Answers

Applied Skills, TX – HKG December 2018 Answers

Taxation – Hong Kong (TX – HKG) and Marking Scheme

Cases are given in the answers for educational purposes. Unless specifically requested, candidates are not required to quote specific
case names to obtain the marks. Only the general principles involved are required.

Section A

1 B

2 D 40,000 x 12 = $480,000

3 A 120,000 x 6/12 x 1/3 = 20,000

4 B RV = (910,000 – 2,500) x 10% = $90,750

AI = 910,000 + 90,750 – 2,500 = $998,250

5 C

6 B

7 D

8 C

9 B 550,000 x 70/366 = $105,191

750,000 x 62/365 = $127,397

10 C 6m x 4% – 6m x 4% x 4/6 x 3/12 = $200,000

11 A

12 D (90,000 x 3/36 + 30,000 x 3 + 20,000 – 3,000) x 80% x 15% = $13,740

13 D Allowable donation (950,000 – 3,000) x 35% = $331,450

NCI (950,000 – 3,000 – 100,000 – 331,450 – 132,000) = $383,550

14 A

15 A (34,000 x 5%) = $1,700

19
Section B Marks

1 (a) For the purpose of revising the commission expense in the profit tax return filed, GoGo Ltd (GGL) is entitled
to lodge a claim under s.70A to have the ‘error or omission’ corrected in respect of the year of assessment
2017/18. A s.70A claim must be made in writing within six years after the end of the year of assessment or
within six months after the service of the notice of assessment, whichever is later. 1
The claim is accepted only if it can be established to the satisfaction of the Inland Revenue Department (IRD)
that the assessment is excessive by reason of:
(i) an error or omission in a return or statement submitted; or
(ii) an arithmetical error or omission in the calculation of the assessable profits or the tax charged. 1
However, the assessment cannot be re-opened for an error or omission in a return or statement where that
return or statement was made on the basis of a prevailing practice. Whether the tax treatment is a prevailing
practice or not is a question of fact, and it is normally distinguished from the basis which is made according
to the stipulated law. Based on case law, a taxpayer must demonstrate the existence of an error or omission
in a return or statement, and an ‘error’ for the purpose of s.70A is generally referred to only as an inadvertent
error and would not extend to a deliberate error. Evidence as to how the error would have come to be made
would still be required to be established. 2
In the case of GGL, it would be required to produce evidence to explain the error due to the oversight of the
accountant and the reason why this omission was not detected and included in its accounts in support of the
profits tax return filed. It is expected that GGL’s accountant or auditor may be required to produce evidence.
Provided that it can be established to the satisfaction of the IRD that the omitted commission payment was an
‘error’ or ‘omission’, its s.70A claim would be allowed and the profits tax assessment for 2017/18 would be
revised accordingly. 2
–––
6
–––

(b) At the time when the error was discovered, the time limit of one month from the date of notice of assessment
for lodging a valid objection against the notice of assessment has already lapsed. Therefore, no objection is
allowed unless GGL has reasonable grounds (such as directors’ absence from Hong Kong) to explain why it
could not lodge the objection in time, in which case a late objection may be accepted. 1

GGL is, however, able to hold over the provisional profits tax in respect of the year of assessment 2018/19
if it is anticipated that the assessable profits for 2018/19 would be, or are likely to be, less than 90% of the
amount assessed to provisional tax. This may or may not be as a result of the omitted commission payment
which occurred in 2017/18. The application for holdover must be made in writing and lodged with the
Commissioner of Inland Revenue 28 days before the due date, i.e. by 23 December 2018. 1·5
If no application for the holdover of provisional tax is made, GGL is required to pay the tax as required at
the amount demanded on the date specified. However, should it be ultimately determined that the 2017/18
profits tax liability was overstated due to the error, and the notice of assessment is revised to reflect a lower
profits tax liability, a tax refund will be issued by the IRD to GGL. 1·5
–––
4
–––
10
–––

2 Glory Ltd’s depreciation allowance schedule for 2017/18

20% 30% HP – 20% Total
allowance
$ $ $ $
Written down value (WDV) b/f 200,000 300,000 0·5
Additions
Cutting machine 40,000 0·5
–––––––– –––––––– –––––––
200,000 300,000 40,000
Initial allowance (IA)
IA – HP (5,000 + 5,000 x 7) x 60% (24,000) 24,000 1·5
–––––––– –––––––– –––––––
200,000 300,000 16,000
Disposal – cutting machine (10,000) – 0·5
–––––––– –––––––– –––––––
190,000 300,000 16,000
Annual allowance (38,000) (90,000) (3,200) 131,200 1
–––––––– –––––––– ––––––– ––––––––
WDV carried forward 152,000 210,000 12,800
––––––––
–––––––– ––––––––
–––––––– –––––––
–––––––
Allowance for plant and machinery 155,200

––––––––
––––––––

20
 Marks
Correct treatment of items not included for depreciation allowance:
Profit from sale of old cutting machine ($2,000), trademark acquired ($500,000), refurbishment ($200,000),
energy saving electric motor car ($400,000)
(0·5 mark each) maximum 2
Commercial building allowance
Qualifying Written down
expenditure value
$ $
Acquisition:
Retail outlet 1,200,000 1,200,000
Wall panelling 200,000 200,000
–––––––––– ––––––––––
1,400,000
Annual allowance
Retail outlet – 1,200,000 x 1/15 (note) (80,000) 1
Wall panelling – 200,000 x 4% (8,000) 1
––––––––––
Balance c/f 1,400,000 1,312,000
–––––––––– ––––––––––
–––––––––– ––––––––––
Note:
Year of first use: 2006/07
25 years after year of first use: 2031/32 1
Year of purchase: 2017/18
No. of years from year of purchase to 25th year: 15 1
Annual allowance rate for the outlet: 1/15
–––
10
–––

3 Mr Li
Personal assessment computation for the year of assessment 2017/18
$
Net assessable income (600,000 – 2,300) 597,700 1
Net assessable value – car park 28,000 0·5
Share of partnership profits (200,000 – 50,000) 150,000 1·5
––––––––
775,700
Less:
Mortgage loan interest for car park (max: net assessable value) (28,000) 1
Self-education expenses (32,000) 0·5
––––––––
715,700
Less: Concessionary deductions:
Approved charitable donations (3,000) 0·5
Elderly residential care expenses (maximum) (92,000) 0·5
Home loan interest (maximum) (100,000) 1
Contributions to mandatory provident fund (maximum) (18,000) 0·5
––––––––
502,700
Less: Part 5 allowance:
Married allowance (264,000) 0·5
Child allowance (son) (100,000) 0·5
––––––––
Net chargeable income 138,700
––––––––
––––––––
Correct treatment of items which require no adjustment: no dependent parent allowance for mother ($46,000),
no deduction for membership fee to Hong Kong Jockey Club, no deduction for toys donation ($3,000) and water
donation ($2,000), no Part 5 allowance for former wife.
(0·5 mark each) maximum 2
–––
10
–––

21
 Marks
4 (a) Mr Ng
Property tax assessment
Year of assessment 2017/18
$
Rent: 1 July 2017 to 31 March 2018 (25,000 x 9) 225,000 0·5
Premium (100,000 x 11/36) 30,555 0·5
Premium (balance upon tenant moving out) 69,445 0·5
––––––––
325,000
Less: Irrecoverable rent (25,000 x 5 – 50,000) (75,000) 1·5
––––––––
250,000
Less: 20% statutory deduction (50,000) 0·5
––––––––
Net assessable value 200,000
––––––––
––––––––
Tax at 15% 30,000 0·5
––––––––
––––––––
Correct treatment of non-adjustable items:
No deduction for rates and management fee, no bad debt recovery, no bad debt for management fee
(0·5 mark each) 2
Tutorial note: The rental deposit is used to compensate any loss of revenue when the tenant defaults on the
rent and so is offset against irrecoverable rent.
Mr Ng
Property tax assessment
Year of assessment 2018/19
$
Rent recovered 30,000 0·5
Less: 20% statutory deduction (6,000)
–––––––
Net assessable value 24,000

–––––––
–––––––
Tax at 15% 3,600 0·5

–––––––
–––––––
Correct treatment of non-adjustable items:
No tax on car park sale, no deduction on repair. 1
–––
8
–––

(b)
Depreciation allowance is not allowable under property tax but should be claimable by Mr Ng under profits
tax as he occupied the shop unit for his own business. The cost of $50,000 should qualify as plant and
machinery and be eligible for initial allowance of 60% and annual allowance of 20%. 2
–––
10
–––

5 (a) Salaries tax is charged on income from an employment, office and pension arising in or derived from Hong
Kong (s.8). Income from employment includes income derived from services rendered in Hong Kong and
excludes income derived from services rendered outside Hong Kong (s.8(1A)) but apart from this, no guidance
is given in the Inland Revenue Ordinance (IRO) and the phrase ‘arising in or derived from Hong Kong’ is to be
interpreted according to case law and Board of Review decisions. 1
In accordance with the principle in the Goepfert case, Mr Black’s employment does not have its source in
Hong Kong. No separate employment contract was entered into between Mr Black and HK-Co, and thus the
London company remains as his employer which is resident outside Hong Kong. The employment contract
with the London company was reasonably assumed to be negotiated and concluded outside Hong Kong, and
the salary was paid outside Hong Kong even during the secondment period. Therefore, his employment is an
offshore employment. However, as Mr Black has performed services in Hong Kong during visits of more than
60 days, he will be chargeable to Hong Kong salaries tax based on the portion of his income attributable to
his Hong Kong services, unless he has rendered all his services outside Hong Kong (s.8(1A)(b)). 2
–––
3
–––

22
 Marks
(b) Mr Black
Salaries tax assessment
Year of assessment 2017/18
$
Salary (90,000 x 12) 1,080,000 0·5
Travelling allowance (10,000 x 12) 120,000 0·5
Passage allowance 20,000 0·5
––––––––––
1,220,000

––––––––––
––––––––––
Time-apportionment:
HK: (121 + 77 – 10) days + 10 days x 188/(365 – 10) days = 193 days 2·5
Taxable: 1,220,000 x 193/365 645,096 0·5
Rental value (10% x 645,096) 64,509 1
––––––––––
709,605
Gain on share option
– On sale (9,000 – 2,000 x 2/10) 8,600 1
– On exercise [8,000 x (19 – 15) – 2,000 x 8/10] 30,400 1
–––––––
39,000
–––––––
Apportioned on time-basis (39,000 x 193/365) 20,622 0·5
––––––––––
Assessable income 730,227
Less: Self-education expenses (45,000) 0·5
––––––––––
Net assessable income 685,227

––––––––––
––––––––––
Correct treatment of items which require no adjustment: no tax on shipment of belongings settled by HK‑Co
($50,000), no tax on medical expenses claimed from insurance company ($48,000), no deduction for
unclaimed medical ($12,000), no tax on annual insurance premium ($1,500), no tax on London residence,
no mandatory provident fund (MPF) deduction, and no tax on sale of shares.
(0·5 mark each) 3·5
–––
12
–––
15
–––

6 Purple Ltd
Profits tax computation for the year of assessment 2017/18
Basis period: year ended 31 March 2018 0·5
$ $
Profit for the year per accounts 63,000 0·5
Add: Loss from trading in China listed shares 300,000 0·5
Donation 70,000 0·5
Depreciation 40,000 0·5
Loss on disposal of fixed asset 15,000 425,000 0·5
–––––––– ––––––––
488,000
Less: Dividend income from HK listed shares 13,000 0·5
Dividend income from China listed shares 22,000 0·5
Special contribution to mandatory provident fund (MPF) in 60,000 1
2015/16 (300,000 x 20%)
Interest income on HK$ deposit 1,000 0·5
Replacement of carpet 50,000 0·5
Environment-friendly vehicle 300,000 1
Depreciation allowance for plant and machinery 4,000 (450,000) 0·5
–––––––– ––––––––
38,000
Less: Donation (limited to 35%) (13,300) 1
––––––––
Assessable profit for the year 24,700

––––––––
––––––––
Tax payable at 16·5% 4,075 0·5

––––––––
––––––––

23
 Marks
Correct treatment of items which require no adjustment (Candidates are NOT required to prepare the following
table in their answer. Marks will be awarded if they are not adjusted in the tax computation.):
Taxable/non-deductible items $ Deductible/non-taxable items $
Advisory fee 1,200,000 Wages to driver for director’s use 200,000
Sub-letting income 120,000 MPF 5% mandatory 100,000
Gain from HK listed shares 800,000 MPF voluntary contribution 140,000
Gain from foreign currencies 330,000 Rent and rates for director’s residence 450,000
Interest on RMB deposit 2,000 Interest on bank overdraft 2,000
Interest income on staff loan 18,000 Interest on bank loan $200,000 4,000
(0·5 mark each) maximum 6
–––
15
–––

24