2. I bought two machines for $200,000 and a second-hand lorry for $50,000. The purchase costs are capital expenditure and cannot be deducted from my assessable profits. Is there any relief that I can claim?

You can claim for depreciation allowances. Please refer to the summary below:

  • Initial Allowance ("IA") is 60% of the cost of the machinery or plant, to be granted in the year of asset purchase.
  • Annual Allowance ("AA") is by nature a "wear and tear" allowance, granted annually on the reducing value of machinery or plant at 10%, 20% or 30% as laid down in the Inland Revenue Rules, a subsidiary legislation under the Inland Revenue Ordinance.
  • Some examples of the rates of AA for the more common machinery or plant :

Air-conditioning plant

10%

Room air-conditioners

20%

Electric refrigerators 20%

Washing machines and boilers

20%

Furniture (excluding soft furnishing)

20%

Motor vehicles

30%

Tractors

30%

  • A "Pooling System" was introduced in 1980/81. All items of machinery and plant qualifying for AA at the same rate are brought together in one “Pool”, with additional items added to, and disposal proceeds subtracted from, the “Pool”.
  • A balancing charge arises where the disposal proceeds exceed the reduced value of the "Pool".
  • A balancing allowance can only be granted to you on the cessation of the business.
  • The allowances that you may claim for your machines and lorry for the year of purchase and the next two years are shown in the table below.

Year 1 (The Year of purchase)

20% Pool
$

30% Pool
$

Purchase Costs

200,000

50,000

Less: IA (60% of cost)

120,000

30,000

 

80,000

20,000

Less: AA

16,000
(20% of 80,000)

6,000
(30% of 20,000)

Reduced value c/f to Year 2

64,000

14,000

Less: AA

12,800
(20% of 64,000)

4,200
(30% of 14,000)

Reduced value c/f to Year 3

51,200

9,800

Less: AA

10,240
(20% of 51,200)

2,940
(30% of 9,800)

Reduced value c/f to Year 4

40,960

6,860

If sold in Year 4
Less: Sale proceeds

23,000

9,900

Balancing charge in Year 4

 

*3,040

 

**17,960

 

Less: AA for Year 4

3,592
(20% of 17,960)

 

Reduced value c/f to Year 5

14,368

 

Less: AA for Year 5

2,874
(20% of 14,368)

 

Reduced value c/f to Year 6

**11,494

 

Notes:

* Your assessable profits for Year 4 will be increased by the balancing charge of $3,040.

** An AA will be given in respect of the sold machines every year until the balance of the “20% Pool” is reduced to zero. (In practice, this will rarely happen. Under normal circumstances, there would be new assets added to this “20% Pool”.)

Top