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Profits Tax - Interest
expenditure
In general,
interest is deductible if the money was borrowed for the purpose of
producing assessable profits. The question of deductibility hinges
on the use of the money borrowed. If it is used as circulating
capital, it is generally allowable. If it is used for private
investment or personal use, it is not deductible.
If the money is
to purchase fixed assets, it is allowable providing the asset is
being used for producing the assessable profits. If the fixed asset
is not completed (that is not being used for producing profits yet),
the related interest will be capitalized and therefore not
deductible.
A lot of tax
disputes arise where the money is used for a combination of
purposes. In such case, the amount attributable to each purpose
should be ascertained and apportioned accordingly.
Section 16(1)(a)
of Inland Revenue Ordinance states the basic test of deductibility
for interest expenditure. In short, the interest will be deductible
if it satisfies Section 16(1) and at least one of the conditions laid down in Section 16(2).
When considering the purpose of the
loan, regard must only be made to the direct and immediate purpose of the loan.
In the case Zeta Estates Ltd. v CIR, the Board of Review found that the direct
and immediate purpose of obtaining the loan was for distribution of dividends to
the shareholders. The taxpayer, however, claimed that the loan was to replenish
the company's working capital after the distribution of dividend. The Board did
not accept the claim as fulfilling the section 16(1) requirement of “in the
production of assessable profits”. As section 16(1) fails, there is no need to
consider the conditions under section 16(2). The taxpayer appealed to the court
against the Board’s decision. The courts at last allowed the taxpayer's
appeal.
Press here for Section 16(2)
conditions
Read IRD's query:
Where the taxpayer claims deduction of
interest
Tax analysis programs for taxpayers
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