Basis Period - Commencement of business
The day of business
commencement declared by the business owner upon registration of business is
usually adopted without queries. However, in some cases involving disputes, it
is not easy to determine the exact day of business commencement. Indeed this is
largely a question of facts. In general, a retailer starts to trade when goods
are first offered for sale. A manufacturer starts trading when the manufacturing
begins. A property developer starts trading when he first enters into a project
of property development by taking such steps as appointment of an architect to
draw up the development plan.
The date of business
commencement may affect the deductibility of expenses. Although by accounting
principle all expenditures to set up a business should be capitalized, the
Revenue may by concession allow deduction for revenue expenditure such as rent
and staff wages before the business commencement.
Section 18C of Inland
Revenue Ordinance deals with the basis period for business commencement. As a
basic principle, the basis periods throughout the business life should start
from the date of commencement to the date of cessation. Normally, if business
account is made on a 12-months basis, the first basis period is the first
accounting year. Otherwise, there are special provisions.
Read the following
examples to see how profits are assessed on business commencement.
Example A: First
business accounts cover 12-months
Example B: First
business accounts cover 6 months
Example C: First
business accounts cover 18 months