An illustration showing how CBA
In practice, 50% of the first
sales price is deemed to be for the cost of construction. The first
sales price is usually found in the record kept by the Land Registry.
For computation of balancing allowance or balancing charge on sale of
the building, 50% of the sales price is deemed to be in respect of the
cost of construction.
A commercial property was purchased from a property developer in 2001/02
for $3,000,000. The property was sold in 2005/06 for $2,000,000.
CBA granted for 2001/02 to 2004/05: $3,000,000 * 50% * 4% per annum =
$60,000. Generally speaking, in view of the small amount of CBA, no
queries will be asked by IRD to ascertain the actual cost of
Total CBA granted for 2001/02 to 2004/05: $60,000 * 4 = $240,000
Residue of expenditure before sale: $1,500,000 - $240,000 = $1,260,000
Computation of Balancing Allowance in 2005/06:
Sales price attributable to the cost of construction: $2,000,000 * 50% =
Balancing allowance: $1,260,000 - $1,000,000 = $260,000 (It is a
deduction in computation of assessable profit).
Assuming the purchaser uses the property for a trade chargeable to
profits tax, the purchaser is entitled, from 2005/06 onward, to CBA per
annum which is determined as follows: Residue of expenditure after sale
* 1 / Number of years of assessment from the purchaser's first year of
CBA to the 25th year after the year of first use. In this example, the
Residue of expenditure after sale is: $1,260,000 - $260,000 =
$1,000,000. The first year of CBA is 2005/06. The year of first use is
2001/02 and the 25th year after the first use is 2026/27. Therefore, the
number of years of assessment from the purchaser's first year of CBA
(i.e. 2005/06) to the 25th year after the year of first use (i.e.
2026/27) is 22. Therefore, the annual CBA is $1,000,000 / 22 =
$45,454.50 from 2005/06 to 2026/27 (Total CBA for the purchaser:
$45,454.50 * 22 years = $1,000,000 --- 50% of his purchase price.)
Press here for another example of CBA in which cost of construction is available.