Tax Rates & Allowances are provided for reference and are contained in this question paper from Page 3 to Page 7.

Transcription

1 CERTIFIED TAX ADVISER QUALIFYING EXAMINATION 2013 PAPER 2 HONG KONG TAX THURSDAY, 24 OCTOBER 2013 (MORNING SESSION) Time allowed: Three hours Tax Rates & Allowances are provided for reference and are contained in this question paper from Page 3 to Page 7. Section A ONE compulsory question. This section carries 36 marks. Section B Answer any FOUR out of five questions. Each question carries 16 marks. This section carries a total of 64 marks. Fill in your Seat Number in the box below. Do not open this question paper until instructed by the invigilation personnel. Answers must be written in black or blue ink. This question paper must not be removed from the examination room. Seat Number Page 1 of 23

2 (THIS IS A BLANK PAGE) Page 2 of 23

3 TAX RATES AND ALLOWANCES 75% of salaries tax, profits tax or tax under personal assessment for the year of assessment 2012/13 will be waived, subject to the maximum of 10,000 75% of salaries tax, profits tax or tax under personal assessment for the year of assessment 2011/12 will be waived, subject to the maximum of 12,000 Personal Allowances (Salaries Tax and Personal Assessment) For 2012/13 Basic allowance 120,000 Married person s allowance 240,000 Child allowance: first ninth child Child allowance additional (for child born during the year) Dependent parent/grandparent allowance (aged 60 or above OR is eligible to claim an allowance under the Government s Disability Allowance Scheme) Dependent parent/grandparent allowance (aged 55 or above but below 60) Additional dependent parent/grandparent allowance (aged 60 or above OR is eligible to claim an allowance under the Government s Disability Allowance Scheme) Additional dependent parent/grandparent allowance (aged 55 or above but below 60) 63,000 EACH 63,000 EACH 38,000 EACH 19,000 EACH 38,000 EACH 19,000 EACH Single parent allowance 120,000 Disabled dependant allowance Dependent brother or dependent sister allowance 66,000 EACH 33,000 EACH For 2011/12 Basic allowance 108,000 Married person s allowance 216,000 Child allowance: first ninth child 60,000 EACH Page 3 of 23

4 Child allowance additional (for child born during the year) Dependent parent/grandparent allowance (aged 60 or above OR is eligible to claim an allowance under the Government s Disability Allowance Scheme) Dependent parent/grandparent allowance (aged 55 or above but below 60) Additional dependent parent/grandparent allowance (aged 60 or above OR is eligible to claim an allowance under the Government s Disability Allowance Scheme) Additional dependent parent/grandparent allowance (aged 55 or above but below 60) 60,000 EACH 36,000 EACH 18,000 EACH 36,000 EACH 18,000 EACH Single parent allowance 108,000 Disabled dependant allowance Dependent brother or dependent sister allowance 60,000 EACH 30,000 EACH Deductions (Maximum) (Salaries Tax and Personal Assessment) For 2012/13 Self education expenses 60,000 Home loan interest 100,000 Elderly residential care expenses 76,000 Contribution to MPF/MPF-exempted retirement scheme 14,500 Approved charitable donations = maximum of 35% of (assessable income LESS allowable expenses LESS depreciation allowances) For 2011/12 Self education expenses 60,000 Home loan interest 100,000 Elderly residential care expenses 72,000 Contribution to MPF/MPF-exempted retirement scheme 12,000 Page 4 of 23

5 Approved charitable donations = maximum of 35% of (assessable income LESS allowable expenses LESS depreciation allowances) Tax Rates (Property Tax) For 2008/09 to 2012/13 15% Tax Rates (Salaries Tax and Personal Assessment) For 2008/09 to 2012/13 Standard Rate 15% Progressive Rates First 40,000 2% Next 40,000 7% Next 40,000 12% Remainder 17% Tax Rates (Profits Tax) For 2008/09 to 2012/13 Corporation 16.5% Unincorporated Business 15.0% Depreciation allowance rates From 1998/99 Initial allowance: - Industrial building (unused) 20% - Plant and machinery 60% Annual allowance: Industrial/Commercial building (unused) 4% Page 5 of 23

6 Plant and machinery: - Furniture, office machine 20% - Motor car, van, computer 30% Stamp Duty Rates Head 1 Head 1(1) and Head 1(1A) Effective from 1 April 2010 Value of consideration Rate of stamp duty 1-2,000, ,000,001-2,351, % x (C - 2,000,000) 2,351,761-3,000, % 3,000,001-3,290,320 45, % x (C - 3,000,000) 3,290,321-4,000, % 4,000,001-4,428,570 90, % x (C - 4,000,000) 4,428,571-6,000,000 3% 6,000,001-6,720, , % x (C - 6,000,000) 6,720,000-20,000, % 20,000,001-21,739, , % x (C - 20,000,000) More than 21,739, % Note: C = Consideration Head 1 (1AA) Special Stamp Duty Effective from 20 November 2010 to 26 October % if the property has been held for six months or less - 10% if the property has been held for more than six months but for 12 months or less Page 6 of 23

7 - 5% if the property has been held for more than 12 months but for 24 months or less Head 1(2) (1 April 2001 present) Premium (without rent) same as under Head 1(1) Premium (with rent) maximum % under Head 1(1) Rent: lease with uncertain term lease with term of less than 1 year lease with term of 1 year to 3 years lease with term of more than 3 years 0.25% of annual rent 0.25% of total rent 0.5% of annual rent 1% of annual rent Head 2 (1 April 2001 present) Head 2(1) 0.1% of the consideration Head 2(2) 5 Head 2(3) % of the consideration Head 2(4) 5 Head 3 (1 April 2001 present) Head 3(1) 3% of market value Head 3(2) 5 Head 4 (1 April 2001 present) 5 ***************************************************** Page 7 of 23

8 This examination paper contains TWO Sections. Section A contains ONE compulsory question carrying 36 marks. Section B contains five questions and candidates are required to answer any FOUR of these five questions. Each question carries 16 marks. Maximum score for Section B is 64 marks. ***************************************************** Section A (COMPULSORY) Question 1 (36 marks) (A) Lucky Limited (the Company ) has been carrying on an import and export business in Hong Kong since 1 July Its accounts are made up to 31 December each year. For the year ended 31 December 2012, the Company has the following operating results: Note Sales 22,412,000 Less: Cost of goods sold (10,000,000) Gross profit 12,412,000 Dividends from quoted shares 11,000 Profit on sale of fixed assets A 13,000 Compensation 1 150,000 Interest income 2 150,000 Exchange gain 3 50,000 Less: Expenses Salaries and allowances (4,100,000) Directors remuneration (3,170,000) Depreciation charge A (56,000) Amortization of cost of construction of office premises B (30,000) Auditor s fee (50,000) Rent and rates 4 (380,000) 12,786,000 Page 8 of 23

9 Interest expenses 5 (283,000) Contributions to a retirement scheme 6 (980,000) Water and electricity (13,000) Bad debts 7 (42,000) Donations 8 (160,000) Legal and professional fees 9 (44,000) Insurance premium (37,000) Transportation (141,000) Taxes paid 10 (210,000) Motor car expenses 11 (64,000) Repairs and maintenance 12 (327,000) Sundry expenses 13 (385,000) (10,472,000) Net profit 2,314,000 Note (1): Compensation Compensation for loss of trading stock 90,000 Compensation for breach of a trading contract 60, ,000 Note (2): Interest income (i) Interest received on Euro deposits placed with Dai Sun Bank Limited in Hong Kong for the year ended 31 March 2012 (ii) Interest received on US deposits placed with Apple Bank Limited in the USA for the period from 1 May 2012 to 31 December A secured overdraft facility was obtained for the same period from the same bank (see note 5(i) below) 47,000 63,000 (iii) Interest on Tax Reserve Certificate 15,000 (iv) Interest received on overdue trade account 25, ,000 Page 9 of 23

10 Note (3): Exchange gain Exchange gain on trade debts collected 38,000 Exchange gain on conversion of Euro fixed deposits into HK 12,000 50,000 Note (4): Rent and rates Rent and rates for directors quarters 365,000 Rates for the Company s office 15, ,000 Note (5): Interest expenses (i) Interest on bank overdraft with Apple Bank Limited in the USA for the period from 1 May 2012 to 31 December 2012, secured by the US deposit (see note 2 (ii) above) to finance the purchase of trading stock only (ii) Interest on a loan borrowed from XYZ Bank Limited in Hong Kong during the year to finance working capital, secured by a mortgage over a director s property 118, ,000 (iii) Interest paid to a director 5,500 (iv) Hire purchase interest on computer system 1, ,000 Note (6): Contributions to a recognized defined-benefit occupational retirement scheme Special contribution 800,000 Ordinary contribution (representing 10% of individual staff s salary) 180, ,000 Page 10 of 23

11 Note (7): Bad debts Trade debts written off 30,000 Loan to staff written off 10,000 Increase in general provision [137,000 (general provision provided in current year s accounts) - 135,000 ( general provision provided in last year s accounts)] 2,000 42,000 Note (8): Donations Cash donation to Hong Kong Community Chest 100,000 Donation of hospital beds to Tung Wah Hospital 60, ,000 Note (9): Legal and professional fees Collection of trade debts 30,000 Collection of loan to staff 2,000 Completion of tax returns 12,000 44,000 Note (10): Taxes paid Profits tax 130,000 Salaries tax of the directors 80, ,000 Page 11 of 23

12 Note (11): Motor car expenses Petrol expense 33,000 General repairs and maintenance 18,000 License fee 5,800 Traffic fines 7,200 64,000 Note (12): Repairs and maintenance General repairs of fixed assets 50,000 Renovation of office premises 140,000 Renovation of directors quarters 137, ,000 Note (13): Sundry expenses All sundry expenses were allowable for profits tax purposes. Additional information: Note (A) The depreciation allowance schedule showed the following pool balances: 20% pool - 60,000 30% pool - 70,000. There are no balances for industrial buildings and for commercial buildings. Page 12 of 23

13 An extract of the Company s movements of fixed assets (other than properties) for the year is as follows: Furniture Computers Motor cars Cost at 1 January , , ,000 Additions 40,000 60,000 * 20,000 Disposals 0 (120,000) (40,000) Balance at 31 December , , ,000 Accumulated depreciation charge at 1 January , ,000 60,000 Depreciation charge for the year 24,000 20,000 12,000 Disposals 0 (80,000) (20,000) Balance at 31 December ,000 80,000 52,000 Carrying amounts at 31 December ,000 80,000 48,000 Carrying values of disposed assets 0 40,000 20,000 Proceeds from disposal 0 30,000** 35,000 Compensation 0 8,000*** Profit/(loss) on disposal 0 (10,000) 23,000 Total/Net profit on disposal = 23,000-10,000 = 13,000 * 60,000 was for a computer system (30% pool) purchased under a hire purchase agreement for 12 months, with an invoice date of 1 October 2012, a down payment of 6,000, and the first monthly instalments of 5,000 payable in October ** The proceeds of 30,000 related to a personal computer, the cost (50,000) of which had been 100% written off in the previous year s profits tax computation. All other computers had been disposed with no monetary proceeds. *** 8,000 was compensation received from the insurance company four months after a second-hand motor car had been stolen on the last day of the last financial year. The stolen second-hand car was purchased for 16,000 at the beginning of the last financial year. All other motor cars disposed during the current financial year were sold at prices below their respective net book values. Page 13 of 23

14 Note (B) Deemed cost of construction amounting to 300,000 for the Company s office premises was incurred for the year ended 31 December This deemed cost was amortized over a period of 10 accounting years in the financial accounts. Required: (a) Compute the depreciation allowances for Lucky Limited for the year of assessment 2012/13. (6 marks) (b) Compute the profits tax payable by Lucky Limited for the year ended 31 December State clearly the relevant year of assessment and basis period. Ignore provisional profits tax and one-off tax reduction. All workings must be shown and brief explanations for adjustments that have been made in the tax computation are to be given. (18 marks) (B) (Total 24 marks) The auditor of Lucky Limited discovered on 1 March 2013 that as a result of the recent implementation of a new electronic filing system, Lucky Limited had discarded all original supporting documents for the period from 1 January 2000 to 31 December Only the management accounts and reports covering the same period were kept. Required: Advise the directors of Lucky Limited of the statutory requirements of record keeping under the current provisions in the Inland Revenue Ordinance. (4 marks) (C) On 20 December 2012, Lucky Limited discovered that it had over-reported its taxable income in its 2011/12 profits tax return by under-reporting the cost of sales by 100,000 due to a missing purchase invoice. The tax demand note for the final profits tax for the year of assessment 2011/12 and provisional profits tax for the year of assessment 2012/13 was issued on 1 September 2012 and the first-instalment payment of the tax demanded would be due on 10 January Required: (a) Advise Lucky Limited of its right of action, if any, to correct the error made in respect of the understated cost of sales in its 2011/12 profits tax return. (4 marks) (b) Advise Lucky Limited of any appropriate actions it may take in respect of the tax payment as demanded under the notice of assessment which was issued on 1 September (4 marks) (Total: 8 marks) [Total: (A), (B) and (C) 36 marks] Page 14 of 23

15 Section B (Answer FOUR questions from this Section) Question 2 (16 marks) (A) Peter Ho bought a new factory unit in Tuen Mun from the developer in his own name. In September 2012, Peter Ho and the developer entered into a legally binding provisional sale and purchase agreement whereby Peter Ho agreed to purchase the factory from the developer for 8.1 million. Peter Ho borrowed 5.2 million from ABC Bank Limited in Hong Kong through a mortgage loan. On 13 October 2012, Peter Ho and the developer executed a formal sale and purchase agreement in a solicitor s office. On 15 December 2012, the date of completion of the transaction, conveyance of the title of the property from the developer to Peter Ho was effected. Peter Ho let out the factory unit on 1 January 2013 to a catering company, which used the factory unit to prepare food for its catering services, on the following terms: a premium of 120,000 paid at the commencement of the lease. a monthly rent calculated at 0.5% of the turnover of the company subject to a maximum monthly rent of 20,000. a lease for 4 years starting on 1 January the tenant is responsible for the management fees and Peter Ho is responsible for the rates. Peter Ho paid rates of 3,000 in respect of this property during the three months ended 31 March Peter Ho paid mortgage interest of 60,000 during the three months ended 31 March He also paid 120,000 to furnish the unit before letting it out and 5,000 for commission to the estate agent. The actual rental income he received from this property during this period was 42,000. On 2 January 2013, he sold the property to Cheung Kwong Limited, a Hong Kong company wholly owned by him, with the existing tenancy agreement for 6.8 million. Cheung Kwong Limited closes its accounts on 31 December every year. Required: Determine the stamp duty payable (a) when the purchase of the property was completed on 15 December (3 marks) (b) when the lease agreement between Peter Ho and the catering company was signed on 1 January (3 marks) (c) when the title of the property was transferred on 2 January 2013 from Peter Ho to Cheung Kwong Limited assuming 6.4 million is the market price on 2 January (4 marks) (Total: 10 marks) Page 15 of 23

16 (B) Peter Ho is also the sole owner of a trading company in Hong Kong. The company purchases goods in Hong Kong and sells them to customers in Hong Kong and Mainland China. In a recent field audit, the officers from the Inland Revenue Department (IRD) found that Peter Ho had not included the profits from the sale of goods to customers in Mainland China in his company s profits tax returns submitted to the IRD. Peter Ho told the IRD officers that he was illiterate and he relied on his bookkeeper for all accounting and tax matters. His bookkeeper explained that he did not include the profits from the sale of goods to customers in Mainland China as he thought that the profits might be offshore and not taxable. Required: (a) Explain the power of the Commissioner of Inland Revenue under the Inland Revenue Ordinance to penalize a taxpayer for understating his/her taxable profits, together with the respective penalties. (3 marks) (b) Advise Peter Ho whether he has committed any offence under the Inland Revenue Ordinance; if yes, what his liabilities are and what possible defence he may have. (3 marks) (Total: 6 marks) [Total: (A) and (B) 16 marks] Question 3 (16 marks) Mr. Fok was the financial controller of China Development Company Limited in Hong Kong. On 1 February 2013, he retired at the age of 58 after having served the company for 36 years. His wife is a part-time lecturer teaching in the University of Hong Kong. Mr. Fok supplies you with the following information for the year ended 31 March Salary: 50,000 per month for 10 months. 2. Bonus: 180,000. He received the bonus on 1 June The bonus was paid to him in respect of the company s financial result for the year ended 31 March Housing allowance (20,000 per month): He used the allowance to repay a mortgage loan for the purchase of his residence. He owns 50% and Mrs. Fok owns the remaining 50% of the property right of the residential property. The total mortgage loan interest paid by him during the year was 180, In July 2012, he took a 20-day business trip to Shanghai, China, and extended his stay for a further 10 days to visit his relatives and friends. The company purchased a Dragonair business class ticket for 6,000 for him but he paid Dragonair 2,000 to exchange that ticket for two economy class tickets. His wife travelled with him on one of the economy class tickets, and shared the hotel room with him at no extra charge. The company approved the arrangement and paid the hotel room charges for 29 nights totalling 29,000 and the Inland Revenue Department Page 16 of 23

17 agreed that 9 nights were for his 10 days of annual leave. He received a special allowance of 12,000 while he stayed in Shanghai for the business trip. 5. He is also a director of CDC China Limited. CDC China Limited is a subsidiary of China Development Company Limited and is incorporated and managed in Shanghai. CDC China Limited allotted Mr. Fok 20,000 shares on 1 April 2012 for taking up the directorship, subject to a payment of 10,000. The market value of the allotted shares on the date of allotment, as ascertained by the auditor of CDC China Limited in Shanghai, was RMB72,000, which was equivalent to 90, He was elected the company s best employee and received a cash prize of 10, Under his contract of employment with China Development Company Limited, he should retire at the age of 60. Due to the reorganization of the company, he was directed to retire at the age of 58. As compensation for accepting the arrangement, the company paid him a lump sum of 500, He received a lump sum of 3,000,000 upon retirement from the company s retirement fund. The fund was a Mandatory Provident Fund-exempt recognized defined-benefit occupational retirement scheme. He was not required to make any contribution towards the scheme. 9. During the farewell dinner held on 31 January 2013, he received the following: (i) (ii) an ex-gratia payment of 27,000 from China Development Company Limited in recognition of his good performance over the past years; and a gold coin from his colleagues as a retirement gift. The coin was purchased in late December 2012 at 15,000 and since gold price soared in January 2013, the market value of the gold coin at the end of January 2013 was 18, Starting from 1 February 2013, he was employed by a consultancy firm as a part-time accountant and received a monthly salary of 10, He owns a flat in Wanchai which earned an annual rental of 250,000 (rates of 3,000 per quarter were paid by him) and a flat in Mongkok which earned an annual rental of 400,000 (rates of 4,500 per quarter were paid by him). Mortgage interest of 150,000 and 350,000 were paid by him for the above two properties respectively. 12. Mrs. Fok earned a total of 120,000 during the year from her part-time teaching. 13. Mrs. Fok runs a flower shop. The agreed loss of the business in the year of assessment 2012/13 was 120, Mrs. Fok owns a flat in Aberdeen which earned an annual rental of 180,000. The rates of 2,000 per quarter were paid by the tenant. The total mortgage loan repayment made by Mrs. Fok amounted to 320,000, which included interest of 200, During the year ended 31 March 2013, Mr. Fok paid the following expenses: (i) Subscription to Hong Kong Institute of Certified Public Accountants (HKICPA) 2,400 Page 17 of 23

18 (ii) Subscription to Association of Chartered Certified Accountants (ACCA) in the United Kingdom UK pound 200 which was equivalent to 2,500 (iii) Subscription to Hong Kong Institute of Chartered Secretaries (HKICS) 2,200 (iv) Donations to approved charities 70, During the year ended 31 March 2013, Mrs. Fok paid the following expenses: (i) Fees for attending a course relating to teaching skills offered by a university in Hong Kong 20,000 (ii) Donations to approved charities 60,000 (iii) Fees to an elderly residential care home which provided residential care to her father who was aged 62 84, Mr. Fok and his wife had three children. The eldest child (aged 23) was studying for a full-time master degree in a university in the United Kingdom. The second child (aged 21) was studying full time at the Hong Kong Polytechnic University. The youngest child (aged 19) worked in a bank in Shenzhen. 18. Mr. Fok s father (aged 65) lived in Guangzhou. He remitted 3,600 per month to his father for his living expenses. His mother-in-law (aged 63) lived with his family throughout the year and was fully supported by him and his wife. 19. He had not paid any tax to the Chinese tax authorities up to 31 March Required: (a) Compute the salaries tax (under joint assessment ONLY; there is NO need to compute the salaries tax payable under separate taxation), property tax and profits tax payable by Mr. Fok and Mrs. Fok for the year of assessment 2012/13, ignoring provisional taxes, one-off tax reductions and applicable Government s remission of rates. (10 marks) (b) Mr. and Mrs. Fok sought your advice on whether they should elect for personal assessment. You are required (i) to inform Mr. and Mrs. Fok under what circumstances it will be tax advantageous for taxpayers to elect for personal assessment and (ii) to advise Mr. and Mrs. Fok whether it is tax advantageous for them to elect personal assessment for the year of Page 18 of 23

19 assessment 2012/13 (note: there is no need to compute and compare the exact tax amounts payable under separate taxes and under personal assessment.) (6 marks) (Total 16 marks) Question 4 (16 marks) There are three brothers in the Zhang family. All three brothers were born in Mainland China (China). The eldest brother, Charlie, emigrated to Hong Kong in Charlie s younger brother, John, always resides in China. John is a Chinese citizen and is working in a law firm in China. The youngest brother, Peter, became a permanent resident of Hong Kong in December 2008 and has been working as a professor of finance in one of the local universities. Peter is also a registered stockbroker in Hong Kong. In April 1997, Charlie emigrated from Hong Kong to the United States (US). Although he has obtained US citizenship, he has kept his Hong Kong identity card. He also retains bank accounts in Hong Kong and his Hong Kong driving licence. Since April 1997, Charlie has been a full-time employee of Silicon Valley Inc., a large multinational software company based in the State of California in the US. He held the job title of software engineer. Silicon Valley has subsidiaries in Hong Kong and China. Silicon Valley decided to transfer Charlie to manage its office in Shanghai, China, operated under the business entity called Silicon Valley (Shanghai) Limited, which is one of Silicon Valley s subsidiaries in China. The transfer was for one year from 1 April 2012 to 31 March Charlie arrived in Shanghai on 1 April 2012 and started his work in the Shanghai office. Charlie occasionally flew to Hong Kong and spent the weekends in Hong Kong. During the year ended 31 March 2013, he spent 315 days in Shanghai and 50 days in Hong Kong. Sometimes, he brought work-related documents from the Shanghai office to the Hong Kong office and vice versa in order to save time for document transfers and courier expenses. While Charlie was working in Shanghai, he was entitled to a monthly basic salary and a monthly overseas allowance. As agreed by the Local Tax Bureau in Shanghai, Charlie s overseas allowance was not subject to Individual Income Tax (IIT) in China. Each month, after deducting the relevant IIT levied by the Chinese tax authority on Charlie s basic salary, the net total of Charlie s monthly basic salary and monthly overseas allowance was paid into Charlie s bank account in Hong Kong. Charlie decided that he would not go back to US at the end of the transfer period. In February 2013, Charlie tendered his resignation and his last working day in the Shanghai office was 31 March From 1 April 2013 onwards, Charlie has resided in Hong Kong, staying in the apartment owned by his girlfriend, who is a permanent resident of Hong Kong. He started his new employment with a Hong Kong software company on 2 April John Zhang never visited the US and Hong Kong although his brothers were residing in the US and Hong Kong. John is interested in buying shares listed on the Hong Kong and US Stock Exchanges. Since December 2008, John has been buying these shares through a securities account in Hong Kong. Page 19 of 23

20 In addition to his teaching in a university in Hong Kong since December 2008, Peter has been engaging in buying and selling shares listed in both Hong Kong and the US via the internet. The share trading is operated through two securities accounts, one in the name of Peter Zhang and the other in the name of John Zhang. Peter usually receives instructions from John through s, phone calls and online chats/text messages on smartphones with regard to what shares are to be bought/sold, when such buy/sell transactions are to be executed, acceptable price ranges for these share transactions, etc. However, on certain occasions, Peter exercises his discretion in Hong Kong to maximise John s investment gains or minimise John s investment losses, without prior consultation with John who is residing in China. Peter regularly collects updated market news and analysts reports and s/faxes them to John. At the end of each month, Peter compiles a transaction summary for John showing the details of the transactions under John s securities account executed during the month. The value of John s portfolio as at 31 March 2013 was about HK30 million, and the average holding period for the shares is between 15 and 25 days. The cumulative net profit made by John s portfolio from December 2008 to March 2013 was around HK10 million. Required: (a) Advise Charlie Zhang on the source of his employment and whether, and if so, to what extent, he will be subject to Hong Kong salaries tax for the year ended 31 March Your answer should cover Charlie s eligibility or ineligibility in relation to all possible exemptions and reliefs relevant to salaries tax under the Inland Revenue Ordinance. (Note: there is no need to do any salaries tax computations.) (8 marks) (b) Discuss whether or not John Zhang (a Chinese resident) is liable to Hong Kong profits tax in respect of the profits arising from the trading of shares listed on the Hong Kong and US Stock Exchanges, having due regard to provisions in the Inland Revenue Ordinance, considerations relevant to badges of trade, court case decisions and views promulgated in Departmental Interpretation and Practice Notes issued by the Inland Revenue Department. Your answer should also include a discussion of whether Peter Zhang would be regarded as the agent of John Zhang for the purpose of Hong Kong profits tax. (Note: there is no need to discuss the impact of electronic commerce on the determination of source of profits or to do any profits tax computations.) (8 marks) (Total 16 marks) Page 20 of 23

21 Question 5 (16 marks) (A) Bell Limited has five vehicles: (i) Vehicle A is an eligible vehicle under the Tax Incentives Scheme for Environment-friendly Commercial Vehicles administered by the Environmental Protection Department. It was purchased on 1 July 2010 at a cost of 300,000. (ii) Vehicle B is a hybrid electric vehicle which is a second-hand car purchased on 1 August 2010 at a price of 200,000. (iii) Vehicle C is an electric vehicle purchased on 1 December (iv) Vehicle D is an electric vehicle purchased on 1 August 2010 under a hire-purchase arrangement. (v) Vehicle E is NOT an environment-friendly vehicle but simply an ordinary delivery van, which was purchased on 1 September All vehicles except Vehicle A were 100% used for business purposes. The Inland Revenue Department agreed that 40% of the usage of Vehicle A was for private purpose. Required: (a) Advise Bell Limited which of the five vehicles (Vehicles A to E) are/is NOT eligible for tax deduction under Section 16I of the Inland Revenue Ordinance, with reasons. No computations of the exact amounts of deduction that can be claimed under profits tax are required. (5 marks) (b) Suppose Bell Limited ceased operation on 1 January All the above-mentioned vehicles except one of the environment-friendly vehicles were sold before the cessation of business. Bell Limited retained that environment-friendly vehicle for Mr. Bell, the major shareholder and Managing Director of Bell Limited, to use for private or non-commercial purposes. Advice Bell Limited what tax adjustments are required in respect of that environment-friendly vehicle. (3 marks) (B) (Total 8 marks) Daniel Poon owns a flat in Bedford Garden, a residential building in North Point. The residential building has 80 flats in total. According to the deed of mutual covenant, the roof of the residential building is part of the building common area, and each owner of an individual flat is entitled to one eightieth share of the building common area. On 1 June 2011, Daniel Poon, in his capacity as Chairman of the Incorporated Owners of Bedford Garden, entered into an agreement with ABC Limited, granting ABC Limited the right to erect a neon Page 21 of 23

22 advertising sign on the roof of Bedford Garden for an annual licence fee of 200,000 (for June 2011 to May 2012). The licence fee is to be used to meet the building management expenses. Recently, Daniel Poon received from the Inland Revenue Department a property tax return for the year of assessment 2011/12, addressed to The Incorporated Owners of Bedford Garden. Daniel Poon convened a meeting of the members of The Incorporated Owners of Bedford Garden and all members considered that the roof is not a flat and The Incorporated Owners of Bedford Garden is not the owner of the roof. Also, as the fee is not directly paid to the owners of the flats, all of them believed that The Incorporated Owners of Bedford Garden and individual owners of the 80 flats should not be liable to property tax in respect of the licence fee received. Required: Advise Daniel Poon and other members of The Incorporated Owners of Bedford Garden whether the Inland Revenue Department is empowered under the Inland Revenue Ordinance to issue a 2011/12 property tax return in the name of The Incorporated Owners of Bedford Garden ; and whether The Incorporated Owners of Bedford Garden is liable to property tax in respect of the licence fee received. (8 marks) [Total: (A) and (B) 16 marks] Question 6 (16 marks) Mr. Fu has been employed by ABC Movie Limited as an art director in movie production for five years and his income has been assessed under Hong Kong Salaries Tax. On 1 April 2012 Mr. Fu established a limited company, Fu Limited, owned by him and his wife and re-arranged his relationship with ABC Movie Limited in the following manner: (i) (ii) (iii) (iv) (v) ABC Movie Limited will pay Fu Limited an annual fee of 1,200,000 which is equal to Mr. Fu s annual salary. This annual fee is to be paid in the following manner - 100,000 to be paid monthly to Fu Limited over a 12-month period. both parties may terminate the contract by giving the other party one month s prior notice. Fu Limited will provide art director-related services to ABC Movie Limited. Fu Limited will employ Mr. Fu in order to provide the services as described in (iii) above to ABC Movie Limited. Fu Limited will generously provide Mr. Fu with numerous employee benefits. The Inland Revenue Department (IRD) came to know about the arrangement and sent letters to Mr. Fu and ABC Movie Limited to ask for further information. After 18 months, the IRD sent a letter to Mr. Fu. The IRD letter advised that Mr. Fu should be considered to be an employee of ABC Movie Limited and an additional assessment was raised under salaries tax to include the payments from ABC Movie Limited. Mr. Fu did not raise any objection to that tax assessment. Two months later, the IRD issued a letter in which it proposed raising additional tax on Mr. Fu under section 82A of the Inland Revenue Ordinance on the basis that he did not report the annual salary of 1,200,000 from ABC Movie Limited. Mr. Fu wishes to challenge the IRD s decision that he is an employee of ABC Movie Page 22 of 23

23 Limited and also wonders what he should do about the letter relating to the proposed additional tax to be issued under section 82A of the Inland Revenue Ordinance by the IRD. Required: (a) (b) Briefly explain what the tax benefits, if any, are to Mr. Fu for engaging in the arrangements described. (In answering this part, ignore any anti-avoidance legislation in the Inland Revenue Ordinance.) (8 marks) Discuss whether the arrangements described above can withstand challenge from the Inland Revenue Department under the anti-avoidance provisions in the Inland Revenue Ordinance; if yes, under what conditions. (8 marks) (Total 16 marks) END OF QUESTION PAPER Page 23 of 23