Inland Revenue Department

The Government of the Hong Kong Special Administrative Region

of the People's Republic of China

DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES

NO. 7 (REVISED)

MACHINERY AND PLANT － DEPRECIATION ALLOWANCES

These notes are issued for the information of taxpayers and their tax
representatives. They contain the Department’s interpretation and practices in
relation to the law as it stood at the date of publication. Taxpayers are
reminded that their right of objection against the assessment and their right of
appeal to the Commissioner, the Board of Review or the Court are not affected
by the application of these notes.

These notes replace those issued in August 2002.

LAU MAK Yee-ming, Alice

Commissioner of Inland Revenue

August 2009

Our web site : www.ird.gov.hk

 DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES

No. 7 (REVISED)

CONTENT

Paragraph

Part I Introduction
Persons entitled to the allowances 3

Expenditure which qualifies 4

Meaning of “machinery or plant” 8

Capital expenditure incurred prior to 11

commencement of business

Basis period 13

Part II The “Pooling System”－1980/81 onwards

Background 15

The allowances－

Initial allowance 16

Annual allowance 19

Annual allowance rates 21

Calculation of the allowances 22

Assets brought into the business after non-business use 25

Proceeds of machinery or plant disposed of 28

Assets removed from pool for non-business use 30

Succession to a trade, etc. 31

Balancing allowances and balancing charges 32

Assets put out of use upon cessation of trade, etc. 35

Part III Situations where the pooling system does not apply
Assets acquired under hire purchase agreements 37

Total depreciation allowances not to exceed total 39

capital expenditure

Balancing allowance concession 41

Machinery or plant used partly for the purposes of 43

the trade, etc.

Part IV Miscellaneous provisions

Commissioner’s discretion－rate of annual allowance 47
Assets sold together 49
Transactions between related parties 50
Commissioner’s power to direct that the old scheme 51
should apply

APPENDIX A(i) Rates of depreciation, as prescribed by the Board of

Inland Revenue

APPENDIX A(ii) “Implements, utensils and articles”, as prescribed by the

Board of Inland Revenue

APPENDIX B Items which qualify as machinery or plant

APPENDIX C Items which do not qualify as machinery or plant

ii
PART I － INTRODUCTION

Sections 12(1)(b) and 12(5) of the Inland Revenue Ordinance (the

Ordinance) provide for depreciation allowances and charges calculated in
accordance with Part VI of the Ordinance to be taken into account in
ascertaining the net assessable income of a person subject to Salaries Tax.
Similarly, section 18F of the Ordinance provides for depreciation allowances
and charges made under Part VI to be taken into account in ascertaining the
assessable profits of a person subject to Profits Tax.

2. For years of assessment prior to 1980/81, the relevant provisions of

Part VI are contained within sections 37, 37A, 38 and 39 (referred to in this
Practice Note as “the old scheme”). A revised scheme, known as “the pooling
system”, was introduced with effect from the 1980/81 year of assessment by
the Inland Revenue (Amendment) (No. 4) Ordinance 1980. The calculation of
depreciation allowances under the pooling system is basically provided by
sections 39B, 39C and 39D. In certain circumstances, provisions of the old
scheme, rather than of the pooling system, may apply in respect of a year of
assessment subsequent to 1979/80.

Persons entitled to the allowances

3. Depreciation allowances in respect of machinery and plant are not

restricted to persons carrying on particular kinds of trades, professions or
businesses. Rather, the allowances under sections 37 and 39B are available to
every person carrying on a trade, profession or business in respect of which the
person is chargeable to Profits Tax under Part IV of the Ordinance. Similarly,
by virtue of section 12(1)(b), all employees are entitled to depreciation
allowances where the use of plant or machinery is essential to the production of
assessable income.

Expenditure which qualifies

4. Depreciation allowances are made in respect of “capital expenditure”

incurred on the provision of machinery or plant. The term “capital
expenditure” is defined in section 40(1), for the purposes of Part VI of the
Ordinance, to include interest and commitment fees incurred in respect of a
loan made for the purpose of financing the provision of machinery or plant. On
the other hand, the definition excludes expenditure which is reimbursed by way
of or is attributable to any grant, subsidy or similar financial assistance. It also
excludes, in relation to the person incurring the expenditure, any expenditure
which is allowed to be deducted in ascertaining for the purpose of Part IV of
the Ordinance the profits of a trade, profession or business carried on by that
person. It follows that depreciation allowances cannot be claimed in relation to
expenditure which qualifies for deduction under, for example, section 16B (in
respect of research and development), 16F (on building refurbishment), 16G
(on the provision of a prescribed fixed asset) or 16I (in relation to
environmental protection facilities, which include environmental protection
machinery).

5. It should be noted that section 16G, which came into effect on 1

April 1998, provides for the situation where a qualifying item of machinery or
plant was acquired in an earlier year of assessment and has accordingly been
the subject of depreciation allowances. In such a case, if an appropriate
election is made, a deduction is allowed under the section in respect of the
1998/99 year of assessment for the capital expenditure incurred on the
provision of the item, reduced by the aggregate of initial and annual allowances
made to the person concerned in prior years of assessment. The relevant
amount ceases to qualify for depreciation allowances and must accordingly be
excluded in relation to their computation for the 1998/99 and subsequent years
of assessment. In respect of environmental protection machinery, similar
transitional provisions are contained in section 16K to deal with machinery or
plant acquired before the commencement of section 16I (i.e. 27 June 2008).

6. Sections 37 and 39B refer to “capital expenditure on the provision of

machinery or plant”, and subsection (2) of section 37 refers to “the cost of the
asset”. Both phrases are construed as meaning the net cost of acquisition of the
asset to the owner for the time being who is claiming the allowances. In this
regard, the net cost of acquisition represents the supplier’s price for the item,
plus any charges relating to freight, insurance, delivery, import duties, etc., and
less any discounts, rebates, subsidies, etc. accorded to the purchaser. The
decision in C.I.R. v. Hong Kong Bottlers Ltd. (H.K.T.C. 497) was to the effect
that cost is to be taken as meaning the same as capital expenditure incurred by
the person claiming the allowance (but see paragraph 31 below as to machinery
and plant which is acquired other than by purchase).

7. Hire purchase interest charges do not form part of the qualifying

expenditure (see paragraphs 37 and 38 below).

Meaning of “machinery or plant”

8. The Ordinance does not provide an exhaustive definition of

“machinery or plant”. However, section 40 of the Ordinance and Rule 2 of the
Inland Revenue Rules provide assistance in determining what constitutes
“machinery or plant” for the purposes of making depreciation allowances. The
following points are pertinent in this regard.

• Section 40(1) provides, inter alia, that “ “capital expenditure

on the provision of machinery or plant” includes capital
expenditure on alterations to an existing building incidental to
the installation of that machinery or plant for the purposes of
the trade, profession or business”.

• Rule 2 provides that items specified in the second column of

the First Part of the Table annexed to the rule are deemed to
be included in the expression “machinery or plant” (see
Appendix A(i)). On the other hand, the rule also provides that
items specified in the second column of the Second part of
that Table (Appendix A(ii)) are deemed not to be included in
that expression (accordingly depreciation allowances cannot
be made), but instead are deemed for the purposes of the
Ordinance to be included in the expression “any implement,
utensil and article”. The latter grouping includes such items
as loose tools, crockery and linen which are normally dealt
with under the “replacement” basis specified in section
16(1)(f). Finally, Rule 2 provides that wharves shall not be or
be deemed to be “plant or machinery”.

9. Nevertheless, as has been stated above, the term “machinery or

plant” is not exhaustively defined, and for the purposes of depreciation
allowances, the Table annexed to Rule 2 per Appendix A(i) lists as the last of
the items “machinery or plant, not specified in items 1 to 34”. Accordingly,
where depreciation allowances are claimed in respect of expenditure on an item

not specifically listed, it is necessary to consider whether the item falls within
the general description of “machinery or plant”.

10. The meaning of the phrase “machinery or plant” has been considered
in a number of cases by the courts in Hong Kong and other common law
jurisdictions. On the basis of the principles established, the Department has
taken positions in relation to a number of items which are not specifically listed
in Appendix A(i) or (ii). In this regard, Appendix B enumerates items which
are recognised as machinery or plant, and Appendix C enumerates items which
are not so recognised.

Capital expenditure incurred prior to commencement of business

11. Where a person carries on a trade and incurs capital expenditure on

the provision of assets for a new trade about to be commenced, the Ordinance
does not provide for deductions or allowances to be granted in respect of the
expenditure against the profits of the existing trade. However, section 40(2)
provides, for the purposes of Part VI, that in such a situation the expenditure is
treated as if it were incurred on the day that the new trade commences.
Accordingly, if the expenditure is incurred on the provision of machinery or
plant, allowances can be granted against the profits of the new trade, once it has
commenced.

12. Where a person ceases to carry on a particular trade and transfers

machinery or plant previously used in it to another trade which he carries on, it
is not considered that the person is entitled to claim more than one annual
allowance in respect of that machinery or plant for any one year of assessment.
This is because the allowance is granted to the “person” and not to the “trade”.

Basis period

13. The basis period for the purpose of calculating depreciation

allowances is generally the same as that used by the taxpayer concerned for the
purpose of computing assessable profits. The term “basis period” is defined in
section 40(1) so that for the purposes of Part VI, apart from the situation where
either of two specified exceptions is applicable, it has the same meaning as that
assigned to it by section 2 of the Ordinance (i.e. “ “basis period” for any year of

assessment is the period on the income or the profits of which tax for that year
ultimately falls to be computed”). The two exceptions, so far as is relevant, are:

(a) where two basis periods overlap, the period common to both
is deemed to fall into the first period only; and

(b) where there is an interval between the end of the basis period
for one year of assessment and the beginning of the basis
period for the next succeeding year of assessment, the interval
is deemed to fall into the second basis period.

14. The meaning assigned to the term “basis period” in Part VI ensures
that on a change of accounting date by a taxpayer, initial allowance is only
granted once in respect of expenditure incurred in a period which is common to
two basis periods, and also that the allowance is not lost where expenditure is
incurred during an interval between two basis periods.

Part II － THE “POOLING SYSTEM” －1980/81 Onwards

Background

15. As was mentioned earlier, the “pooling system” for making

depreciation allowances was introduced by the Inland Revenue (Amendment)
(No. 4) Ordinance 1980 and has been in effect since the year of assessment
1980/81. The pooling system was not introduced with the intention of
fundamentally changing the depreciation allowances or charges made under the
old scheme. Rather, the intention was merely to save time and expense by
modifying the old scheme to reduce the need to maintain detailed depreciation
records in respect of individual items of machinery and plant. The pooling
system seeks to achieve this objective by, in essence, creating a single “pool”
of expenditure in respect of all items of machinery or plant which qualify for a
particular rate of annual allowance.

The allowances

Initial allowance

16. Section 39B(1) provides for an initial allowance to be made where “a

person carrying on a trade, profession or business incurs capital expenditure on
the provision of machinery or plant” for the purposes of producing profits
chargeable to Profits Tax. As with the corresponding provision under the old
scheme (section 37(1)), section 39B(1) provides that the initial allowance is
made to the person for the year of assessment in the basis period for which the
expenditure is incurred. There is no requirement that the asset must be in use
in the basis period, but the allowance is subject to the asset eventually being
acquired and used in the trade carried on.

17. As initial allowance is made in respect of capital expenditure

“incurred”, it is not limited to sums actually paid. Where a contractual
obligation exists, the due date for payment of deposits, instalments, etc. will be
regarded as the date when the expenditure is incurred, even if actual payment
occurs at a later date. It should be noted, however, that no allowance can be
made in respect of what is merely a contingent liability. It follows that a
deposit or advance payment is not recognised as expenditure incurred on the
provision of machinery or plant unless it has been paid on a non-refundable
basis in respect of a binding purchase contract. In the absence of a written
contract, the date of delivery of the asset is normally taken to be the date on
which the expenditure is incurred.

18. The rate of initial allowance for any year of assessment commencing
on or after 1 April 1989 is 60% (section 39B(1A)(c) and, where the old scheme
is applicable, section 36A(3)(c)).

Annual allowance

19. Section 39B(2) provides for an annual allowance to be given for

each year of assessment. This is calculated at the appropriate rate on the
reducing value of each class or pool of machinery or plant. A class of
machinery or plant is made up of all such items eligible for the same rate of
annual allowance (see paragraph 21). Unlike the position in respect of annual
allowances under the old system (see section 37(2)), there is no requirement

under the pooling system to the effect that the asset must be owned and in use
at the end of the basis period.

20. Section 39B(2) provides, in effect, for annual allowance to be made

to a person where he has at some time (not necessarily during the basis period
for the current year of assessment) owned and had “in use” any machinery or
plant for the purpose of producing profits chargeable to Profits Tax. It is the
Department’s view that the words “in use” should not be strictly construed.
Thus where a machine is temporarily idled during the last few days of a basis
period, e.g. awaiting commencement of a new production run, the machine is
considered to be “in use” for the purposes of the allowance. In regard to spare
parts, e.g. reserve engines for taxis, the Department’s position is that where
these are “on the bench” ready for installation and use, they qualify for the
allowance. However, where spares are held in store for issue or are held crated
as received from the supplier, they are not considered to be “in use” for the
purposes of the allowance.

Annual allowance rates

21. Section 39B(3) provides that the annual allowance shall be

calculated at the rates of depreciation prescribed by the Board of Inland
Revenue and shall be computed on the reducing value of each class of
machinery or plant. The rates prescribed by the Board are set out in the third
column of the First part of the Table annexed to Rule 2 of the Inland Revenue
Rules. The Table (see Appendix A(i)) specifies the rates of depreciation for
certain classifications of machinery and plant and, for those not specifically
itemised, lays down a general rate of 20%. [The same rates apply in respect of
annual allowances made under the old scheme (section 37(2)).]

Calculation of the allowances

22. Apart from its role in relation to the rates of depreciation, section
39B(3) also provides that the annual allowance “shall be computed on the
reducing value of each class of machinery or plant”. Section 39B(4), (5), (6)
and (7) detail what is meant by the reducing value of a class of machinery or
plant. In essence, the “reducing value” of a class of machinery or plant (i.e. the
figure which is multiplied by the prescribed rate of depreciation to calculate the

annual allowance to be made in respect of the class concerned for the year of
assessment under consideration) is arrived at by aggregating (as applicable):

(a) the reducing value of the class (i.e. the “pool”) brought
forward from the end of the previous year of assessment;

(b) the amount of qualifying capital expenditure incurred on the

provision of machinery and plant of the same class during the
basis period for the current year, less any initial allowance
given in respect of that expenditure. [Expenditure does not
qualify if incurred in respect of machinery or plant which is
either under hire-purchase (section 39C(1)(a)) or only partly
used for the purpose of producing chargeable profits (section
39C(1)(b)). These categories are further discussed in Part III
below];

(c) the reducing value (i.e. capital expenditure incurred less any
initial or annual allowances made), as at the end of the
previous year of assessment, of each item of machinery or
plant acquired under hire-purchase which passed into the
ownership of the person during the previous year of
assessment (see section 39C(2) and paragraphs 37 and 38
below);

(d) in respect of each item of machinery or plant owned and used

by the person for any period immediately before using it to
produce chargeable profits in the particular year of
assessment, the actual cost of the item less the notional annual
allowances which would have been made under section 37 if
the owner had used the item since acquisition for the purpose
of producing chargeable profits (see section 39B(6) and
paragraphs 25 to 27 below);

(e) the reducing value taken over (as a result of succession during
the year of assessment to a trade, profession or business) of
machinery or plant acquired without being purchased (see
section 39B(7) and paragraph 31 below);

 and deducting (as applicable):

(f) the aggregate of any sale, insurance, salvage or compensation

money received in respect of any item of machinery or plant
belonging to that class disposed of during the basis period
(see section 39B(4)(e) and paragraphs 28, 49 and 50 below);
and

(g) the reducing value (determined by the Commissioner) of any

machinery or plant previously used wholly and exclusively in
the production of profits which ceased to be so used during
the basis period (see section 39C(3) and paragraph 30 below).

23. The following examples illustrate the operation of the pooling

system. [In considering the examples in this Practice Note, it should be
assumed, unless information to the contrary is provided, that the taxpayer
concerned is carrying on a trade, profession or business in Hong Kong and that
the machinery or plant is used therein by the taxpayer for the purpose of
producing profits chargeable to Profits Tax.]

Example 1

24. A taxpayer commenced business on 2 February 1994. The accounts

of the business are made up to 31 December each year. During the first year of
trading, the following items of machinery and plant were purchased:

1 motor car $150,000 (30% annual allowance rate)

3 electric cookers $50,000 (30% annual allowance rate)
1 set of office furniture $20,000 (20% annual allowance rate)
2 room air-conditioning units $28,000 (20% annual allowance rate)

Machinery and plant depreciable at the same annual allowance rate is “pooled”
together for the purpose of calculating the depreciation allowances. For the
year of assessment 1994/95, the company is entitled to depreciation allowances
totalling $176,640, computed as follows:

 30% Pool 20% Pool Allowance

$ $ $
Cost 200,000 48,000
Less : I. A. (60%) 120,000 28,800 148,800
80,000 19,200
Less : A. A. 24,000 3,840 27,840
Reducing value c/f 56,000 15,360
Total 176,640

During the year ended 31 December 1995, the motor car was damaged beyond
repair in an accident. The insurance company paid $30,000 and the taxpayer
also obtained $1,000 from a scrap dealer for the wreck. During the same year,
a new van was purchased for $180,000, an electric cooker was disposed of for
$3,000, and a room air-conditioning unit was sold for $2,000, replaced with a
new one purchased for $8,000.

For the year of assessment 1995/96, the taxpayer would be entitled to

depreciation allowances totalling $144,312, computed as follows:

30% Pool 20% Pool Allowance

$ $ $
Reducing value b/f 56,000 15,360
Add : New assets 180,000 8,000
236,000 23,360
Less : I.A. 108,000 4,800 112,800
128,000 18,560
Less : Sale proceeds 34,000 * 2,000
94,000 16,560
Less : A.A. 28,200 3,312 31,512
Reducing value c/f 65,800 13,248
Total 144,312
* Sale proceeds: $34,000 = $30,000 + $1,000 + $3,000
*****
Assets brought into the business after non-business use

25. Under both the old scheme and the pooling system (see sections
37(2A) and 39B(6)), notional allowances have to be computed if an item of

10

machinery or plant is owned and used by a person before he uses it for the
purpose of producing profits chargeable to tax. In such a case, for the purpose
of calculating the annual allowance in respect of the item (i.e. the amount to be
included in the pool where the pooling system is applicable), the capital
expenditure incurred on the provision of the item is computed by deducting
from its actual cost the notional amount of the annual allowance that would
have been made under section 37 to the owner if since acquiring the machinery
or plant he had used it for the purpose of producing profits chargeable to tax.
There is no provision for deducting a notional initial allowance from the actual
cost.

26. No entitlement to initial allowance arises in such circumstances.

This is because entitlement only arises under the respective Profits Tax and
Salaries Tax provisions where it can be said of the relevant capital expenditure
that it was incurred on the provision of machinery or plant for the purpose of
producing profits chargeable to tax under Part IV, or in the case of
employment, machinery or plant the use of which is essential to the production
of the assessable income. It follows that where the expenditure is incurred for
some other purpose, irrespective of how the machinery or plant is subsequently
used, the requirement for entitlement is not satisfied.

Example 2

27. A taxpayer, who had been trading for some years, purchased a car
for private use on 10 May 1994 at a cost of $160,000. The car was transferred
to business use on 12 August 1996. The taxpayer’s accounts are made up to 31
March each year.

30% Pool
$
Actual Cost 160,000
Less : 1994/95 Notional annual allowance
$160,000 x 30% 48,000
112,000
Less : 1995/96 Notional annual allowance
$112,000 x 30% 33,600
Notional cost of asset 78,400

11

 Note: For the purposes of the 30% pool in the 1996/97 and
subsequent years of assessment, the car would be treated as if
it had been purchased on 12 August 1996 for $78,400.

*****

Proceeds of machinery or plant disposed of

28. The Ordinance makes it clear that any sale, insurance, salvage or
compensation moneys received in respect of machinery or plant which has
been included in a pool is to be deducted in ascertaining the reducing value of
the pool (section 39B(4)(e)) and, where cessation is involved, in calculating
any balancing charge required to be made under section 39D(2)(b) (see
paragraph 32 below). Thus, if machinery or plant is destroyed, the sum to be
taken into account is generally the total of any insurance, salvage or
compensation received. However, section 39D(6) provides that the total
amount taken into account is not to exceed the capital expenditure incurred on
the provision of the particular item. Where the asset was introduced into the
business after non-business use, the relevant figure is the capital expenditure
computed in accordance with section 39B(6) (i.e. the actual cost of the asset
less notional annual allowances for the years of non-business use).

Example 3

29. The reducing value of a taxpayer’s 30% pool after 1995/96

allowances was $36,000. During the year ended 30 June 1996, a van which
had cost $138,000 was sold for $140,000. A car, which had been purchased in
July 1993 for $320,000, was introduced into the business on 1 September 1995.
The accounts of the taxpayer are made up to 30 June each year.

Year of Assessment 1996/97

30% Pool
$
Reducing value b/f 36,000
Add: Notional cost of car introduced * 156,800
192,800
Less : Disposal value (restricted to actual cost) 138,000
54,800

12

 Less : A.A. 16,440

Reducing value c/f 38,360

* Computation of the notional cost of the car for the purpose of its
introduction into the business (see paragraphs 25 and 26 above):

$
Actual cost of the car 320,00
0
Less: Notional annual allowances for years of
non-business use (two complete years):
• 1994/95 notional annual allowance
$320,000 x 30% 96,000
• 1995/96 notional annual allowance
$224,000 x 30% 67,200 163,20
0
Notional cost for business under section 156,80
39B(6) 0

Note: (i) No initial allowance is due on the car introduced as no

capital expenditure was incurred during the basis period.
(ii) Any new expenditure has to be added to the pool before
disposal proceeds are deducted. Even though the van
was sold for $2,000 more than its purchase price, the
disposal value is not to exceed the capital expenditure
incurred on the provision of the particular item.
*****
Assets removed from pool for non-business use

30. Where an item of machinery or plant which has been used wholly
and exclusively in the production of chargeable profits ceases to be so used
(e.g. when it becomes used wholly or partly for private purposes), its reducing
value must be deducted from that of the pool for the year of assessment during
the basis period for which the change occurred. The reducing value of the
machinery or plant is deemed, under section 39C(3), to be the amount which
the Commissioner considers the item in question would have realised if sold in
the open market at the time it ceased to be wholly and exclusively used in the
production of chargeable profits. Depreciation allowances are separately

13

calculated for the year of change, and for subsequent years for so long as the
item continues to be used (partly or wholly) in the production of chargeable
profits (see paragraphs 43 and 44 below).

Succession to a trade, etc.

31. The provisions of section 39B(7) cater for the situation where a
person succeeds to a trade, profession or business and are broadly similar to
those of section 37(4), relating to the old scheme. Thus, if on succession to a
trade, ownership of machinery or plant passes to the successor without it being
sold to him, the reducing value of each pool of expenditure unallowed to the
old proprietor is taken over by the new proprietor. The successor is entitled to
annual allowance under section 39B(2) once the machinery or plant is used to
produce chargeable profits in his trade. The successor is not, however, entitled
to any initial allowance in respect of such machinery or plant (section 39B(8)).
For the purpose of calculating any subsequent reduction from the pool or
balancing charge on disposal, the cost of the asset acquired by the successor in
this way will be deemed to be equal to the reducing value of the pool taken
over.

Balancing allowances and balancing charges

32. Section 39D(2) provides that where a person ceases to trade and the
sale, etc., moneys received for the machinery or plant are less than the reducing
value in the pool, a balancing allowance equal to the difference is to be made.
This is the only situation in which a balancing allowance can be given － any
sum received on the disposal of an asset at any other time is simply deducted
from the value of the pool. A balancing charge can, however, arise whenever
disposal proceeds exceed the reducing value of the pool (i.e. not only on the
disposal of a class of machinery or plant on the cessation of trading). However,
it should be noted that by virtue of section 39D(3), no balancing charge or
balancing allowance can arise where on cessation machinery or plant passes to
a successor to whom the reducing value of the machinery or plant is transferred
under section 39B(7).

14

Example 4

33. A taxpayer owned three motor vehicles as at 30 June 1994. During

the year ended 30 June 1995 he sold one for $130,000 without replacing it, and
during the following year another for $60,000, again without replacing it. In
each case the vehicle was sold for less than its original cost. The accounts of
the business are made up to 30 June each year.
The reducing value carried forward after the 1994/95 allowances was $125,000
for the 30% pool. As a result of the disposals, balancing charges, computed as
follows, would be made:

Year of Assessment 1995/96

30% Pool
$
Reducing value b/f 125,000
Less: Disposal value 130,000
Balancing charge [s.39D(1)(a)] 5,000

Reducing value c/f [s.39D(1)(b)] nil

Year of Assessment 1996/97

30% Pool
$
Reducing value b/f nil
Less: Disposal value 60,000
Balancing charge [s. 39D(1)(a)] 60,000

*****

Example 5

34. A taxpayer commenced trading in 1976. His accounts were made up

to 30 September each year. On 15 May 1996 he ceased trading. During the
final year he purchased machinery costing $20,000, which qualified for the
20% annual allowance rate. The reducing values of the 20% and 30% pools
after the 1995/96 allowances were $13,000 and $21,000 respectively. On

15

cessation, the machinery and plant were sold for $15,000 and $28,000, for the
20% and 30% pools respectively. The resulting balancing allowance and
balancing charge for the cessation year would be computed as follows:

Year of Assessment 1996/97

30% Pool 20% Pool

$ $
Reducing value b/f 21,000 13,000
Add: New asset 20,000
33,000
Less: I.A. 12,000
21,000
Less: Sale proceeds 28,000 15,000
Balancing allowance [s. 39D(2)] 6,000

Balancing charge [s. 39D(2)] 7,000

Note: As a matter of practice, no annual allowance is computed for the

year of cessation, but initial allowance is due on capital
expenditure incurred during the final basis period.

*****

Assets put out of use upon cessation of a trade, etc.

35. Section 38(4) and section 39D(4) and (5) contain similar rules to the
effect that where machinery or plant is put out of use by reason of a person
ceasing to carry on a trade, the person is deemed to have received immediately
prior to the cessation sale proceeds for the machinery or plant of such amount
as the Commissioner may consider it would have realised if sold in the open
market. However, if within twelve months of the date of cessation the taxpayer
sells the asset, he may claim the adjustment of any balancing allowance or
balancing charge which may have been made to or on him as if the actual sale
had taken place immediately prior to the date of cessation. The sections
provide for such an adjustment to be made, notwithstanding that the assessment
may otherwise have become final and conclusive under the provisions of
section 70. These sections are not considered to apply where following the

16

cessation of a trade any machinery or plant previously used therein is

transferred to another trade carried on by the same person, whether or not there
is an intervening period between the cessation and the transfer.

Example 6

36. On 15 February 1995 a taxpayer ceased to carry on a business. The

accounts of the business had been made up to 31 March each year. The items
of machinery and plant included in the 30% pool, which originally cost
$75,000 and had a reducing value of $21,000 after the 1993/94 allowances,
were sold shortly after cessation of the business for $80,000.

Items (consisting of office furniture) in the 20% pool, which originally cost
$20,000 and had a reducing value of $6,400 after the 1993/94 allowances, had
not been sold when the accounts for the final period of trading were submitted
to the Inland Revenue Department. In accordance with section 39D(4), the
Commissioner placed an open market value of $7,200 on the furniture.

On 7 June 1995, a Notice of Assessment was issued to the taxpayer advising

the assessable profits under section 18D for the final year of assessment of the
business, i.e. 1994/95. No objection was lodged in respect of the assessment.
However, on 11 November 1995, the taxpayer advised the Department that the
office furniture had been sold for $5,000, and claimed adjustment to the
assessment in accordance with section 39D(5). Balancing charges, computed
as follows, would have been included in the original assessment:

30% Pool 20% Pool

$ $
Reducing value b/f 21,000 6,400
Less: Sale price 80,000 7,200 [s. 39D(4)]
Balancing charge* 59,000 800
* The balancing charge for the 30% pool would be restricted, in effect,
under section 39D(6) to $54,000, being the total of the allowances
previously granted to the taxpayer, i.e. $75,000 － $21,000.
The total balancing charge would be $54,800
i.e. $54,000 + $800.

17

Upon receipt of the claim under section 39D(5), a revised assessment would be
issued to reflect the following adjustment to the balancing charge previously
made in respect of the 20% pool:

20% Pool
$
Reducing value b/f 6,400
Less: Actual sale proceeds 5,000
Balancing allowance 1,400
Add: Previous balancing charge now withdrawn 800
Reduction in assessment 2,200

*****

Part III － SITUATIONS WHERE THE POOLING SYSTEM DOES

NOT APPLY

Assets acquired under hire purchase agreements

37. Section 39C(1)(a) provides that the pooling system does not apply in
respect of machinery or plant being acquired under hire purchase (i.e.
machinery or plant in respect of which section 37A applies). The initial and
annual allowances due in respect of expenditure incurred on the provision of
such machinery or plant must be calculated separately, as per Example 7
below. In effect, the legislation provides that for each year of assessment in the
basis period for which the taxpayer has made an instalment payment, an initial
allowance is made in respect of the capital element of the instalment payments
made during the basis period. However, when the instalment payments are
completed and no further initial allowance is due, the reducing value of the
asset is added to the appropriate pool, i.e. in the year of assessment following
the year of assessment during the basis period for which the machinery or plant
passes into the ownership of the taxpayer (section 39C(2)).

Example 7

38. A taxpayer acquired a suite of office furniture at a hire purchase

price of $220,000 in January 1995. The cash price was $160,000. A deposit of
$10,000 was paid in January 1995. The first of 24 monthly instalments was

18

paid in February 1995. The taxpayer closes his accounts on 31 March

annually. Depreciation allowances would be made to the taxpayer as follows:

20% HP Allowance Y/A

$ $
Cost 160,000
Less: I.A. ($10,000 + 150,000 x 2/24) x 60% 13,500 13,500
146,500
Less: A.A. 29,300 29,300
117,200
42,800 1994/95

Less: I.A. ($150,000 x 12/24 x 60%) 45,000 45,000

72,200
Less: A.A. 14,440 14,440
57,760
59,440 1995/96

Less: I.A. ($150,000 x 10/24 x 60%) 37,500 37,500

20,260
Less: A.A. 4,052 4,052
Reducing value c/f * 16,208
41,552 1996/97

* The reducing value figure of $16,208 would be transferred to the 20% pool
in the year of assessment 1997/98.

*****

Total depreciation allowances not to exceed total capital expenditure

39. It should be appreciated that initial and annual allowances are

provided under the Ordinance as a process of allocation of capital expenditure.
It therefore follows that where an item of machinery or plant is acquired under
a hire purchase agreement, the total amount of depreciation allowances made to
a taxpayer should not exceed the amount of capital expenditure incurred on the
item. The following example provides an illustration of a situation where the
limitation would be applied.

19

Example 8

40. A taxpayer entered into a hire purchase agreement in July 1993 to

acquire a tractor, at a hire purchase price of $250,000. A deposit of $30,000
was paid. The hire purchase price included interest of $40,000. The first of 36
monthly instalments was paid in August 1993. The taxpayer makes up
accounts to 31 December each year. The following depreciation allowances
would be made to the taxpayer.

30% HP Allowance Y/A

$ $ $
Cost 210,000
1
Less: I.A. * 33,000 33,000
177,000
Less: A.A. 53,100 53,100 86,100 1993/94
123,900
2
Less: I.A. * 36,000 36,000
87,900
Less: A.A. 26,370 26,370 62,370 1994/95
61,530
2
Less: I.A. * 36,000 36,000
25,530
Less: A.A. 7,659 7,659 43,659 1995/96
17,871
3
Less: I.A. * 17,871 17,871 17,871 1996/97
Accumulated deprecation allowances 210,000

*1 ($30,000 + $180,000 x 5/36) x 60%

*2 $180,000 x 12/36 x 60%
*3 The amount of depreciation allowance made to the taxpayer in
the year of assessment 1996/97 would be $17,871,
notwithstanding the payment of capital expenditure of $35,000
(i.e. $180,000 x 7/36).

*****

20

Balancing allowance concession

41. It is recognised that in some cases where machinery or plant under a

hire purchase agreement is repossessed by, or voluntarily returned to, the
vendor, the taxpayer’s total capital expenditure may exceed the sum of the
depreciation allowances made prior to the disposal and whatever amount, if
any, is received from the vendor upon the latter’s disposal of the repossessed or
returned asset. In such a situation (i.e. where the machinery or plant is under
hire purchase), the Ordinance does not provide for any balancing allowance to
be made to the taxpayer in respect of the excess. The Department does,
however, by way of an extra-statutory concession, grant such an allowance.

Example 9

42. In June 1995 a taxpayer entered into a hire purchase agreement to

acquire office furniture. The hire purchase price of the furniture was $120,000,
including an interest element of $20,000. A deposit $10,000 was paid in June
1995, and the first of the 24 monthly instalments covering the balance was paid
in July 1995. The taxpayer ceased paying instalments in April 1996 (i.e. after 9
instalments had been paid), shortly after which the furniture was repossessed
(the taxpayer did not receive any payment from the vendor after the
repossession). The taxpayer continued to carry on the business. The accounts
of the business are made up to 31 December each year.

Whereas the total amount of capital expenditure paid by the taxpayer was
$43,750 (i.e. $10,000 + $90,000 x 9/24), the total of the depreciation
allowances which could be made to the taxpayer under section 37A would be,
as can be seen below, $42,350 (i.e. $19,500 + $16,100 + $6,750). In the
circumstances, a concessional allowance in respect of the difference of $1,400
(i.e. $43,750 － $42,350) would be made to the taxpayer.

20% HP Allowance Y/A

$ $ $
Cost 100,000
Less: I.A. 19,500 19,500 *1
80,500
Less: A.A. 16,100 16,100 35,600 1995/96
64,400

21

 Less: I.A. 6,750 6,750 *2

Reducing value 57,650 *3
Concessional allowance*4 1,400 *4 8,150 1996/97
Total allowances 43,750

*1 ($10,000 + $90,000 x 6/24) x 60%

*2 ($90,000 x 3/24) x 60%
*3 Reducing value of $57,650 will be eliminated for the purpose of
calculating depreciation allowances for future assessments.
*4 Excess of capital expenditure incurred over initial and annual
allowances $1,400 (i.e. $43,750 － $42,350)

*****

Machinery or plant used partly for the purposes of the trade, etc.

43. Section 39C(1)(b) provides, in effect, that the pooling system does
not apply to assets which are used only partially for producing chargeable
profits. The allowances due in respect of any such asset need to be separately
calculated in accordance with the old scheme so that the appropriate
apportionment for non-business usage can be made (under section 12(2),
18F(1) or 19E(1)). Any such reduction does not affect the calculation of
subsequent allowances which are computed in the first place as if the full
amount had been granted, and then apportioned as appropriate in relation to the
extent to which the asset is or has been used (a) in the production of the
chargeable profits and (b) for other purposes (section 39A).

44. Even if partial non-business use ceases, and the asset is then used
wholly for business purposes, separate calculations must continue. This is
because any balancing charge on subsequent disposal of the asset has to be
apportioned to take into account the earlier non-business usage.

45. The following example illustrates the method of calculating the

allowances and balancing charge where the proportion of non-business use has
not been constant.

22

Example 10

46. A taxpayer commenced to carry on a business on 1 June 1991, on

which date he purchased a motor vehicle for $280,000. This vehicle was used
wholly for business purposes until 31 March 1992. As from 1 April 1992
(after the taxpayer had sold his private car), the vehicle was used partly for
private purposes, with the estimated private use being 50% of the total annual
mileage. Twelve months later, the private use portion had declined to 25%. In
June 1994 the vehicle was sold for $60,000. The taxpayer’s accounts are made
up to 31 March each year.

30% Allowances made Adjustment Y/A

against business in respect of
profits private use
$ $ $
1
Cost * 280,000
Less: I.A. 168,000 168,000 (100%)
112,000
Less: A.A. 33,600 33,600 (100%)
201,600 1991/92
Reducing value 78,400
Less: A.A. 23,520 11,760 (50%) 11,760 1992/93

Reducing value 54,880

Less: A.A. 16,464 12,348 (75%) 4,116 1993/94
225,708 15,876
Reducing value 38,416
Sale proceeds 60,000
Excess over
Reducing value 21,584
Balancing Charge 20,165 * 1,419 1994/95
2

*1 For the 1991/92 year of assessment, the cost would have been included as
part of the 30% pool. The reducing value of the car at the end of that year
(i.e. $78,400) would have been excluded from the pool for the separate
calculation of depreciation allowances in 1992/93 (i.e. the year in which
the car ceased to be used wholly for business purposes).

23

*2 For the 1994/95 year of assessment, a balancing charge, calculated as

follows, would be made:
$21,584 x $225,708 / ($225,708 + $15,876) = $20,165

*****

Part IV － MISCELLANEOUS PROVISIONS

Commissioner’s discretion － rate of annual allowance

47. Both proviso (b) to section 37(2) and section 39(B)(11) empower the
Commissioner in his discretion to allow a higher rate for annual allowance than
that prescribed by the Board of Inland Revenue. An application for an
increased rate of allowance should include the following details:

(a) the estimated working life of the asset;

(b) the anticipated disposal/scrap value of the asset at the end of

its working life; and

(c) where excessive wear and tear is claimed in respect of the use
of an asset on a specific project, the possibility of it being
restored/repaired for further use in the business on completion
of the project.

48. At the present time, the rates of initial and annual allowances are
such that the Commissioner considers it unlikely that any claim for a higher
annual allowance could be justified.

Assets sold together

49. Particularly where cessation occurs, it is not uncommon to find that

assets are sold together for one price, without the consideration in respect of
each asset being separately specified. Where this occurs the Commissioner is
empowered, by virtue of the provisions of section 38A, to allocate a price to
each individual asset.

24

Transactions between related parties

50. Section 38B provides for the situation where the Commissioner is of
the opinion that the sale price of an asset, which qualifies for initial or annual
allowances, does not represent its true market value, and any of the following
circumstances are applicable:

(a) the buyer is a person over whom the seller has control; or

(b) the seller is a person over whom the buyer has control; or

(c) both the seller and the buyer are persons over both of
whom some other person has control; or

(d) the sale is between a husband and wife, not being a wife
living apart from her husband.

In such a case, the section provides that the Commissioner may determine the
true market value at the time of the sale, and that value is deemed to be the sale
price of the asset for the purpose of calculating the allowances and charges
under part VI of the Ordinance.

Commissioner’s power to direct that the old scheme should apply

51. Section 36A(2) gives the Commissioner power to direct the extent
and the duration for which the provisions of the old scheme shall continue to
apply for any year of assessment from 1980/81 onwards, whenever he is
satisfied that the application of any of the provisions of the pooling system to
any machinery or plant would be impracticable or inequitable.

25

 APPENDIX A(i)

RATES OF DEPRECIATION, AS

PRESCRIBED BY THE BOARD OF INLAND REVENUE

[From Rule 2 of the Inland Revenue Rules]

TABLE

FIRST PART

Rate of
Item Depreciation

1. Air-conditioning plant excluding room air-

conditioning units ........................................................ 10%

2. Bank safe deposit boxes, doors and grills .................... 10%

3. Broadcasting transmitters .....................................…… 10%

4. Cables (electric) ........................................................... 10%

5. Lamp standards (street)-gas or electric ......….............. 10%

6. Lifts and escalators (electric) ....................................... 10%

7. Mains (gas or water) .................................................... 10%

8. Oil tanks ....................................................................... 10%

9. Shipping-

Ships, junks and sampans ...................................... 10%

Lighters .................................................................. 10%

Tugs ....................................................................... 10%

10. Sprinklers ..................................................................... 10%

11. Domestic appliances .................................................... 20%

12. Furniture (excluding soft furnishings) ......................... 20%

13. Room air-conditioning units ........................................ 20%

14. Shipping-
Launches and ferry vessels .................................... 20%
Hydrofoils .............................................................. 20%
15. Taxi meters ..............................................................…. 20%

16. Type and blocks (if not dealt with on renewals 20%
basis) ......................................…..................................
17. Aircraft (including engines) ......................................... 30%

18. Bar syphon apparatus ................................................... 30%

19. Bicycles ........................................................................ 30%

20. Bleaching and finishing machinery and plant .............. 30%

21. Concrete pipe moulds .................................................. 30%

22. Electric cookers and kettles ......................................... 30%

23. Electronic data processing equipment ......................... 30%

24. Electronics manufacturing machinery and plant ......... 30%

25. Motor vehicles ….......................................................... 30%

26. Plastic manufacturing machinery and plant including 30%

moulds ………………………………………………..
27. Shipping-
Outboard motors ........…........................................ 30%
28. Silk manufacturing machinery and plant ..................... 30%

29. Sulphuric and nitric acid plant ..................................... 30%

30. Tank lorries .................................................................. 30%

31. Textile and clothing manufacturing machinery and 30%

plant ........…...........…………........................................
32. Tractors ⎯ bull dozers and graders ............................. 30%

33. Weaving, spinning, knitting and sewing machinery.... 30%

34. Machinery or plant, not specified in items 1 to 33, and 10%
used for the purposes of a transport, tunnel, dock,
water, gas or electricity undertaking or a public
telephone or public telegraphic service ........................
35. Any other machinery or plant, not specified in items 1 20%
to 34 …...……………...……………………………

ii
 APPENDIX A(ii)

“IMPLEMENTS, UTENSILS AND ARTICLES”, AS

PRESCRIBED

BY THE BOARD OF INLAND REVENUE

[From Rule 2 of the Inland Revenue Rules]

TABLE

SECOND PART

Item

1. Belting.
2. Crockery and cutlery.
3. Kitchen utensils.
4. Linen.
5. Loose tools.
6. Soft furnishings (including curtains and carpets).
7. Surgical and dental instruments.
8. Tubes for X-ray and infra-red machines.
 APPENDIX B

ITEMS WHICH QUALIFY AS MACHINERY OR PLANT

In addition to the items specified in the First Part of the Table annexed
to Rule 2 of the Inland Revenue Rules, the following items are recognised as
“machinery or plant” for the purposes of the depreciation allowances:

Item

(i) Design and process plans (for the construction of a machine to be

used in the production of the saleable product of the taxpayer).
(ii) Display platforms.
(iii) First Registration Tax (paid on acquisition of a new motor vehicle).
(iv) Iron gates (where not an integral part of a building or structure).
(v) Office partitioning (where not an integral part of a building or
structure).
(vi) Poster-boards (advertisement hoardings).
(vii) Signboards.
(viii) Dry docks.
(ix) Lighting and décor items installed to provide atmosphere or
ambience in, but not forming an integral part of, licensed premises
such as hotels and restaurants whose trade includes the provision of
“atmosphere” or “ambience”.
(x) Barrister’s books.
 APPENDIX C

ITEMS WHICH DO NOT QUALIFY AS MACHINERY OR PLANT

Item

(i) Acoustic tile ceilings (installed as an integral part of a building).

(ii) Ceiling lighting points.
(iii) Cocklofts.
(iv) Fish ponds and fish storage barge.
(v) Shop fronts, fixed wall and floor coverings, suspended ceilings,
raised floors, balustrades and stairs.
(vi) Telephone cable and wiring (installed as an integral part of a
building).
(vii) Wiring and electrical fixtures and fittings (installed as an integral
part of a building).
(viii) Car parks and piers.
(ix) Canopies over petrol-filling stations.
(x) Car-wash halls (i.e. buildings housing washing and control
equipment).