ACCT 4410 Taxation Property Tax

2022/23 Spring Semester

Week 3 Premium spread-over; treatment of bad debts & tax computation

Estimated time used: 50 minutes

1. Mr. Wong owns a flat and lets the flat to a tenant for a period of 2 years commencing on 1 August
2019. Among other terms of the lease, Mr. Wong received a non-refundable deposit of $120,000.
Compute the deposit to be spread over and assessable in each relevant year of assessment, if you
consider it so required.

The non-refundable deposit to be spread over the relevant lease period, i.e., 24 months
commencing on the first day of lease (1 August 2019 to 31 July 2021)

Year of assessment 2019/20

Period spread over is 1.8.2019 – 31.3.2020 $120,000 x 8/24 = $40,000

Year of assessment 2020/21

Period spread over is 1.4.2020 – 31.3.2021 $120,000 x 12/24 = $60,000

Year of assessment of 2021/22

Period spread over is 1.4.2021 – 31.7.2021 $120,000 x 4/24 = $20,000

2. Mr. Chan owns a flat and lets the flat to a tenant for a period of 5 years commencing on 1 January
2019 at a premium of $648,000. Compute the premium to be spread over and assessable in each
relevant year of assessment.

The premium to be spread over the relevant lease period or a maximum of 3 years, whichever is
the shorter, commencing on the first day of lease (1 January 2019 to 31 December 2021) – the
statutory maximum prevails

Year of assessment 2018/19

Period spread over is 1.1.2019 – 31.3.2019 $648,000 x 3/36 = $54,000

Year of assessment 2019/20

Period spread over is 1.4.2019 – 31.3.2020 $648,000 x 12/36 = $216,000

Year of assessment 2020/21

Period spread over is 1.4.2020 to 31.3.2021 $648,000 x 12/36 = $216,000

Year of assessment 2021/22

Period spread over is 1.4.2021 to 31.12.2021 $648,000 x 9/36 = $162,000

1
3. Kelly owned a flat in Diamond Hill, Hong Kong. The following information is relevant to the property
tax matters of her:

a) Kelly let out the above property to Susan for rental income for a period of 3 years, starting
from 1 April 2020.
b) The agreed monthly rent was $15,000, payable in advance.
c) Kelly paid rates during the year amounted to $4,500.
d) During the year of assessment 2020/21, Susan paid rent to Kelly up until December 2020.
e) For the months following December 2020, Kelly never received the rent arrears from Susan.
There was no sign or indication to show Susan had moved out.
f) Without Kelly’s notice, Susan sneaked in the flat and quietly moved out all her belongings.
g) Kelly noticed Susan’s departure on 31 May 2021.
h) After the incident, Kelly was so frustrated and decided not to rent out her flat to anybody
thereafter.

Required: (ignore tax rebate and provisional property tax)

Compute property tax liability of Kelly for the years of assessment 2020/21 and 2021/22.

Kelly
Property Tax Computation – Diamond Hill Property
Year of assessment 2020/21

$ $
Assessable value ($15,000 x 12) 180,000

Less: rates paid by Kelly 4,500

175,500

Less: Statutory deduction @20% of 175,500 35,100

Net Assessable Value 140,400

Property tax @15% thereon 21,060

Note: even though Susan did not pay three months’ rent, Kelly couldn’t get the
deduction of unpaid rent because it hasn’t been proved as “irrecoverable”.

Kelly
Property Tax Computation – Diamond Hill Property
Year of assessment 2021/22

$ $
Assessable value ($15,000 x 2) – April & May 2021 30,000

Less: irrecoverable rent (from January to May 2021) 75,000

Excess bad debt carried back to immediate prior year 45,000

Property tax @15% 0

2
Note: since there was no assessable value for 2021/22 to set off the rates, it was
not deductible

Kelly
Property Tax Computation – Sai Kung Property
Year of assessment 2020/21 (Revised)

$ $
Assessable value ($15,000 x 12) 180,000

Less: irrecoverable rent carried back 45,000

Less: rates paid by Kelly 4,500 49,500
130,500

Less: Statutory deduction @20% of 130,500 26,100

Net Assessable Value 104,400

Property tax @15% thereon (revised) 15,660

Note: the amount of tax overpaid of $5,400 (i.e., $15,660 – 21,060) would be
refunded for the year of assessment 2020/21.

3
4. Doris Fu emigrated to England several years ago. During a recent visit back to Hong Kong, she
acquired a property in Hong Kong. The property was subsequently leased to Joy Ltd. The following
information is provided regarding the property lease transactions:

a) Term of lease: two years from 1 April 2021.

b) Monthly rental: $20,000 per month, payable in advance.
c) Rent free period: one month from 1 April 2021.
d) Rent deposit: $40,000, payable on signing the lease agreement and it’s refundable at the end
of the lease term.
e) Management fee: $2,000 per month, payable by Joy Ltd. directly to the property management
company.
f) Rates: $1,500 per quarter, payable by Doris and due on 31 January, 30 April, 31 July and 31
October each year.
g) Mortgage interest: $25,000 per month, incurred by Doris on a bank loan obtained to acquire
the property.
h) Renovation: $50,000, incurred by Doris to a decoration company.
i) Repair to door lock: it broke down because of natural wear-and-tear, but $5,000 incurred by
Joy Ltd. on 31 July 2021.
j) Property agency fee: half of the monthly rental.
k) Sub-letting: Joy Ltd. sublet the property to Ms. Kung on 1 November 2021.

Doris had never considered any tax reporting in Hong Kong as she believed that she was not subject to
Hong Kong tax on the basis that she is no longer a resident in Hong Kong and all rentals are deposited
into her bank account directly in England. On 1 January 2022, Doris was declared bankrupt in England,
as a result of which the bank took possession of the property, subject to the existing tenancy on 2
January 2022.

Required: (ignore tax rebate and provisional property tax)

a) Advise Doris Fu of her liability to tax and statutory compliance obligations under the Inland
Revenue Ordinance regarding her property. Hint: There are FOUR points/areas of concern.

b) Compute the property tax liability of Doris Fu in respect of the year of assessment 2021/22,
giving explanations of ALL your tax treatment of the various items.

4
a) Taxpayer’s statutory obligations:

1. Under s.5(1), property tax is levied on the owner of land or buildings, or land and buildings
situated in Hong Kong, in respect of the net assessable value. The definition of “owner” does
not differentiate Hong Kong resident from non-Hong Kong resident.

2. An owner may be charged with property tax even if his or her only connection with Hong Kong is
the land and/or building from which the income is earned. The place of receipt of the property
income is also irrelevant for property tax purposes.

3. If Doris has not received any notice or return from the Inland Revenue Department (IRD), she
should inform the IRD in writing that she has commenced to receive income from property and
thus is chargeable to property tax. This notification should reach the IRD within four months
after the end of the basis period for the year of assessment in which the income was first
received. In Doris’ case, the first relevant year of assessment is 2021/22 and thus the
notification should reach the IRD not later than 31 July 2022.

4. When Doris ceases to own the property on which property tax is chargeable, she is also required
to notify the IRD in writing within one month of the cessation of ownership. Based on the
information given, Doris went bankrupt on 1 January 2022 and on 2 January 2022, the property
was taken over by her bank. Doris should give notice to the IRD advising of the cessation of her
ownership in the property, not later than 2 February 2022.

5. Under s.51D of the IRO, Doris is also required to keep adequate rent records in respect of the
property on which property tax is chargeable. The statutory requirement for retaining the
relevant records is for a period of not less than seven years after the completion of the
transaction. Therefore, Doris is obliged to retain adequate records to support the consideration
received from her property during this period.

b) Compute the property tax liability

Doris Fu
Property Tax Computation
Year of assessment 2021/22
Note HK$
Rental income ($20,000 x 8) 1. 160,000
Repairs borne by Joy Ltd. 2. 5,000
Assessable value 165,000
Less: rates paid by Doris ($1,500 x 3) 3. 4,500
160,500
Less: 20% statutory deduction 32,100
128,400

Property tax @ 15% 19,260

5
Notes to property tax computation:

1. As no rental was payable during the one-month rent-free period, no taxable consideration was
earned by Doris.
2. Repairs paid and borne by a tenant are deemed to be income earned by the owner and thus
taxable.
3. Rates paid by the owner are statutorily allowed as a deduction before the 20% statutory
deduction. Rates are payable per quarter. Under normal cases, only those payments already
made are deducted, i.e., April, July and Oct.
4. A rent deposit is not consideration earned by Doris and thus not assessable (it was mentioned
that it was refundable)
5. The management fee paid by the tenant directly to the management company is not the taxable
income of Doris and thus not assessable (taken the position that it was specified in the tenancy
agreement)
6. Mortgage interest paid on a loan acquired to fund the acquisition of the property is not tax
deductible for property tax purpose.
7. The renovation cost incurred by Doris is regarded as a capital expenditure, but no capital
allowance provided under property tax.
8. A property agency fee is not separately allowed as a deduction under property tax, as this kind
of expense is deemed to be covered by the 20% statutory deduction.
9. The fact that Joy Ltd. has sublet the property to Ms. Kung does not affect the property tax
liability of Doris so long as Joy Ltd. still pays the rental payment to Doris.