Taxation Q21 Handout v3 PDF

12/4/12
Introduc.on
Non-taxable Income
Non-deduc.ble Expenses
Allowances
Prots Tax Liability
GROUP MEMBERS:
CHAN Tsz Chun (Kelvin)
KWAN Tsz Fung (Jack)
LEUNG Kai Hei (Jonathan)
WU Yiu Ho (Frankie)
Opera)ng results for year ended 31 Dec 2009
- Carrying on business
in Hong Kong
- As a sole proprietor
4
Task: Compute Mr. Lees prots tax liability for Y/A 2009/10
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
(i) US$ deposits placed with a bank in Singapore
Sec.on 15(1)(g)
v Interest received by a person:
Provision of credit test

v where the credit was rst made available?
Carrying on trade, profession or business in HK?
Interest derived from HK?
Interest is in respect of the funds of the trade,

profession or business?
(Singapore)
Introduc)on
Non-deduc)ble
Expenses
Lender: Mr. Lee
Borrower: Bank
The currency of the deposit (US$) is NOT relevant

Interest income:
NOT derived from Hong Kong
(Singapore)
Non-taxable
Income
First made available

in Singapore
Allowances
Prots Tax
Liability
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
12/4/12

Sec.on 15(1)(g)

Carrying
on trade, profession or business in HK?
Interest
derived from HK?

Interest
is in respect of the funds of the trade,


NOT taxable
(ii) Euro xed deposits with a local bank

Sec.on 15(1)(g)

(Singapore)
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
Introduc)on
Lender: Mr. Lee
The currency of the deposit (Euro) is NOT relevant

Interest income:
Derived from Hong Kong
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Allowances
Prots Tax
Liability
Sec.on 15(1)(g)

in HK
Introduc)on
Non-deduc)ble
Expenses

Borrower: Bank
Non-taxable
Income
Prots Tax
Liability

Taxable
But Exemp)on Order applies
9
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
10
(iii) Debentures registered in the U.S.

Exemp.on from Prots Tax (Interest Income) Order (S.87)

v Eec.ve from 22 June 1998:
Interest income derived from a deposit placed with a
nancial ini.a.on in Hong Kong is exempt from
prots tax
A local bank is a qualied nancial ins.tu.on
Exempt from prots tax
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
Sec.on 15(1)(g)
11

Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
12
12/4/12

Sec.on 15(1)(g)

in USA
Borrower: A corpora)on in
Lender: Mr. Lee
USA
The currency of the deposit is NOT relevant
Interest income:
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses

NOT taxable
Allowances
Prots Tax
Liability
13
(iv) HK$ deposits placed with a local bank
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Prots Tax
Liability
Allowances
14
Sec.on 15(1)(g)
Sec.on 15(1)(g)


Taxable
But Exemp)on Order applies
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
15
US$ in a
Singaporean
bank
Exemp.on from Prots Tax (Interest Income) Order (S.87)

v Exempt from prots tax
v But Excep)on also applies
Excep.on to Exemp.on Order
If the relevant deposit is used to secure any borrowing
[where the interest expense on such borrowing sa.ses the
condi.on for deduc.on under S16(2)(c), (d) or (e), and the
deduc.on amount is not restricted by S16(2A) & (2B)]
Non-deduc)ble
Expenses
Allowances
Non-deduc)ble
Expenses
Prots Tax
Liability
Allowances
Prots Tax
Liability
Euro in a local
bank
American
Debentures
HK$ in a local
bank (security)
Credit made No
in HK?
Yes
No
Yes
Solely under Not taxable

S.15(1)(g)
Taxable
Not taxable

Taxable
Exemp)on N/A
Order (S.87)
Sa.sed
N/A
Sa.sed

Excep)on to N/A
exemp)on
N/A

N/A

Sa.sed

Conclusion:
Taxable (with no exemp.on)

Non-taxable
Income
Non-taxable
Income
16
Summary of interest income:
Introduc)on
Introduc)on
17
Introduc)on
Not taxable
Not taxable
Non-taxable
Income
Non-deduc)ble
Expenses
Not taxable
Allowances
Taxable
Prots Tax
Liability
18
12/4/12
Mr. Lees Business

Prots Tax Computa)on
For the year of assessment 2009/10
Net prot per account (HKD$)
1,154,000
Less: Non-taxable income

(1)(i) Interest income from deposit in a bank in Singapore
40,000
(1)(ii) Euro deposits with a local bank
16,000
(1)(iii) Debentures (registered in US) interest income
Commission received from a company in Malaysia

Sec.on 14(1)
v 2-Limb Test: for prots tax chargeability
1st: the person must carrying on a trade, profession
or business in HK
? 2nd: the prots must be arising in or
derived from Hong Kong
8,000
19
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
21
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
Allowances
Prots Tax
Liability
20
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
22
Prots on disposal of xed assets
Sec.on 14(1)
v 2-Limb Test: for prots tax chargeability
1st: the person must carrying on a trade, profession
or business in HK
2nd: the prots must be arising in or
derived from Hong Kong
Not taxable
Non-taxable
Income
Non-deduc)ble
Expenses

Opera.ons test (ac.vi.es test)
v where are the prot making ac.vi.es carried out?
The sale contracts were nego.ated and concluded by
Mr. Lees sta in Malaysia
Its likely that the sale services
were performed in Malaysia
Commission income:
Introduc)on
Non-taxable
Income
Commission earned by:

v helping a Malaysian company sell certain products
v i.e. prots earned due to performance of services
Ac)vi)es test applies

Introduc)on
Introduc)on
Sec.on 14(1)
v prots tax shall be charged for each yearfrom such
trade, profession or business (excluding prots arising
from the sale of capital assets)
v xed assets give rise to capital receipts when sold
Not taxable
23
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
24
12/4/12
(i) Dividends from shares investment
(ii) Sale of scrap stock to sta
Sec.on 26(a)
v a dividend from a corpora.onshall NOT be included in
the prots
Not taxable
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
Sec.on 14(1)
v prots tax shall be charged on every person
carrying on a tradein Hong Kong
v Stock means trading inventory, which gives rise to
revenue receipts when sold
v The condi.on of the stock is NOT relevant
v Who the customers are is NOT relevant
Taxable
25
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
26
Mr. Lees Business

Reported net prots: $1,154,000

Amount
(HKD)
Taxable?
US$ deposits placed in a Singaporean

bank
$40,000
No
Euro xed deposits with a local bank
$16,000
No
Debentures registered in the U.S.
$8,000
No
HK$ deposits placed with a local bank

(used to secure for interest-expense-
deduc.ble borrowings)
$16,000
Yes
Commission
$55,000
No
$15,000
No
Dividends from shares investment
$10,000
No
Sale of scrap stock to sta
$15,000
Yes
Included items
1,154,000

Subtract from
$1,154,000
(1)(i) Interest income from deposit in a bank in Singapore
40,000
(1)(ii) Euro deposits with a local bank
16,000
(1)(iii) Debentures (registered in US) interest income
8,000
(2) Commission
55,000
15,000
(3) Dividends from shares investment
10,000
144,000
1,010,000
27
28
(i) Air )ckets and hotel charges for sales

managers trip to aeend an exhibi)on in the U.S.
Sec.on 16(1) general deduc.on rule
v Outgoings and expenses shall be deducted to the
extent to which they are incurred during the basis
period for that year of assessment in the produc)on of
prots chargeable to prots tax for any period
29
to the extent
incurred
in the produc)on of prots

chargeable to HK prots tax
Deduc)ble
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
30
12/4/12
(ii) Entertainment of local customers
(iii) Travelling expenses in respect of commission

income men)oned in note (2)

to the extent

incurred


Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
31
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
33
Allowances
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
32
Fees:
Not
deduc)ble!
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
34
(ii) Solicitor fees for li)ga)on to recover debts from

What about the stamp duty?
v Stamp duty is a type of tax
Not deduc)ble under prots tax

Non-deduc)ble
Expenses
Introduc)on
(i) Solicitor fees and stamp duty for the

purchase of a new oce
Non-taxable
Income
Non-taxable
Income
Reason:
The associated prots were
not sourced in Hong Kong
1.) Fixed Capital vs. Circula.ng Capital test

v Expenses are capital in nature if connected with
xed assets (i.e. not for resale)
v An oce is a xed asset
The associated solicitor fees are capital in nature

2.) Once and for all test
v Solicitors fees are only paid once per transac.on
The fees are capital in nature
Capital expenditure is to be spent once and for all
Non-taxable
Income
Introduc)on

purchase of a new oce
Sec.on 17(1)(c) specic non-deduc.ble items

v disallows any expenditure of a capital nature (or
any loss or withdrawal of capital)
Fixed Capital vs. Circula)ng asset test applies
Once and for all test also applies

Vallambrosa Rubber Co. Ltd. vs. Farmer (1910)
Introduc)on

Non-taxable
Income

purchase of a new oces
Introduc)on
incurred
chargeable
to HK prots tax

Not deduc)ble

Deduc)ble
Introduc)on
to the extent
Prots Tax
Liability
35

Debtors: (1) Customers
(2) Sta

Trade debts
Sta benets
Nature of the debts
o produc)on of

Related tprots?
Fees: incurred in the
produc)on of prots

chargeable to HK prots
tax

Fees associated with (1) customer debts: Deduc)ble
Fees associated with (2) sta debts: Not deduc)ble

Non-taxable
Non-deduc)ble
Prots Tax
Introduc)on
Allowances

Income
Expenses
Liability
36
12/4/12
(iii) Registra)on fee of trade mark in Hong Kong
Interest paid to various par)es

to the extent
incurred

Deduc)ble
Sec.on 16(1)(a) interest expense deduc.on

vInterest payable on money borrowed for the
purpose of producing chargeable prots
vAllowable only if any one of the condi.ons in S.16(2)
is also sa.sed
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
37
Introduc)on
Secured by
Interest paid to various par)es

(i)
of
Recipient
interest
Purpose
Secured by
1. Secured by
deposit/ loan?
(iv)
Mr. Lee
A local bank
A bank
Overdraq
interest
Interest on
capital
injec.on
Mortgage
interest
(purchase of
new oce)
Loan interest
Nil
Nil
Bank deposits
in note (1)(iv)
16(2)(c)
16(2)(d)
16(2)(d)
Personal
guarantee
Non-taxable
Income
Non-deduc)ble
Expenses
Non-deduc)ble
Expenses
Prots Tax
Liability
Allowances
38
Interest on Interest on
Interest on
bank
capital injec)on mortgage
overdrajs of Mr. Lee
Interest on bank
loans
Personal
guarantee
Bank deposits
Nil
Nil
1st: Secured loan test Sec)on 16(2A)

(iii)
A bank
Sec)on 16(2) 16(2)(d)
Introduc)on
(ii)
Non-taxable
Income
2. Security made by
the taxpayer?
3. Interest income
taxable in HK?
No
No
No
Sec)on 16(2A) is
NOT applicable
ajer Step 2
No need to look further
Yes
Yes
Yes
Sec)on 17(2)
also disallows
All deduc)ble
interest to
2nd: Interest-ow
owner back test Sec)on 16(2B)
Deduc)ble?
Allowances
Prots Tax
Liability
39
Interest payment
back to the issuer/
connected person?
No
Yes
No
No
Deduc)ble?
Yes
No
NO
Added to $1154000? No
40
Mr. Lees Business

1,154,000

Con.nued.
144,000
1,010,000
Add: Non-deduc.ble expenses

(4)(iii) Travelling expenses in respect of commission
income men.oned on note (2)
10,000
(5)(i) Solicitor fees and stamp duty for the purchase of a

new oce
45,000
5(iii) Solicitor fees for li.ga.on to recover debts from sta

6(ii) Interest paid to Mr. Lee for capital injec.on
(i) Decora)on of new oce

Sec.on 16F expenditure on building refurbishment
The Law Shiping Co.
Ltd vs. CIR (1923):
vNot applicable to ini.al decora.on
Cost of ini.al repairs
to improve a newly
acquired asset to put
it into a usable
condi.on is capital in
nature.
Sec.on 16(1)(e) & (f) repairs & replacement

vNot applicable: decora.on repairs/replacement
3,000
25,000
41
Sec.on 17(1)(c) specic non-deduc.ble items

v Decora.on expense is capital in nature
Not deduc)ble
Non-taxable
Non-deduc)ble
Introduc)on
Allowances

Income
Expenses

Prots Tax
Liability
42
12/4/12
(ii) Repairs and maintenance of oce equipment
(i) Compensa)on from insurance

Sec.on 16(1)(e) & (f) repairs & replacement
vRepair expenditures are deduc.ble if the repaired
items are used in the produc.on of prots
vOce equipment: used to produce prots
Deduc)ble
e.g. premises, plant,

machinery, implement,

utensil or ar)cles

Sec.on 17 (1) - specic non-deduc.ble items
v Sum recoverable under an insurance is not
deduc.ble
Not deduc)ble
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
Green v J Gliksten & Son Ltd (1929)

v Compensa.on received for loss of trading stock is of
revenue nature taxable
Taxable
43
(ii) Insurance premium
to the extent
incurred
Allowances
44
Allowances
Prots Tax
Liability
45
(i) Bad debts recovered (deducted previously)
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
(ii) Specic provision for bad debts

Sec.on 16(1)(d)
v Recovery of bad debts previously allowed for
deduc.on is taxable in the year recovered
Taxable
Sec.on 16(1)(d) Bad debts

Debts incurred in trade, AND
1st
Prots Tax
Liability
46
Specic provision
= incurred
(Case: CIR v Lo & Lo)
Proved to have become bad

Previously included as taxable trade receipts, or
2nd Incurred in money lending business
Introduc)on
Prots Tax
Liability

v Also, it is NOT once and for all (revenue expense)
Deduc)ble
Non-deduc)ble
Expenses
Non-deduc)ble
Expenses
Sec.on 17(1) salaries and Interest

vConsidered as withdrawal of capital
Not deduc)ble

Non-taxable
Income
Non-taxable
Income
Salaries to Mr. Lee

Introduc)on
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
47
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
48
12/4/12
(iii) Bad debts wrieen o (non-trade loans to

customers)

(a) Trade debts
Yes specic provision Yes specic provision
Proved bad?
Assumed yes
Assumed yes
Previously included as
trading receipt?
Yes
Money lending business? No

Conclusion:
(b) Sta loans
Incurred?
Non-trade customer loans

Incurred?
Yes
No
Proved bad?
Assumed yes
No
trading receipt?
No
Money lending business?
No
Deduc.ble
Not deduc.ble
Conclusion:
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
49
Introduc)on
Non-taxable
Income
Not deduc.ble
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
Reported net prots: $1,154,000
(iv) Increase in general provision of $10,000
Amount
Deduc)ble?
(HKD)
Bad debt items
(i) Bad debts recovered
General provision
$7,000
Yes
Added to
$1,154,000
No
Incurred?
No general provision
(a) trade debts
$12,000
Yes
No
Proved bad?
Presumably No
(b) sta loans
$5,000
No
Yes
trading receipt?
No
(iii) Bad debts wriuen o (non-trade

customer loans)
$10,000
No
Yes
Money lending business?
No
(iv) Increase of general provision
$10,000
No
Yes
Conclusion:
Introduc)on
Non-taxable
Income
Not deduc.ble
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
51
(i) Oce expenses
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
52

to the extent

incurred
incurred



Deduc)ble
Non-taxable
Income
Prots Tax
Liability
(ii) Statutory trac nes

to the extent

Introduc)on
50
Non-deduc)ble
Expenses

Not deduc)ble
Allowances
Prots Tax
Liability
53
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
54
12/4/12
Mr. Lees Business

1,154,000

Con)nued.
144,000
1,010,000

Con)nued.
6(ii) Interest paid to Mr. Lee for capital injec.on
25,000
7(i) Decora.on of new oce
150,000
Salaries to proprietor
162,000
9(ii)(b) Specic provision for bad debts sta loans
5,000
9(iii) Bad debts wriuen o (non-trade customer loans)
10,000
9(iv) Increase in general provision
10,000
11(ii) Statutory trac nes
2,000
56
55
Dona)ons to organiza)ons

Sec.on 16D(1)
v To approved charitable ins)tu)ons in HK only
v Aggregate is not less than $100
v In cash, not in kind

Sec.on 16D(2)
vMaximum deduc.on = 35% (2008/09 onwards) of
assessable prots aqer deprecia.on allowances
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
Tung Wah Group of

Hospitals
Approved
organiza)ons
> HKD $100 in

aggregate

(HK$1,000)

(HK$5,000)
Deduc)ble:
57
Hospital in Shenzhen,
PRC
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
58
Mr. Lees Business

1,154,000
Deprecia)on allowance for xed assets
Con)nued.
144,000
1,010,000
v Ignore: accoun.ng deprecia.on expense amount

Use: Deprecia.on Allowance amount as agreed with IRD

Con)nued.
9(iv) Increase in general provision
11(ii) Statutory trac nes
Dona.ons (in total)
Deprecia.on expense (accoun.ng-based)
10,000
2,000
6,000
85,000
513,000
1,523,000
Less: Deprecia.on Allowance

Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
92,000
1,431,000
59
60
10
12/4/12
Mr. Lees Business

1,154,000
Con)nued.

Max. deduc.on
v 35% assessable prots aqer deprecia.on allowances
35% $1,431,000 = $500,850
Actual deduc.ble dona.on = $1,000
Not exceeding max. limit
$1,000 is deduc)ble

144,000
1,010,000

Con)nued.
513,000
1,523,000
Less: Deprecia.on Allowance
92,000
1,431,000
Less: Approved charitable dona.ons
1,000
Assessable prots:
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
61
1,430,000
62
Assessable prots = $1,430,000

Remarks
Q & A
1. Basis Period: 1st Jan, 2009 31st Dec 2009

Last day falls within Y/A 2009/10
2. Standard rate
For persons other than corpora.ons
(Mr. Lee is a sole proprietor)
15% (2008/09 onwards)
3. Assump.on: Mr. Lee does not elect Personal Assessment
Tax liability = $1,430,000 x 15% = $214,500
Introduc)on
Non-taxable
Income
Non-deduc)ble
Expenses
Allowances
Prots Tax
Liability
63
64
11

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12/4/12

Opera)ng results for year ended 31 Dec 2009

(i) US$ deposits placed with a bank in Singapore

(i) US$ deposits placed with a bank in Singapore

Provision of credit test

Carrying on trade, profession or business in HK?

Interest derived from HK?

Interest is in respect of the funds of the trade,

Lender: Mr. Lee

The currency of the deposit (US$) is NOT relevant

First made available

(i) US$ deposits placed with a bank in Singapore

(ii) Euro xed deposits with a local bank

Carrying on trade, profession or business in HK?

Interest derived from HK?

Interest is in respect of the funds of the trade,

(ii) Euro xed deposits with a local bank

Lender: Mr. Lee

The currency of the deposit (Euro) is NOT relevant

First made available

(ii) Euro xed deposits with a local bank

Provision of credit test

Carrying on trade, profession or business in HK?

Interest derived from HK?

Interest is in respect of the funds of the trade,

(ii) Euro xed deposits with a local bank

(iii) Debentures registered in the U.S.

Exemp.on from Prots Tax (Interest Income) Order (S.87)

Interest derived from HK?

Interest is in respect of the funds of the trade,

(iii) Debentures registered in the U.S.

(iii) Debentures registered in the U.S.

Provision of credit test

First made available

Interest derived from HK?

Interest is in respect of the funds of the trade,

(iv) HK$ deposits placed with a local bank

(iv) HK$ deposits placed with a local bank

Carrying on trade, profession or business in HK?

Carrying on trade, profession or business in HK?

Interest derived from HK?

Interest derived from HK?

Interest is in respect of the funds of the trade,

Interest is in respect of the funds of the trade,

Exemp.on from Prots Tax (Interest Income) Order (S.87)

Solely under Not taxable

Taxable (with no exemp.on)

Summary of interest income:

(iv) HK$ deposits placed with a local bank

Mr. Lees Business

Less: Non-taxable income

(1)(ii) Euro deposits with a local bank

(1)(iii) Debentures (registered in US) interest income

Commission received from a company in Malaysia

Commission received from a company in Malaysia

Prots on disposal of xed assets

Commission received from a company in Malaysia

Commission received from a company in Malaysia

Commission earned by:

(i) Dividends from shares investment

(ii) Sale of scrap stock to sta

Mr. Lees Business

Reported net prots: $1,154,000