Hong Kong taxpayers under profits tax are allowed tax depreciation allowances on the expenditure of fixed assets. It is usually given under the condition that these fixed assets were purchased to generate assessable income to the taxpayer.
Nevertheless, under the Hong Kong tax laws, capital expenditure is not deductible when determining an entity’s profits tax liabilities.
Therefore, expenses on capital assets like self-use/rental properties, office furniture and equipment, motor vehicles, computer hardware and software and manufacturing machineries, which are usually considered as capital in nature, are not tax deductible but may be eligible for tax depreciation allowances.
The types of allowances that may be used in the depreciation calculation will be looked at.
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Categories of Depreciation Allowances
The forms of depreciation allowances awarded to taxpayers are usually determined by the type of fixed assets acquired. Please find below the basic information as a general reference:
| Nature of fixed assets | Types of depreciation allowances potentially granted | Amount of allowances granted |
|---|---|---|
| Properties for self-use/rental purposes | Commercial building allowance (CBA) or industrial building allowance (IBA), depending on the nature of the business conducted by taxpayers | CBA: 4% of the qualifying expenditure each year (i.e. annual allowance) IBA: 20% of the qualifying expenditure in the year the qualifying expenditure is incurred (i.e. initial allowance); and 4% of the qualifying expenditure each year (i.e. annual allowance) (see Note below) |
| Office furniture and equipment | 10%, 20% or 30% depreciation allowance pool, depending on the nature of office furniture and equipment acquired | 60% of the qualifying expenditure in the year of acquisition (i.e. initial allowance) 10%, 20% or 30% of the remaining tax written down value each year since the year of acquisition (i.e. annual allowance) |
| Motor vehicles | 30% pool | 60% of the qualifying expenditure in the year of acquisition (i.e. initial allowance) 30% of the remaining tax written down value each year since the year of acquisition (i.e. annual allowance) |
| Computer hardware and software, manufacturing machineries | Prescribed fixed assets | 100% tax deduction in the year of acquisition |
Note: These principles for the calculation of the initial/annual allowances are applied for the case that the properties are bought by the taxpayers according to the first-hand situation. The property will be calculated on other basis when it is acquired by second-hand.
Key Aspects to Consider When Claiming Depreciation
- Fixed assets purchased under hire purchase financial scheme are also permitted depreciation allowances but with different calculation basis.
- Tax deduction and allowances are allowed for expenditures on intangible assets, as defined in the specific tax laws and regulations.
- Disposals/sales of fixed assets might lead to tax implications and consequences, for example, deemed trading receipts and taxable balancing charges.
- The tax entitlements for the above-mentioned depreciation allowances are subject to certain specific conditions stipulated in the Hong Kong tax laws.
How FastLane Group Can Help
Navigating the complexities of depreciation allowance claims and tax adjustments stemming from fixed asset disposals can be challenging. It’s advisable to seek professional guidance from a tax consultant or lawyer to ensure accurate accounting of tax depreciation allowances and prevent tax disputes with the IRD. Furthermore, working with a knowledgeable local tax advisor can help you leverage various tax allowances and incentives.
In FastLane Group, our consultants who are experienced to the tune of 15 years or more, and who continuously follow suit with the current regulations, are knowledgeable and can advise on applicable tax depreciation allowances. FastLane Group is here to guide you through the complicated and challenging terrain of tax depreciation, and help make sure you follow the correct Hong Kong tax rules. Contact us now.