Answers

Applied Skills, TX – HKG December 2022 Answers

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

Section A

1 2 only
Whether a person is subject to tax in Hong Kong does not depend on his residency.

2 2 and 4
Where both the contract of purchase and contract of sale are effected in Hong Kong, the trading profits are fully
taxable. The purchase and sale contracts are important factors, but the totality of facts must be looked at in order
to determine the locality of the profits.

3 Option 3
2020/21 2021/22
HK$ HK$
0 1,460,000
Since the company was resident in Hong Kong, Mr Brown was under Hong Kong employment. For the year
of assessment 2020/21, he was exempt from salaries tax as his visits did not exceed 60 days. For the year of
assessment 2021/22, he was fully chargeable to salaries tax as his total visits exceeded 60 days.

4 Option 3
2021/22 (final) 2022/23 (provisional)
$12,912 $28,224

[(20,000 x 5·5) – (1,200 x 2)] x 80% x 15% = 12,912

[(20,000 x 12) – (1,200 x 4)] x 80% x 15% = 28,224
Property tax is assessed on actual consideration receivable, only rates and 20% statutory deduction can be deducted
from the assessable value.

5 3 only
Only the executor can elect for personal assessment for the deceased.

6 Option 2
Amount Year of assessment
$60,000 2021/22
100,000 x (5 – 2) x 73/365 = 60,000
Share option benefits are taxable at the time when the option was exercised, which was 1 September 2021 in this
case. The gain is equal to the open market value of the shares at the time of exercise less the amount paid for the
shares. Part of the gain attributable to services rendered in Hong Kong is chargeable, having regard to the number
of days in Hong Kong during the vesting period to the total number of days in the vesting period.

7 3 and 4
Consular and approved charitable institutions or trusts of public character are exempt from property tax.

8 $99,000
(880,000 + 120,000 – 10,000) x 10% = 99,000
The rental value (i.e. taxable housing benefit) is based on 10% of income from the employer and its associates
excluding any share option or termination payment but after any deductible expenses and depreciation allowance
(but not self-education expenses). In this case, Patrick’s income from his employer includes his annual salary plus
the market value, as at the end of the vesting period, of the shares granted to him.

3
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9 Option 1
Latest date Year of assessment
31 March 2021 2020/21
The partnership business commenced in 2020/21 and the basis period for the year of commencement is from
1 May 2020 to 30 November 2020. The latest date by which it is required to notify the IRD that it is chargeable
to tax for the year of assessment 2020/21 is four months after 30 November 2020, i.e. 31 March 2021.

10 $28,000
60,000 – [40,000 x (2/(2 + 0·5))] = 28,000
Part of the offshore deposit is used to secure the loan. Allowable interest is reduced by a portion of the tax-free
interest on the deposit, calculated as $32,000 [$40,000 x ($2m deposit/$2m deposit + $0·5m property)].
Therefore, allowable interest is $28,000 ($60,000 – $32,000).

11 1, 3 and 4
An individual aged below 18 is eligible to elect for personal assessment if both parents are deceased. Married
persons have the option to elect for personal assessment separately and an individual may elect for personal
assessment even if their spouse does not do so, unless the couple have jointly elected for joint assessment and the
individual is chargeable to salaries tax based on their aggregated net chargeable income.

12 2 only
Any act or thing required by or under the Inland Revenue Ordinance to be done by an incapacitated person shall be
done by the trustee of the incapacitated person.

13 1 and 4
For depreciation allowances purposes, capital expenditure incurred in the common basis period for two years of
assessment is treated as incurred in the first basis period; and capital expenditure incurred in the interval between
the basis periods for two years of assessment is treated as incurred in the second basis period.

14 Option 4
Peter Mary
HK$11,000 HK$8,000
The allowable deduction for Mary cannot exceed the cap of $8,000 for each specified relative. The excess of
$4,000 can be transferred to the spouse for deduction. Therefore, the total allowable deduction for Peter is $11,000
($7,000 + $4,000).

15 Option 4
Basis period Adjusted profits
1 April to 31 August 2021 $231,000
(240,000 x 5/8) + (240,000 x 3/8 drop out profits – 27,000 x 4/12 profits in 1974/75) = 231,000
For a business which commenced before 1 April 1974, the basis period for the year of cessation runs from 1 April in
the year of cessation to the date of cessation (s.18D(2)), which is 1 April to 31 August 2021 for Words Ltd. Section
18D(2A) applies to add back the drop-out profits for the period from 1 January to 31 March 2021 as reduced by
the transitional amount for the period from 1 December 1974 to 31 March 1975.
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2 marks each 30
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4
Section B Marks

1 Mr Chan

Reporting obligations
Mr Chan is obliged to fulfil the following reporting requirements in relation to the leasing of the property:

(a) Commencement to earn lease income

A person who is liable to tax for any year of assessment is required to inform the Commissioner in writing
that he is so chargeable to tax, not later than four months after the end of the basis period of that year of
assessment, unless he is already required to furnish a return [s.51(2)]. In the case of Mr Chan, as lease rental
commences in June 2022, he starts to be liable to property tax for the year of assessment 2022/23. He is
therefore obliged to inform the Commissioner of his chargeability not later than 31 July 2023 if he has not
received any tax return from the Inland Revenue Department requiring him to report the income. 2
(b) Submission of tax return, and the consequences of failing to submit
If Mr Chan is issued a tax return, he is required to submit the return within the time stipulated in the return,
which is normally one month after the date of issue of the return. 1
If Mr Chan fails to submit the tax return without reasonable excuse, he is regarded as guilty of an offence
under s.80(2) and may be prosecuted. A penalty will therefore be imposed comprising a fine at level three (i.e.
$10,000) plus treble the amount of tax which was either undercharged or would have been undercharged.
However, the Commissioner may compound the penalty to a smaller amount depending on the circumstances.
Alternatively, instead of prosecuting via the court, the Commissioner or his deputy may personally raise an
assessment of ‘additional tax’ under s.82A up to treble the amount of tax undercharged or would have been
undercharged. 2
Moreover, an estimated assessment may be issued based on an estimation of the assessable value and
demand payment of tax accordingly. If Mr Chan considers the estimated assessment excessive, he may lodge
an objection in writing within one month from the date of estimated assessment together with a properly
completed tax return. 1
(c) Cessation to earn lease income or disposal of the property
Every person who ceases to receive chargeable income is required to inform the Commissioner in writing
within one month of the cessation of the income [s.51(6)]. In the case of Mr Chan, if he ceases to receive
rental income or ceases to own the property, he should report this within one month of the date of ceasing to
receive the income. 1
(d) Change of correspondence address
Where a person chargeable to tax in Hong Kong changes address, he is required to inform the Commissioner
in writing within one month of such a change. 1
(e) Record keeping
Every person who owns a property earning lease income subject to tax in Hong Kong is required to keep
sufficient records, in English or Chinese, of the consideration received, such as lease agreements and duplicates
of rent receipts, for a period of not less than seven years. The requirements are exempt if the Commissioner
has specified that records need not be preserved. 2
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5
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2 Mr and Mrs Ho

Personal assessment for the year of assessment 2021/22

Mr Ho Mrs Ho
$ $ $
Net assessable value (NAV)
Rental received 240,000 0·5
20% statutory deduction (48,000) 192,000 0·5
––––––––
Net assessable income
Director’s fee 180,000 0·5
Assessable profits
Profit from sole proprietorship business 120,000 0·5
Approved charitable donations (ACD) 35% (42,000) 78,000 0·5
––––––––
Share of profit from partnership business 138,000 0·5
Less: Loss brought forward (138,000) 0 0·5
–––––––– –––––––– ––––––––
Total income 258,000 192,000
Less: Mortgage interest (69,000) 0·5
ACD – Mrs Ho (30,000) 0·5
ACD – distilled water (0) 0·5
ACD – Mr Ho ((258,000 + 42,000) x 35% – 42,000) (63,000) 0·5
Unabsorbed ACD transferred from spouse
(170,000 – 42,000 – 63,000) = 65,000
limited to ((192,000 – 69,000) x 35% – 30,000) (13,050) 1
Elderly residential care expenses (90,000) 0·5
Payment to mother (0) 0·5
MPF contributions (9,000) 0·5
Share of partnership loss (130,000) 0·5
–––––––– ––––––––
(34,000) 79,950
Less: Loss transferred from spouse 34,000 (34,000) 1
–––––––– ––––––––
Reduced total income 45,950
Less: Married person’s allowance (264,000) 0·5
––––––––
Net chargeable income Nil
––––––––
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3 LLU Ltd

Item Category Amount State ‘taxable’ or To be If yes, state the basis

No. (HK$) ‘non‑taxable’ and the adjusted of treatment (add
amount in the tax back or deduction)
computation and the amount of the
(Yes/No) adjustment.
Income
1. Compensation 280,000 $280,000 non-taxable Yes 0·5
income Deduct $280,000 in 0·5
tax computation and
deduct $280,000 0·5
from 20% depreciation
allowance pool
2. Foreign exchange 40,000 $40,000 taxable No 0·5
gain
3. Gain on disposal of 24,000 $24,000 non-taxable Yes 0·5
electric car Deduct $24,000 0·5

$35,000 taxable Add back $35,000 as 0·5

taxable sale proceeds

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Item Category Amount State ‘deductible’ or To be If yes, state the basis
No. (HK$) ‘non‑deductible’ and the adjusted of treatment (add
amount in the tax back or deduction)
computation and the amount of the
(Yes/No) adjustment.
Expenditure
4. Property cost 12,000 $12,000 deductible No 0·5
5. Donation 220,000 $48,000 deductible Yes 0·5
but subject to 35% of Add back $48,000 first; 0·5
assessable profits before then deduct if positive
donation balance of assessable
profit after all other
tax adjustments, but
subject to 35%
$172,000 non-deductible 0·5
Add back total 0·5
$172,000
6. Staff costs 219,000 $180,000 deductible No 0·5
$39,000 non-deductible Yes 0·5
Add back $39,000 0·5
7. MPF (executive) 200,000 Only $150,000 deductible; Yes 0·5
max 15% Add back $50,000 0·5
8. MPF (special 2021) 50,000 $10,000 deductible Yes 0·5
(20% p.a.) Deduct $10,000 0·5
9. Share option 92,000 $92,000 deductible No 0·5
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4 Kate

Property tax computation

Year of assessment 2021/22 (original)
$
Rental: 1 July 2021–31 March 2022 (15,000 x 9) 135,000 0·5
Premium (24,000 x 9/24) 9,000 1
Rental deposit 0 0·5
Rates 0 0·5
Mortgage loan interest 0 0·5
Property management fee 0 0·5
––––––––
Assessable value 144,000
Less: 20% statutory allowance (28,800) 0·5
––––––––
Net assessable value 115,200 0·5
––––––––
––––––––
Tax at 15% 17,280 0·5
––––––––
––––––––
Property tax computation
Year of assessment 2022/23 (original)
$
Rental: 1 April 2022 – 31 May 2022 (15,000 x 2)
Premium (24,000 – 9,000) 30,000 0·5
15,000 1
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45,000
Less: Irrecoverable rent: 1 December 2021 – 31 May 2022 (15,000 x 6 – 30,000) (60,000) 1
–––––––
Irrecoverable rent carried back to 2021/22 (15,000) 0·5
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7
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Property tax computation
Year of assessment 2021/22 (revised)
$
Rental: 1 July 2021 – 31 March 2022 (15,000*9) 135,000
Premium (24,000*9/24) 9,000
––––––––
144,000
Less: Irrecoverable rent carried back from 2022/23 (15,000) 0·5
––––––––
Assessable value (revised) 129,000
Less: 20% statutory allowance (25,800)
––––––––
Net assessable value (revised) 103,200 0·5
––––––––
––––––––
Tax at 15% 15,480
Less: Tax per original computation (17,280) 0·5
––––––––
Tax repayable (1,800) 0·5
––––––––
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10
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5 Adrian

Salaries tax assessment

Year of assessment 2021/22
$ $
Salary (100,000 x 12) 1,200,000 0·5
Less: Amount charged to income tax in Singapore (1·2m x 2/3) (800,000) 1
––––––––––
400,000
Singapore income tax paid by Silver 0 1
Interest savings on staff loan 0 0·5
Reimbursement of removal expenses 8,000 0·5
Holiday benefit 30,000 0·5
Reimbursement of self-education expenses 0 0·5
––––––––––
438,000
Rental value (438,000 x 5/12 x 10%) 18,250 1·5
Less: Rent paid (3,000 x 5) (15,000) 3,250 0·5
–––––––
Cash allowance to cover accommodation cost 12,000 0·5
Difference between market value and purchase price of the flat 500,000 1
––––––––––
Assessable income 953,250
Less: Self-education expenses (100,000) 0·5
Removal expenses (0) 0·5
Share option cost (0) 0·5
––––––––––
Net assessable income 853,250
Less: Concessionary deductions
Home loan interest (0) 0·5
Contributions to mandatory provident fund (MPF) (18,000) 0·5
Tax deductible MPF voluntary contributions (30,000) 0·5
Qualifying annuity premium for Adrian (25,000) 0·5
Qualifying annuity premium for wife (60,000 – 55,000) (5,000) 1
––––––––––
775,250
Less: Part V allowances
Married person’s allowance (264,000) 0·5
Child allowance (120,000 x 2) (240,000) 0·5
Dependent parent allowance (0) 0·5
––––––––––
Net chargeable income 271,250

––––––––––
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Salaries tax payable at progressive rates 28,112 0·5

––––––––––
––––––––––
Salaries tax at standard rate is not applicable (775,250 x 15%) 116,287 0·5

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8
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6 Gee Ltd

(a) Gee Ltd’s HK profits tax computation for the year of assessment 2021/22
Basis period: year ended 31 March 2022 0·5
$ $
Profit before tax per accounts 1,132,000 0·5
Add: Depreciation 30,000 0·5
Loss on disposal of fixed asset (computer) 60,000 0·5
Disposal of trademark (note 1) 80,000
Interest on director’s loan 8,000 0·5
Finance charge 0 0·5
Royalty payment 0 0·5
Wages for director’s driver and helper 0 0·5
Proceeds of prescribed fixed asset (computer) 23,000 201,000 0·5
–––––––––– ––––––––––
1,333,000
Less: Depreciation allowance (note 2) 184,600
Gain on disposal of trademark 240,000 0·5
Interest on staff loan 0 0·5
Gain from HK securities trading 0 0·5
Enhanced R&D deduction ($640,000 x 200%) 1,280,000 (1,704,600) 1
–––––––––– ––––––––––
Adjusted loss for the year to be c/f (371,600) 0·5
––––––––––
––––––––––
Profits tax payable Nil 0·5

–––––––––– ––––––––––
Note (1):
Disposal of trademark:
$
Unallowed deduction under s.16EA(3): (200,000 x 20% x 3) (120,000) 1
Sale proceeds deemed taxable 440,000 0·5
––––––––
Excess of sale proceeds over unallowed deduction 320,000

––––––––
––––––––
Taxable proceeds limited to deduction claimed before (200,000 x 20% x 2) 80,000 0·5
Note (2):
Depreciation allowance schedule for 2021/22:
HP 20% Total
(30%) allowance
$ $ $
Written down value (WDV) b/f 500,000 0·5
Add: Image machine (cash price) 170,000 0·5
Less: Initial allowance
[$50,000 + ($10,000 x 3)] x 60% (48,000) 48,000 1
––––––––
122,000
Less: Annual allowance (36,600) (100,000) 136,600 1
–––––––– –––––––– ––––––––
Written down value c/f 85,400 400,000

––––––––
–––––––– ––––––––
––––––––
Total allowance 184,600

––––––––
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(b) Gee Ltd is required to withhold the following amount of tax from the royalty payment:
$40,000 x 30% x 8·25% = $990 2
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