Taxpayers acquire real property to operate businesses. The related capital expenditures are not fully deductible. However, tax allowance can be claimed, one of which is the commercial building allowance. Only commercial and non-industrial buildings are qualifying expenditure. The annual commercial building allowance is at 4% per annum computed by reference to the cost of construction of the building.
Taxpayers acquire real property from developers, and their total cost of acquisition will include cost of land, cost of construction, and a profit margin for the developers. The Inland Revenue will not examine the developers’ accounts to ascertain the real cost of construction. The practice is that they will determine the cost of construction based on 50% of the acquisition price of the property as deemed cost of construction. Upon sales of the property in the future, they can get a full difference deduction if the construction cost is more than half of the acquisition price. On the contrary, if half of the property acquisition price is greater than the construction costs before settlement, then the difference will be taxable.
The above information is for reference only. Should you have more queries, we welcome your tax enquiries.