Taxation I

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Question 1 (30 marks)
Mr Kyung, a Korean, has been working in Hong Kong for four years. On July 25, 2013, he returned to Korea together with his family. Before leaving Hong Kong, he acquired a property located in Wan Chai and entered into a lease agreement with Ms Cheung to let the property for two years. The details of the terms of the agreement were as follows:
i The lease started on August 1, 2013.
ii The monthly rental was $32,000 payable in advance on the first day of each month.
iii A rental deposit of $64,000 was paid on signing the lease agreement.
iv Upon the request of the tenant, Mr Kyung agreed to offer a rent-free period of one month from August 1, 2013 to August 31, 2013.
v The rates of $2,500 per quarter and management fee of $1,800 per month are included in the rent and the tenant does not need to pay extra for them.
vi All repairs to the property are to the account of the owner.
During the year ending March 31, 2014, Mr Kyung incurred mortgage loan interest of $15,000 per month, payable to the Standard Chartered Bank in Hong Kong. In addition, he paid an agency fee of $16,000 for leasing the property. In February 2014, Ms Cheung advised that she had incurred and paid a repair cost of $25,000 for the water pipe and electricity line. However, Mr Kyung subsequently negotiated with Ms Cheung and agreed that he did not need to reimburse the amount to Ms Cheung.
Assignment File 15
On May 15, 2014, a property tax return for the year of assessment 2013/14 was issued to Mr Kyung. Based on the belief that he was no longer a resident of Hong Kong, Mr Kyung ignored the tax return.
Required:
a As the tax advisor to Mr Kyung, explain to him the scope of charge to property tax in Hong Kong and advise him of his property tax position and the action to take. (8 marks)
b Assuming that Mr Kyung is subject to Hong Kong property tax, determine his property tax liability for the year of assessment 2013/14, and explain your treatment of any items of income or expenditure which do not appear in your computation. Ignore any provisional tax, tax reductions, tax waivers, or rates concession in your calculations. (15 marks)
c Briefly explain to Mr Kyung the obligations of property owners for the purpose of Hong Kong property tax. (7 marks)
Question 2 (25 marks)
The following information is provided in respect of a manufacturing business owned by Mr Cheung. The business closes its accounts on 31 March of each year.
a The tax written-down values of plant and machinery brought forward from the year of assessment 2013/14 are as follows:
$
30% pool 50,000
20% pool 100,000
b The movements of plant and machinery in the year ending 31 March 2015 are as follows:
i One motor van costing $130,000 in 2009 was sold for $18,000. A new motor van was purchased for $150,000.
ii A sewing machine with a cash-price of $80,000 was bought on hire-purchase terms. A down payment of $35,000 was paid on 1 July 2014, and the balance owing, together with interest, is to be paid in 10 equal monthly instalments of $5,000. The instalment is payable on the first day of the month, starting from August 2014.
iii The 30% pool includes a motor car which has occasionally been used by Mr Cheung’s son for non-business purposes since 1 April 2014. The portion of private use has been agreed with the IRD to be 70%. The cost of the car was $127,000 in June 2011. The estimated market value of the car on 1 April 2014 was $60,000.
16 ACT B414 Taxation I
iv Mr Cheung inherited his father’s business and took over the office furniture for use in his own business. The written-down value of the furniture taken over was $6,000 at the date of cessation of his father’s business. The market value of the furniture at the time was $12,000.
v Old machinery included in the 20% pool was scrapped and new machinery costing $20,000 has been ordered, but not yet delivered. A deposit of $5,000 has been paid which is refundable if the supplier fails to deliver the machine within one month.
Required:
In accordance with the relevant provisions of the Inland Revenue Ordinance, determine the depreciation allowances for Mr Cheung’s business for the year of assessment 2014/15.
Question 3 (25 marks)
Mr Orlando is a US citizen and has been working in the Finance Department of Clever Inc. in Los Angeles since 2008. In April 2015, he was relocated to the Hong Kong office as the regional financial controller. In his new role, he has to travel to other Asian countries on a regular basis to review financial and related matters. The Hong Kong subsidiary of Clever Inc. did not sign any new employment contract with him but did provide him with the administrative and support services he needed in carrying out his responsibilities. Mr Orlando’s salary was deposited in his bank account opened in Hong Kong right after his arrival in Hong Kong. Mr Orlando continues to work closely with his superior in the US on important direction and policy issues.
Required:
a State the factors which are used by the IRD in determining the source of employment, and discuss whether Mr Orlando’s employment should be considered a Hong Kong employment or not. (10 marks)
b Explain the significance of the source of employment in terms of the taxability of employment income under Hong Kong salaries tax. (6 marks)
c Regardless of the source of employment, there are several exemptions available to taxpayers under the provisions of the Inland Revenue Ordinance. State the exemptions available, quoting the section numbers where appropriate, and the conditions that have to be fulfilled in order to qualify for the exemptions. (9 marks)
Question 4 (20 marks)
Professional Services Limited (‘PSL’), a Hong Kong incorporated company, provides professional teaching services. PSL’s income statement for the year ending 31 December 2014 is as follows:
Assignment File 17
Note
$
$
Income
Service income
(1)
801,000
Interest income
(2)
27,000
Profit on disposal of fixed assets
5,000
833,000
Expenses
Salaries and wages
300,000
Legal and professional fees
(3)
50,000
Provident fund
(4)
60,000
Depreciation
56,000
Insurance
3,500
Bank charges and interest
(5)
20,000
Exchange gain
(6)
(1,000)
Travelling costs
(1)
15,000
Advertising
11,000
Printing and stationery
130,000
Provision for accounts receivables
(7)
(2,000)
Sundry expenses
(8)
71,500
(714,000)
Profit before tax
119,000
The following information, extracted from the audit working papers, provides further details of PSL’s operations during the year:
1 During the year, PSL gave two seminars in Singapore, for which it received a total remuneration of $120,000. The remuneration covered learning materials, seminar facilitators and other teaching related equipment. The travel costs from Hong Kong to Singapore for the facilitators totalled $15,000.
2 Interest income comprised the following:
i $20,000 from a US$ fixed deposit placed with HSBC, New York branch
ii $7,000 from a HK$ savings account placed with HSBC, Hong Kong branch
3 Legal and professional fees comprised the following:
Fees for collection of trade debts – Hong Kong customers $5,000
– Singapore customers 4,000
Professional fees relating to mandatory provident fund 20,000
18 ACT B414 Taxation I
Legal fees relating to a copyright infringement claim by 10,000 a publisher
Audit and taxation fees 11,000
4 PSL maintains a mandatory provident fund for its employees and regular contributions of $60,000 were made in the year, representing 20% of all eligible employees’ total salary.
5 Bank charges and interest comprised the following:
Bank charges on normal daily operations $8,000
Interest on bank overdraft with HSBC that was secured by the US$ fixed deposit referred to in (2)(i) above 12,000
6 The exchange gain of $1,000 arose from the settlement from Singapore customers referred to in (1) above.
7 The provision for accounts receivable has the following details:
Balance brought forward – general $(5,000)
Receivables written off – Hong Kong customers 4,000
Amount recovered from a Hong Kong customer written off in 2009 (11,000)
Staff loan written off 4,500
Balance carried forward – general 5,500
8 Sundry expenses comprise the following:
Tax late filing penalty $3,000
Compensation to a staff member whose employment was terminated 12,000
Salaries tax for directors 13,000
Singapore personal income tax for staff 17,000
Office consumables (all allowable) 18,000
9 PSL’s previous year profits tax computation showed PSL had a tax loss of $10,000, but this has not yet been agreed to by the Inland Revenue Department. The depreciation allowances for all plant and machinery and commercial building were calculated to be $66,000 for the current year.
Required:
Determine Professional Services Limited’s Hong Kong profits tax liability in respect of the year ending on 31 December 2014, clearly identifying both the year of assessment and the basis period. (Ignore provisional profits tax and any tax reduction or waiver in your calculations.)
— END OF TMA 2 —