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

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Profits Tax - Capital expenditure? or revenue expenditure? 

As a generally accepted accounting principle, capital expenditure is not a deductible expense in computing net profits. Indeed, Section 17(1)(c) of Inland Revenue Ordinance reaffirms this accounting principle so that capital expenditure is specifically disallowed when computing assessable profits. 

Nevertheless, the following capital expenditure can still be tax deductible because of the specific provisions in the Inland Revenue Ordinance:

What is capital expenditure? or revenue expenditure?

From time to time, the courts have difficulty in distinguishing a capital expenditure from a revenue expenditure. Of course, there are seldom disputes as to the normal recurrent expenditures such as salaries, wages, rent, bank interest, advertising... etc. that they are revenue expenses. But what about a big lump sum payment that is non-recurrent? Sometimes, disputes arise between between the taxpayers and the IRD as to such big  payments and the disputes go to the courts.

In fact, an asset can be fixed capital to a trader, but a circulating capital to the other --- in fact, the distinction depends on the nature of the trade and how the asset is used. Take machinery as an example: it is fixed capital to most traders but it is circulating capital to a trader of manufacturer of machinery. Whether an expenditure is of capital or revenue  is a question of facts and law --- it is to be determined on the merits of each particular case. There is no hard and fast rule for this question. It is frequently not a question with a clear yes or no. In fact, it is hard to make the distinction in practical circumstances. So, there are so many tax cases on the question. 

Indeed, the question of capital versus revenue is very important for taxation, not just concerning the deductibility of an expense but also affecting the taxability of an income. For its effect on the taxability of an income, please click here.

Press here for some well-known tax cases

 

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