Posted: November 26th, 2015



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
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.
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.
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.
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 $ $
Service income (1) 801,000
Interest income (2) 27,000
Profit on disposal of fixed assets 5,000 833,000
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
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.
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


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