Departmental Interpretation And Practice Notes - No

1 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. 2 (REVISED) PROFITS TAX PART A : INDUSTRIAL BUILDINGS ALLOWANCES PART B : COMMERCIAL BUILDINGS ALLOWANCES These Notes are issued for the information and guidance of taxpayers and their authorised representatives. They have no binding force and do not affect a person s right of objection and appeal to the Commissioner, the Board of Review or the Courts. These Notes replace those issued on 20 July 1983. WONG Ho-sangCommissioner of Inland Revenue April 1999 Our web site : 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.

2 2 (REVISED) PROFITS TAX PART A : INDUSTRIAL BUILDINGS ALLOWANCES PART B : COMMERCIAL BUILDINGS ALLOWANCES Corrigendum In line 5 of Example 8 (page 14 of the Appendix), kindly amend the word December to March . SIN LAW Yuk-lin, Agnes Commissioner of Inland Revenue October 1999 Our web site : Departmental Interpretation AND Practice Notes No. 2 (REVISED) CONTENT Paragraph Introduction 1 Part A Industrial Building Allowances Trades Which Qualify 3 Buildings Which Qualify 10 Buildings Excluded 15 Capital Expenditure Incurred on Construction 16 Persons Entitled to the Allowances 18 Relevant Interest 21 Buildings and Structures Bought Unused 23 Initial Allowance 26 Annual Allowance 29 Residue of Expenditure 31 Balancing

3 Allowances and Charges 32 Termination of a Leasehold Interest 34 Examples 35 Part B Commercial Buildings Allowances Buildings Which Qualify 36 Expenditure Which Qualifies 37 Persons Entitled to the Allowances 38 Rebuilding Allowance Prior to 1998/99 39 Allowances for 1998/99 and Subsequent Years of 42 Assessment Annual Allowance 43 Balancing Allowances and Charges 52 Termination of a Leasehold Interest 56 Examples 58 Appendix INTRODUCTION Whereas expenditure of a capital nature is generally not deductible, section 18F of the Inland Revenue Ordinance (the Ordinance) provides for the assessable profits of a person for any year of assessment to be decreased by the amount of any allowances made to the person under Part VI of the Ordinance, and to be increased by the amount of any balancing charge directed to be made on the person under the same Part.

4 The relevant allowances and charges apply in respect of certain (a) industrial buildings and structures; (b) commercial buildings and structures; and (c) machinery and plant. 2. This Departmental Interpretation & Practice Note (DIPN) is concerned with the provisions of Part VI relating to (A) industrial buildings and structures, and (B) commercial buildings and structures. The provisions concerning machinery and plant are discussed in DIPN No. 7 (Revised). PART A : INDUSTRIAL BUILDINGS ALLOWANCES Trades Which Qualify 3. The term industrial building or structure is defined, for the purposes of Part VI, in section 40(1) of the Ordinance and commences with the following enumeration - industrial building or structure means any building or structure or part of any building or structure used - (a) for the purposes of a trade carried on in a mill, factory or other similar premises; or (b) for the purposes of a transport, tunnel, dock, water, gas or electricity undertaking or a public telephonic or public telegraphic service; or (c) for the purposes of a trade which consists of the manufacture of goods or materials or the subjection of goods or materials to any process.

5 Or (d) for the purposes of a trade which consists in the storage - (i) of goods or materials which are to be used in the manufacture of other goods or materials; or (ii) of goods or materials which are to be subjected in the course of a trade to any process; or (iii) of goods or materials on their arrival into Hong Kong; or (e) for the purposes of the business of farming; or (f) for the purposes of scientific research in relation to any trade, profession or business, .. [ profession has been included with effect from the year of assessment 1998/99.] 4. It should be noted that for a building or structure (or part of a building or structure) to qualify, it must be used for the purposes of a trade, undertaking, service, business or profession as specified in paragraphs (a) to (f) of the definition, and not be excluded under the proviso to the definition.

6 In this regard it is pertinent that except for paragraphs (b), (e) and (f), only trades qualify. It should not be thought that a building or structure can only qualify under (c) if it is used for the purposes of a trade which involves a manufacturing process; allowances may also be granted if the trade consists of the subjection of goods or materials to any process. 5. Guidance in relation to the question of whether a trade consists of the subjection of goods or materials to any process can be obtained from the High Court decision in the case of CIR v. Aberdeen Restaurant Enterprises Ltd (1988) 2 HKTC 330. One of the issues considered in the case was whether a floating restaurant qualified as an industrial structure. The main thrust of the argument for the taxpayer was that cooking of food amounted to the subjection of goods or material to a process or processes.

7 In considering the issue, Jones J. referred to the Judgement of the Court of Appeal in Vibroplant Ltd. v. Holland [1982] 54 TC 658 where it was accepted, in relation to the equivalent provision in the United Kingdom s legislation, that process connotes a substantial measure of uniformity of treatment or system of treatment.. Jones J. went on to hold that the restaurant boat did not qualify for the allowances. In doing so he said, at pages 351 and 352, - However, does the preparation and cooking of food come within the definition of the subjection of goods to any process. Process is defined in the shorter Oxford Dictionary inter alia as a continuous and regular action or succession of actions, taking place or carried on in a definite manner; a continuous (natural or artificial) operation or series of operations.

8 A particular method of operation in any manufacture. From the authorities, it is clear that in order to determine whether a building is an industrial building or structure, it is necessary to look at the legislation to ascertain its meaning. The words of the section show that the legislature intended allowances to be claimed by those engaged in the manufacture of goods or in the subjection of goods to a process. A restaurant has been described in the Rael-Brook case [(1967) 2 65] as a service industry, but it is plain that it is not a manufacturing industry. Nor, as was submitted by Mr Feenstra, is it akin to a factory or mill but rather to a retail shop. Again, I am unable to agree that the cooking of food results in a uniformity of treatment as urged upon me by Mrs Clough.

9 Each individual dish is prepared separately depending on the order placed by the customer. I can see no distinction between the cooking of food and the carrying out of the repairs in the Vibroplant case [(1982) 42 658]. Repairs have no uniformity and are different in the same way as the cooking of food. It is again far removed from the Kilmarnock case [(1966) 42 675] which encompassed a definite process and a trade of manufacturing.. I do not consider that the legislation was ever intended to extend to the business of a restaurant. The trade of the restaurant has nothing to do with manufacturing or processing. Accordingly, I am satisfied that the restaurant boat and kitchen boat, three bridges or gangways do not qualify for the allowances for they are not industrial buildings or structures.

10 6. The following are examples regarded as satisfying the test of subjection of goods or materials to any process - an explosives shed used in the trade of quarrying and mining; buildings used in the trade of motion picture procedures; buildings used for the purposes of the trade of fumigation and extermination ( pest control which might be performed outside of the premises) - see Hong Kong Inland Revenue Board of Review decisions D3/87 and D4/87, Volume 2, page 329; and buildings used to screen and pack coal for sale Kilmarnock Equitable Co-operative Society Ltd. v. CIR, 42 675. 7. The following are examples of buildings which would not satisfy the test in question - buildings used for wage packeting, as Notes and coins held as currency are not goods for processing - Buckingham v.