Section 13bis of the Income Tax Act offers tax deductions for the erection or improvement of buildings used in the trade of hotelkeeping. If the building is used primarily for hotel-related activities, taxpayers can claim an annual allowance, provided certain conditions are met.
Requirements for Section 13bis
A taxpayer can deduct an annual allowance if they incurred costs in:
- Constructing a building used for hotelkeeping.
- Improving a building used for hotelkeeping.
The building must be wholly or mainly used for hotelkeeping purposes. Unlike other building allowances, Section 13bis does not require the taxpayer to own the building or improvements—they only need to have incurred the cost of construction or improvements. Note that purchased buildings do not qualify for the annual allowance, as the building must have been newly erected.
What Qualifies as the Trade of Hotelkeeping?
To qualify under hotelkeeping, the taxpayer or lessee must:
- Operate as a hotelkeeper, boarding housekeeper, or lodging housekeeper.
- Provide meals and accommodation to patrons in exchange for payment.
Several factors are used to determine if a taxpayer is running a hotelkeeping business, including:
- The size and location of the building.
- The amount of capital expenditure and turnover.
- The prospects of profitability.
- Dedication of significant time and resources toward hotelkeeping.
- Conducting trade in a commercial manner, including appropriate staffing and advertising.
- Continuity of activities throughout the year.
- Minimal or no interruptions in trade that would affect the use of the building for providing accommodation.
Improvements to Existing Buildings
A taxpayer may convert an existing building into a hotel. In this case, the purchase price of the building does not qualify for the allowance, but the taxpayer may still claim an allowance if the renovations qualify as improvements.
Annual Allowance Rates
The rate at which the annual allowance is calculated depends on when the building was erected or when the improvements were made:
- Buildings erected before 4 June 1988, or improvements made before that date:
2% per year. - Buildings erected on or after 4 June 1988, or improvements made after that date:
5% per year. - Improvements commencing on or after 17 March 1993 that do not extend the building’s exterior framework:
20% per year.
To qualify for the 20% accelerated rate, improvements must be confined to the building’s existing exterior structure. Improvements extending beyond the exterior framework may still qualify for the annual allowance but at the lower rates of 2% or 5%, depending on the date of construction or improvement.
Important Note: Allowances are not apportioned for part of a year.
Buildings Used for Dual Purposes
If a building is used for both hotelkeeping and other purposes (e.g., shops or offices), Section 13bis(1)(d) allows the annual allowance only on the portion of the building used for hotelkeeping. In such cases, the cost of construction or improvement must be apportioned between the hotelkeeping portion and other uses, and the allowance is based only on the hotelkeeping section.
