Question

Section 17(1)(c) of the Ordinance prohibits deducting expenditure of a capital nature in ascertaining assessable profits for profits tax purposes. In so far as principles in deciding capital expenditure are concerned, the most frequently cited authority is the UK case of British Insulated and Helsby Cables v Atherton in which Lord Cave stated:

But when an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such expenditure as properly attributable, not to revenue, but to capital.

Below are cases where the companies involved suffered losses or incurred certain expenditure:

v Company E is a garment manufacturer. For the purpose of business expansion, it moved into a bigger factory and incurred expenses in dismantling, transporting, and re-erecting of machinery.

vi Company F, a trading company in Hong Kong, pays a big sum of money to a foreign company for a registered trademark. Company F intends to market the trademark-related products in Singapore and Hong Kong.

Required Evaluate whether the loss suffered or expenditure incurred by each of the above companies is or is not deductible for profits tax purposes.

Answer 1

v. Expenses incurred will be allowed as tax deduction as it is incurred for the purpose of business. However since the expenditure is of capital nature, the deduction would be distributed over the useful life.

vi. Expenses incurred on acquiring registered trademark shall be allowed as deduction provided

1. it is directly connected with the acquisition of trademark.

2. is chargeable to capital account.

3. is not part of consideration or purchase price paid for trademark already in existence

Since in above case, amount is paid in connection with the acquisition of existing trademark, the amount will not be eligible for amortization.