERCISE 5

On 1 February 2008, AB Ltd, prepares its accounts to 31 March annually, purchased a used commercial building from CD Ltd for $1,800,000 as its office. CD Ltd had purchased the property from the developer for $1,500,000 (50% related to cost of construction) on 1 November 2006. CD Ltd immediately used the building as its office after the purchase. CD Ltd prepares its accounts to 31 December annually.

Required:

(a) Compute the amount of balancing adjustment under commercial building allowance available to CD Ltd in respect of the above commercial building for the year of assessment 2008/09. (4 marks)
(b) Compute the amount of commercial building allowance available to AB Ltd in respect of the above commercial building for the year of assessment 2007/08. (5 marks)
(Adapted HKIAAT P5 Hong Kong Taxation December 2006 C2(b))

(H) Notional allowance

4.17 In computing the residue of expenditure, a notional allowance has to be written off for any year of assessment in which no annual allowance is made (s 40).

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Depreciation Allowance Industrial Buildings

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