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

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Depreciation allowance - plant and machinery - pooling system

Under this system, the reducing value after initial allowance of all assets with the same rate of annual allowance are put into the same pool. Then, from the reducing value of this pool, disposal proceeds of any asset belonging to that pool are deducted. Then, annual allowance at the proscribed rate on the reducing value of the pool is deducted.

Initial allowance is 60% on capital expenditure incurred --- capital expenditure means the purchase price plus delivery and set-up cost. Then, the reducing value (that is the cost less the initial allowance) is transferred to the pool for annual allowance.

The rate of annual allowance is proscribed in Inland Revenue Rule No. 2. Applying this rate on the reducing balance gives the annual allowance which is to be deducted from the reducing value of the pool.  Annual allowance will be granted if the asset has been used for the trade during the basis period --- unlike the old system, the asset must be used at the end of the basis period.

Clearly, this system dispenses with keeping record for each asset and the frequent computing of balancing adjustments on disposal of assets. If the business is going on, there will be no balancing allowance. And balancing charge will only arise when the sales proceeds exceeds the reducing balance of the pool --- this is obviously very rare in practice.

On cessation of business, if the assets are sold, there will be balancing adjustments --- that is to adjust the total allowances to the total net cost of the assets (the total costs less total sale proceeds). If the sale proceeds exceeds the reducing balance, the difference being the adjustment will be a balancing charge --- a taxable receipt.  If the sale proceeds is less than the reducing balance, the difference being the adjustment will be a balance allowance --- a further allowance.

When an asset bought for private use is used for the trade, the notional reducing value of such asset will be added to the pool for annual allowance. The notional reducing value is computed by deducting from the cost of the asset by a notional allowance at the proscribed rate of annual allowance for each complete year of not used for the trade.  No initial allowance will be granted for such asset.

If an asset of a pool ceases to be used for the trade, then the reducing value (as determined by the Revenue) will be deducted like disposal proceeds from the reducing value of the pool.  

Press here for an illustration showing how the pooling system works 


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