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Commercial building allowance 

An illustration showing how CBA is computed

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.

Example

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 construction.
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% = $1,000,000.
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.

 

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