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 - Refurbishment expenditure 

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 deduction. 

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 off.

 

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