Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Commercial building allowance 

Balancing adjustment on disposal of CB

Like IBA, the purpose of balancing adjustment is to adjust the total CBA to the cost of construction. If the residue of expenditure is less than the sales proceeds (attributable to the building), the adjustment will be a balancing charge --- that is to claw back the excess depreciation allowance. Of course, the balancing charge is restricted to the total CBA granted so as to avoid a tax on capital gain. If the residue of expenditure is greater than the sales proceeds (attributable to the building), the adjustment will be a balancing depreciation allowance.  

Balancing adjustment is to be made where any of the followings occurs to a commercial building:

  1. the relevant interest in the building is sold;

  2. the relevant interest in the building, being a leasehold interest, comes to an end; or

  3. the building is demolished or destroyed, or ceases altogether to be used.  

No balancing adjustment will be made if the building is NOT used as a CB when any of above events occurs.

Author's advice: Before commencement of business, some taxpayers incur decoration (裝修) expenditure on their business premises which are held on lease for, say 2 years. From my experience, many taxpayers omit to claim deduction for the decoration expenditure because they misunderstand that as the expenditure is of a capital nature, it is not deductible. In fact, in most cases, they are deductible in the form of depreciation allowances. 

Let's look at the following example. A taxpayer started a business on 1 April of 2006 and closed the business accounts on 31 March 2007. In March 2006, he spent $500,000 on decorating the shop before he started business. In this case, he could claim CBA in the first year of assessment 2006/07: 4% on $500,000 equal to $20,000. And in the second year of assessment 2007/08, in which the lease expired, he could claim balancing allowance on the residue of the expenditure: $480,000. In other words, although the decoration expenditure is of capital nature, it is fully deductible over the lease periods.

Where a taxpayer incurs decoration expenditure on a business premises which has been in use for many years, the taxpayer can claim deduction in respect of the expenditure on the grounds of "repairs" or "refurbishment". For details, please read my tax guide on expenditure of repairs or refurbishment

An illustration showing how CBA is computed

 

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