BUSI 0018 Hong Kong Taxation

Tutorial Questions
Unit 11 Depreciation Allowance: Buildings

Question 26
Part (a)
Better Investment Limited had acquired a 3-storey building (which was not a mill, factory or
other similar premises) which it eventually let to three different tenants:
Ground floor

The tenant was carrying on a car distributing business. Half of the floor
was used as a showroom whereas the other half was utilised as a
workshop where motor cars were polished and tuned before being placed
in the showroom.

First floor

The tenant was a radio set manufacturer. A production line had been
installed on this floor and production had begun in the relevant period.

Second floor

The tenant was a fashion trading company. The goods purchased from
overseas suppliers were stored in this warehouse before distributing to
the local retailers.

Required:
Discuss whether Better Investment Limited is entitled to industrial building allowance in
respect of each of these floors.

Part (b)
Red Ltd. contracted for an industrial building to be built in Mongkok for its manufacturing
business in November 1999 at a construction cost of $2 million. The building was completed
and put into use in July 2000. As from June 2006, this building was put out of use because
the company had moved to Taipo. In February 2008 the building was put into qualifying use
again. In April 2008, it was sold to Blue Ltd. for $15 million which included the land value
of $12.5 million. Red Ltd. closes its annual accounts on 31 December.
The purchase of the building by Blue Ltd. was financed by a bank mortgage loan.
The building was brought into use by Blue Ltd. as from April 2008 for manufacturing
purposes. Blue Ltd. closes its annual accounts on 31 March.
Required:
Calculate the balancing allowance or charge available to Red Ltd. and the industrial building
allowance available to Blue Ltd. for the year of assessment 2008/09.

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Question 27
On 1 August 2005, Hing Wong Ltd. purchased from a property development company a new
two-storeyed building at a price (excluding the value of the land) of $5 million. The building
was immediately used by the company for its garment manufacturing business.
On 1 April 2006, the company let out the building to its subsidiary for use as a retail shop.
One year later, it repossessed the building and used it again for its manufacturing business.
On 1 May 2008, the company redeveloped the building into a ten-storeyed factory building at
a construction cost of $20 million for resale to the public.
On 1 September 2009, the whole building was sold to Tai Fat Ltd. for $30 million (excluding
the value of the land). The company immediately used the building for manufacturing
purposes.
All companies use 31 March as their accounting date.

Required:
Compute the depreciation allowances for Hing Wong Ltd and Tai Fat Ltd for all relevant
years of assessment.

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Question 28
Blue Star Company Ltd. carries on business in Hong Kong as a textile manufacturer and
prepares accounts to 31 December. As at 31 December 2008, the company owned a factory
building in Shatin which it purchased from the developer in late 2008. The company carries
on its manufacturing business in the upper floor and leases the lower floor to a storage
company who uses it as a godown.
Details of the costs incurred by the developer of the building are as follows:
Cost of land
$1,500,000
Payment made to existing tenants
600,000
Construction costs
900,000
3,000,000
The company paid the developer a price of $4,000,000 for the factory.
In September 2009, the roof of the factory was damaged by a typhoon. The company
replaced the original tiled roof with a roof made of cement at a cost of $450,000.
In October 2009, the company spent $300,000 to construct an extension to the factory.
In November 2009, the company bought another factory in Tuen Mun at a price of
$2,750,000 (including the cost of land at $1,500,000). The factory was originally constructed
by the vendor for its own use at a cost of $900,000 but due to a change in the company's
policy, it had not been put into use and was sold to the company at a fair market price. The
factory was immediately put into use.

Required:
Compute the depreciation allowances for Blue Star Company Ltd. for the year of assessment
2009/10. Give your explanations where necessary.

Check Figures:
Question 26(b)
Balancing allowance (Red Ltd.): $1,540,000 restricted to $880,000
Annual allowance (Blue Ltd.): $102,222
Question 27
Residual before sale (Hing Wong Ltd): $3,400,000
Total allowance in Y/A 2009/10 (Tai Fat Ltd): $4,800,000
Question 28
Total allowances (Shatin factory): $288,000 (Y/A 2008/09); $120,000 (Y/A 2009/10)
Total allowances (Tuen Mun factory): $216,000 (Y/A 2009/10)

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