Profits Tax -
Section 16F of IRO allows deduction for expenditure on
renovation or refurbishment of a non-domestic building or
structure over 5 years of assessment (20% each). Any person who
incurs the expenditure in the production of taxable profits can
claim the deduction.
A domestic building or structure is defined as any building or
structure used for habitation. It does not include any building
or structure used as a hotel or guesthouse, or any part of a
hotel or guesthouse. See section 16F(5). In other words, the
expenditure on a hotel or a guesthouse qualifies the deduction.
However, the expenditure on residential buildings used for
letting or on directors' or staff's quarters do not qualify the
No definition of “renovation” or “refurbishment” are laid down in
the Ordinance. In practice, the IRD adopts the ordinary
dictionary meanings. According to the Shorter Oxford English
Dictionary, “renovation” means renewal or restoration whereas
“refurbishment” means renovation.
Repair expenditure, providing it
is incurred in the production of assessable profits, is 100%
deductible under Section 16(1)(e). But deduction for renovation
or refurbishment expenditure spreads over 5 years of assessment.
So, it is preferable to distinguish repairs expenditure from
renovation or refurbishment expenditure. Repair means bringing
the asset back to its original conditions without substantial
improvement. Renovation or refurbishment expenditure implies a
substantial improvement to the asset.
In the case Conn v. Robins Brothers Ltd. 43 TC 266, the business
premises was over 400 years old and in a state of substantial
disrepair. The repair work was very substantial including: (a)
constructing a new roof (b) inserting steel joists to support
the new first floor walls (c) replacing oak flooring with
concrete (d) building a new shop front and (e) replacing timbers
with oak-encased steel beams. The overall expenditure was held
as revenue expenditure on the grounds that the fundamental
structure of the premises did not change.
Where the building renovated or refurbished is no longer used
for the production of profits, e.g. when the building or
structure is disposed of or returned to the landlord upon
termination of lease, the taxpayer can still claim the 20%
deduction in the remaining years of assessment until the
expenditure is exhausted: Section 16F(2)
Where a taxpayer ceases to carry on his business before the
refurbishment expenditure is exhausted, the deduction for the
year of cessation is still 20% of the expenditure. No more
deduction will be granted after the business cessation even
though the balance of expenditure has not been fully written