Hongkong tax law

Part I: Multiple Choice Questions (20 x 2 marks = 40 marks)

1. Mr. Kam, an accounting manager, earned salaries income of $600,000 during the year of assessment 2018/19. He remarried in May 2018 and had a new child the same year. He had to pay alimony payment of $5,500 per year to his ex-wife and membership dues for two professional accounting bodies for $1,000 each. Please calculate his salaries tax liability for the year of assessment 2018/19. (Ignore provisional salaries tax & one-time off tax deduction).

(A) $3,700. (B) $800. (C) $3,640. (D) $780.

2. Jack Fong owns an investment property in Kowloon City which is let at a rent inclusive of rates and management fee. The existing lease will be expiring in two months and tenant has indicated that he is happy to renew the lease if the terms are acceptable. Hence, Jack has been asking his friends to give him some ideas on revising the terms of the lease so that he can save some property tax. What will be your advice to him?

(A) He should include rates and management fee in the rent under the new lease. (B) He should exclude rates and management fee in the rent under the new lease.

(C) He should include rates and exclude management fee in the rent under the new lease. (D) It does not matter as the assessable income under property tax is always calculated at the

new amount received.

3. In determining the source of interest income of a non-financial institution chargeable to profits

tax, which of the following is adopted?

(A) Provision of credit test. (B) Contract effected test.

(C) Place of business conducted by the recipient. (D) Place of business conducted by the payer.

4. Which of the following statements is correct regarding an employer’s obligations under the

Inland Revenue Ordinance?

(A) To retain money payable to employee who is about to leave Hong Kong for regular

business trip.

(B) To notify the Inland Revenue Department about the employment of new staff within one

month from the date of employment.

(C) To notify the Inland Revenue Department about an employee’s departure from Hong

Kong within one month after the date of such departure.

(D) None of the above.

5. Notwithstanding the secrecy provisions of the Inland Revenue Ordinance, the Commissioner of Inland Revenue may communicate any information obtained in the course of his duties to the following persons, EXCEPT the:

(A) Commissioner of Police.

(B) Commissioner of Rating and Valuation. (C) Collector of Stamp Duty.

(D) Commissioner of Estate Duty.

6. Mr. Lee received a notice of assessment for the year of assessment 2018/19 (final) and 2019/20

(provisional) with the first instalment of $80,000 and the second instalment of $17,000 payable

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on 10 January 2020 and 10 April 2020 respectively. If Mr. Lee does not pay on the first due date, what will be the amount of surcharge to be imposed immediately by the CIR?

(A) $4,000 (B) $4,850 (C) $9,700 (D) $10,185

7. Mr. Lin is single. During the year ended 31 March 2019, he had employment income of

$120,000 and assessable profits of $300,000 (after deducting charitable donations of $90,000). Mr. Lin has not yet claimed an approved charitable donation of $30,000. Mr. Lin has elected for personal assessment for the year of assessment 2018/19. The amount of approved charitable donations deductible as a concessionary deduction under personal assessment is:

(A) $42,000 (B) $15,000 (C) $120,000 (D) $30,000

8. Which of the following income from employment will NOT be included in the calculation of

rental value?

(A) Furniture allowance

(B) Holiday journey benefit

(C) Lump sum received on termination of employment (D) Meal allowance

9. Before 31 March 2019, Mr. Ho’s income was not subject to Hong Kong salaries tax. Mr. Ho was granted an option at a cost of $5,000 to purchase 100,000 shares at $2 each in his employer’s holding company on 1 May 2018. Mr. Ho was seconded to Hong Kong and was employed by a Hong Kong company on 1 April 2019. On 1 June 2019, Mr. Ho exercised the option. The market value of the shares as at 1 June 2019 was $4. The “share option gain” chargeable to salaries tax for the year of assessment 2019/2020 is:

(A) $200,000 (B) Nil

(C) $400,000 (D) $195,000

10. Mr. Bau is a sailor of a Hong Kong shipping company with regular monthly salaries. He has no other income. He stayed in Hong Kong for 60 days, 50 days, 61 days, 61 days and 59 days respectively during the year ended 31 March 2015, 2016, 2017, 2018, 2019. Which of the following is FALSE?

(A) Mr. Bau’s salaries income is not chargeable to salaries tax for the year of assessment

2015/16.

(B) Mr. Bau’s salaries income is not chargeable to salaries tax for the year of assessment

2016/17.

(C) Mr. Bau’s salaries income is chargeable to salaries tax for the year of assessment 2017/18. (D) Mr. Bau’s salaries income is not chargeable to salaries tax for the year of assessment

2018/19 if he will stay no more than 60 days in Hong Kong for the year of assessment 2019/20.

11. Michael is an engineer whose employment income for the year 2018/19 was $430,000. He was

provided with a flat as his place of residence. He claimed deductions for annual subscription

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to the Institute of Engineers $3,000, contributions to Mandatory Provident Fund (MPF)

$30,000 and expenses of self-education $45,000 in that year. Please calculate his net chargeable income before deducting personal allowance for the year of assessment 2018/19.

(A) $364,000. (B) $394,700. (C) $406,700. (D) $410,700.

12. The cost of the machinery is $100,000. The tax written down value of the machinery is $19,500 when it is sold for $30,000. The necessary tax adjustment in respect of the sale of the machinery is:

(A) A balancing allowance of $70,000 (B) A balancing allowance of $19,500 (C) A balancing charge of $10,500

(D) No balancing allowance and charge

13. Alice and Manny are partners operating AML Solicitors and Notaries. Under the partnership agreement. Alice is allowed to draw a monthly salary of $10,000 and the partnership profit is divided in equal shares between the partners. During the year of assessment 2018/19, the partnership profit was HK$100,000 (before deducting partner’s salary). How will the assessable profits be allocated between the partners?

(A) Alice (loss of $10,000) Manny (loss of $10,000) (B) Alice (profit of $110,000) Manny (loss of $10,000)

(C) Alice (profit of $45,000) Manny (profit of $45,000) (D) Alice (profit of $50,000) Manny (profit of $50,000)

14. Scott Smith is a professor at the University of Hong Kong. He entered into an employment contract with the University on 1 October 2016 for a 5-year term. Upon completion of the contract, he is entitled to a gratuity of $600,000. If John decides to have the gratuity related back, how much will be his additional assessable income for the year of assessment 2018/19?

(A) $0.

(B) $100,000. (C) $200,000. (D) $600,000.

15. Your client has income from property and employment. He understands that by electing personal assessment (PA), his income would be aggregated and he may enjoy deduction of personal allowance and mortgage interest. However, he is very hesitated to elect PA as he isn’t sure whether he may end up paying more tax if he subsequently finds that he does not have PA advantage. What is your advice to him?

(A) He needs not worry as the Inland Revenue Department will not issue an assessment under

PA if it is not to his advantage.

(B) He has to lodge an objection if he finds that the assessment under PA is excessive.

(C) He has to pay the tax under PA even if he subsequently finds that he does not have PA

advantage.

(D) He needs to complete a withdrawal application form within one month after election of

PA if he subsequently finds that he does not have PA advantage.

16. Mr. Choi carries on a business in Hong Kong. During the year ended 31 March 2019, he

purchased the following assets (AA:30%) for his business use:

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Motor car: $160,000 Computer: $50,000

There is no balance brought forward in the 30% pool from the previous year of assessment. The total amount of deduction available to Mr. Choi in respect of the above two assets for the year of assessment 2018/19 are:

(A) $115,200. (B) $151,200. (C) $165,200. (D) $210,000.

17. Wolf Film Productions Inc., a US film producer without any establishment in Hong Kong granted the exclusive right to show the title “The White Tiger” to AMC, a cinema operator in Hong Kong, for a period of two weeks in 2019. According to the agreement, AMC should pay a fixed royalty fee of US$200,000 to the film producer. Assuming an exchange rate of US$1 to HK$7.8, what is the profit tax payable by Wolf Film Production Inc. for 2019?

(A) $257,400. (B) $9,900. (C) $77,220. (D) $25,740.

18. Edwin Butt agreed to sell his holding of 10,000 shares in Everbeam Limited, a private company in Hong Kong, to Cody Au at the price of $100 per share. One instrument of transfer was affected on the completion date and they agreed to share the stamp duty in equal share. How much is Edwin’s share of the stamp duty on the transaction?

(A) $2,002.50 (B) $1,002.50 (C) $2,005.00 (D) $502.50

19. Which of the following statement(s) regarding the Boarding of Review (BOR) is/are

CORRECT?

(1) The BOR is an independent Tribunal to hear objections against tax assessments upon the

Commissioner of Inland Revenue’s determination.

(2) The cases are heard in camera and the BOR’s decisions will be published without

mentioning the names of the taxpayers.

(3) The BOR issues Departmental Interpretation and Practice Notes to govern the practice of

the Inland Revenue Department.

(A) 1 only. (B) 2 only.

(C) 1 and 2 only. (D) 2 and 3 only.

20. Great Profit Ltd acquired machinery with a cash price of $160,000 under hire purchase terms. Great Profit Ltd made a down payment of $40,000 on 1 September 2017 and settled the balance by 16 equal monthly instalments of $8,000 each starting on 1 October 2017. Great Profit Ltd closes its accounts on 31 March each year. The annual allowance rate for the machinery is 30%.

Which statement concerning the depreciation allowances for the machinery is CORRECT?

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(A) No initial allowance will be given in the year of assessment 2018/19 (B) The annual allowance in the year of assessment 2017/18 is $32,160 (C) The machinery will be transferred to the 30% pool in 2018/19

(D) The annual allowance in the year of assessment 2018/19 is $9,390

Part II: Answer any Two Questions (2 x 30 marks = 60 marks) Question # 1

Alice Chung has asked your firm to handle all her Hong Kong tax affairs. You have held an initial meeting with Alice, at which you ascertained the following information relating to the year ended 31 March 2019:

(1) Alice has been employed by TMA Inc (TMA), a US company, since January 2013. On 1 April 2018, she was transferred to TMA’s Hong Kong buying office to take charge of the sourcing operations.

(2) Alice’s basic salary is $90,000 per month. She receives her salary and benefits in Hong Kong dollars. She joined the Hong Kong Mandatory Provident Fund and is covered under the Hong Kong medical scheme.

(3) An air ticket for Alice, to relocate her from the US to Hong Kong, was purchased by TMA at a cost of $16,000.

(4) Alice travels frequently to the Mainland and neighboring countries in the performance of her duties. During the year of assessment 2018/19, she spent 182 days (including 26 days annual leave) on overseas trips.

(5) Alice receives $30,000 per month as a ‘housing allowance’ for the purpose of enabling her to afford accommodation in Hong Kong. She spends $20,000 per month on a one room serviced apartment in a hotel and keeps the rest of the housing allowance for herself. TMA does not require the excess amount to be reimbursed to it.

(6) In addition, she receives $50,000 per year as a ‘holiday allowance’. The purpose of this allowance is to enable her to return to her home in the US once a year, as well as to fund other occasional holidays. TMA does not monitor how this amount is actually spent. In fact, Alice spent only $40,000 of this amount on holiday travel in the year of assessment 2018/19.

(7) Alice holds a number of different share options in TMA. Under tranche A, granted in January 2015, she was awarded the right to acquire 10,000 shares in TMA if she was still employed by TMA in January 2018. Under tranche B, granted in March 2017, she was awarded the

right to acquire 8,000 shares if she was still employed by TMA in March 2019. She exercised both options on 31 March 2019 when the shares were worth $90 each. In addition, on 1 October 2018, under tranche C, she was granted the right to acquire 15,000 shares provided that she remains employed by TMA in October 2021. She believes that she will have left Hong Kong by that date. All the options were awarded for no consideration and the exercise price in each case is $10 per share.

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(8) TMA reimburses Alice for her electricity and phone bills, up to a maximum of $12,000 per year. To obtain this reimbursement, she must provide invoices to TMA to prove that she has in fact incurred this amount.

(9) During the year, TMA received and paid the following tax bills in respect of Alice:

PRC individual income tax $80,000;

Other Asian countries’ income tax $30,000

(10) Alice purchased a flat in Kowloon on 1 July 2018. To fund the acquisition of the flat, she borrowed the equivalent of Hong Kong $5 million from her brother in the US to whom she pays interest at 5% per year. On the same day the flat was leased to a friend for a term of four years at a monthly rent of $20,000. No lease agreement was signed.

(11) Alice’s husband lives with their 10-year-old daughter in Philadelphia.

(12) Alice spent $120,000 supporting her aged parents who live with her family in Philadelphia.

Her parents originally came from Hong Kong and hold permanent resident identity cards.

(13) Alice gave $25,000 to charities in Hong Kong and $15,000 to charities in the US during the

2018/19 year.

Required:

Prepare a memorandum for your manager setting out the advice that should be given to Alice Chung on her tax position for the year of assessment 2018/19. If you need further information to determine the tax position, state what information you need and why you need it.

(30 marks)

Question # 2

Digital Technology Ltd (DTL), is a Hong Kong incorporated company, which carries on business in Hong Kong providing consultancy services on digital technology. DTL commenced business on 1 February 2018 and its first set of accounts prepared for the period ended 31 December 2018 shows the following:

$ $

Service income 2,900,000

Profit/loss from investments (1) 680,120

Interest income

(2)

57,000

3,637,120

Less: Donation (3) 188,000

Director’s remuneration 910,000

Staff costs (4) 1,644,000

Rent, rates and utilities 481,000

Legal and professional fees (5) 74,000

Interest expenses (6) 42,000

Depreciation (7) 112,000

Office consumables (all deductible) 9,000 (3,460,000)

Profit for the year 177,120

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Notes:

(1) Profit/loss from investments:

$

Gain from trading in Hong Kong listed shares 690,120

Loss from trading in China listed shares (30,000)

Dividends from Hong Kong listed shares 20,000

Total per accounts 680,120

(2) Interest income comprises:

$

Interest on HK$ deposit with a bank in Hong Kong 19,000

Interest on HK$ loan made to Hurricane’s director (the loan amount was remitted to the director’s bank account in Hong Kong)

38,000

Total per accounts 57,000

(3) A one-off donation of $188,000 was paid to Red Cross Hong Kong, specifically to the flood in China in June 2018.

(4) Staff costs comprise:

$

Salaries and allowances 1,580,000

Regular contributions to registered pension fund 64,000

Total per accounts 1,644,000

(5) Legal and professional fees comprise:

$

Incorporation fee 4,000

Legal fee for setting up DTL 40,000

Audit and tax filing fees 30,000

Total per accounts 74,000

(6) Interest expenses comprise:

Interest on a bank loan, secured by a personal guarantee from DTL’s director; the loan money was used to fund the operation of DTL

39,000

Bank charges on daily transactions 3,000

Total per accounts 42,000

(7) DTL acquired all of its fixed assets after 1 April 2018, as follows:

Cost

($)

(i) Microwaves and distilled water dispensers for use in the

office by staff

29,000

(ii) Computer lap-tops for use by staff 176,000

(iii) Energy saving lighting system installation for the office 123,000

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(iv) Car for use by DTL’s director 232,000

DTL has agreed with the Inland Revenue Department that 50% of the acquisition cost of the commercial building is attributable to the cost of the land.

There were no disposals of fixed assets during the year.

Required:

(a) Prepare Digital Technology Ltd’s profits tax computation for the year of assessment

2018/19, showing the net assessable profit/adjusted loss and profits tax payable, if any.

Clearly identify the basis period. (23 marks)

(b) Show full details of the depreciation allowance calculations. (7 marks)

Question # 3

Mr. Li, a Hong Kong resident, is working as a CFO under Hong Kong employment. He also runs a trading business under a partnership with his brother. Two years ago, he bought a car park for investment purposes. During the year ended 31 March 2019, he had the following income and expenditure:

Note $

Salary from employment 1,440,000

Share of partnership profit (1) 200,000

Rent and deposit from car park (2) 42,000

Car park expenses (2) 2,800

Repayment of mortgage loan and interest (3) 510,000

Maintenance and education fee for stepson (4) 480,000

Support and maintenance of mother (4) 107,000

Support and maintenance of former wife and her daughter (4) 96,000

Contributions to mandatory provident fund (MPF): 5% of salary 30,000

Donations (5) 8,000

Tuition fee for a master’s degree which Mr. Li is studying 32,000

Membership fee to ACCA 2,300

Membership fee to HK Jockey Club 10,200

Notes:

(1) The partnership incurred a tax loss of $100,000 in 2017/18, out of which Mr. Li’s share is

$50,000 and is being carried forward under the partnership. Mr. Li did not elect for personal assessment in 2017/18.

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(2) The car park was leased out on 1 April 2018 for a term of two years at a monthly rent of

$3,000 payable in advance. Mr. Li is responsible for rates and management fee. The net assessable value of the car park as agreed with the Inland Revenue Department for 2018/19 is $28,000.

(3) During the year, Mr. Li repaid the following bank mortgage loans with interest:

(i)

Loan to acquire Mr. Li’s accommodation – $400,000 (including $230,000 interest)

(ii) Loan to acquire car park – $110,000 (including $30,000 interest)

(4) Mr. Li is married with a stepson aged 19 who is studying in the USA as a full-time student. Mr. Li’s mother is aged 60 and is living in a government elderly home in Hong Kong. The total cost for the elderly home is $95,000 per year. Each month, Mr. Li also pays his mother $1,000. Mr. Li also supports his former wife and her daughter with

$8,000 per month.

(5) Donations were made to the following approved charitable institutions in Hong Kong:

Community Chest of Hong Kong – cash of $3,000 Red Cross of Hong Kong – toys worth $3,000

Standard Chartered Marathon – distilled water worth $2,000

Required:

(a) Assuming that Mr. Li has elected for personal assessment for the year of assessment

2018/19 only, compute his tax liability payable for 2018/19 under personal assessment.

(20 marks)

(b) Explain the tax treatment for Note (4) and (5). (10 marks)

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Year of Assessment 2017/18

Net Chargeable

Income

Tax rates

$

On the First 45,000 2%

On the Next 45,000 7%

90,000

On the Next 45,000 12%

135,000

Remainder 17%

or Standard rate 15%

Profits tax rate for corporations 16.50%

Property tax rate 15%

Year of Assessment 2018/19

Net Chargeable

Income

Tax rates

$

On the First 50,000 2%

On the Next 50,000 6%

100,000

On the Next 50,000 10%

150,000

On the Next 50,000 14%

200,000

Remainder 17%

or Standard rate 15%

Profits tax rate for corporations 16.50%

Property tax rate 15%

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