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Where a company has incurred capital expenditure on the construction of a building, it is entitled to claim depreciation allowances on the capital expenditure incurred. There is a significant difference between the rate of depreciation allowances applicable to the building itself and that applicable to plant and machinery therein. A depreciation review is a process used to analyse the capital expenditure incurred so as to maximise the allowances and provide robust documentation to support the claim.
For example, a Hong Kong company has incurred HK$100 million on the construction of a commercial building. If the entire construction cost were classified as cost of the building, the annual depreciation allowance would be HK$4 million. Depending on the type of building, depreciation review may be able to identify a significant portion of the construction cost as relating to the provision of plant and machinery. The depreciation allowances in the first year (assuming a 20% allocation to plant and machinery is possible) would increase to HK$17.6 million, and this means that there would be a tax deferral of approximately HK$2.8 million in the first year.
A depreciation review can therefore give rise to significant tax deferral and cash flow advantages. It is applicable to a wide range of infrastructure, property development, hotel and major renovation projects. We have well-developed methodology, research materials and a pro-forma technical report which ensures the process is cost-effective and adds value.