Depreciation allowance is an important area of accounting and taxation, particularly in Hong Kong. It is the amount of claim for deductions that a company might have due to wear and tear against revenues derived from assets. Most of us know that it will help reduce the tax burden. This blog will talk about what is depreciation allowance, its types and calculation in Hong Kong.
What is depreciation allowance?
A depreciation allowance is a tax deduction that a business can claim on its capital assets. Including machinery, vehicles and equipment, depreciation reflects the loss in value of a capital asset through use, age or obsolescence. In Hong Kong, it falls under the purview of the IRO and forms the cornerstone for any tax planning.
Types of Depreciation Allowance in Hong Kong
Initial Allowance (IA)
Claimed in the year an asset is bought and used.
Normally charged at 60% of the asset’s cost.
Annual Allowance (AA)
Claimed every year based on the remaining value of the asset.
Rates applicable depending on the asset type, starting from 10% to 30%.
Balancing Allowance/Charge
Applied upon sale or disposal of the asset.
The difference between sale proceeds and written-down value is taken to taxable income.
Depreciation Allowance Pool in Hong Kong
The assets are held in a pool of depreciation allowance according to their kind. Each pool has its own allowance rate. It’s, therefore, easier for companies to handle more than one asset in a pool. Some common pools include:
Plant and Machinery Pool: 10%-30% per annum.
Industrial Buildings Pool : 4% per annum.
Commercial Buildings Pool: 4% per annum.
Calculation of Depreciation Allowance
To evaluate the depreciation allowance, follow the steps below:
Find Cost of Asset
Purchase price plus incidental costs, including installation costs.
Apply Initial Allowance (if applicable)
Deduct 60% of the asset’s cost in the first year.
Add to the Appropriate Pool
The remaining value can be added into the relevant depreciation allowance pool.
Calculate Annual Allowance
Multiply the pool’s balance by the applicable rate.
Depreciation Allowance Example
Assume that a company purchases machinery at HKD 100,000:
Initial Allowance: HKD 60,000 (60%).
Remaining Balance: HKD 40,000
Annual Allowance: HKD 8,000 (20%) deducted annually from its remaining balance.
Advantages
Tax Savings: Reduces the amount of taxable profit, allowing businesses to retain more of their earnings.
Simplified Asset Management: Depreciation pools offer a simplified manner in managing multiple assets.
Financial Reporting: Reflects the true value of assets in financial statements.
How FastLane HR Can Help
FastLane HR provides professional and reliable accounting and tax services, particularly in Hong Kong. How we can help:
Accurate Calculations
The calculations of your depreciation allowances are accurately made by our team in line with the latest guidelines of the Inland Revenue Ordinance (IRO).
Tax Planning Optimization
We assist in maximizing your benefits by identifying qualified assets and applying the proper rates of depreciation allowances.
Compliance Assurance
Feel continually assured of compliance with Hong Kong’s tax legislation through our advisory services.
Customized Support for SMEs
We provide customized services to SMEs, targeting their specific needs while focusing on business development.
For more information, contact FastLane HR today!