Profits Tax
- Capital expenditure? or revenue expenditure?
As a generally accepted accounting principle, capital
expenditure is not a deductible expense in computing net profits.
Indeed, Section 17(1)(c) of Inland Revenue Ordinance reaffirms this
accounting principle so that capital expenditure is specifically
disallowed when computing assessable profits.
Nevertheless, the following capital expenditure can
still be tax deductible because of the specific provisions in the
Inland Revenue Ordinance:
What is capital
expenditure? or revenue expenditure?
From time to time, the courts have
difficulty in distinguishing a capital expenditure from a revenue
expenditure. Of course, there are seldom disputes as to the normal
recurrent expenditures such as salaries, wages, rent, bank interest,
advertising... etc. that they are revenue expenses. But what about a
big lump sum payment that is non-recurrent? Sometimes, disputes
arise between between the taxpayers and the IRD as to such big
payments and the disputes go to the courts.
In fact, an asset can be fixed
capital to a trader, but a circulating capital to the other --- in
fact, the distinction depends on the nature of the trade and how the
asset is used. Take machinery as an example: it is fixed capital to
most traders but it is circulating capital to a trader of
manufacturer of machinery. Whether an expenditure is of capital or revenue
is a question of facts and law --- it is to be determined on the merits
of each particular case. There is no hard and fast rule for
this question. It is frequently not a question with a clear yes or no.
In fact, it is hard to make the distinction in
practical circumstances. So, there are so many tax cases on the question.
Indeed, the question of capital
versus revenue is very important for taxation, not just concerning the
deductibility of an expense but also affecting the taxability of an
income. For its effect on the taxability of an income, please
click here.
Press here for some well-known
tax cases
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