Qualification Programme Examination Panelists Report Module D Taxation (June 2016 Session) (The main purpose of the following report is to summarise candidates common weaknesses and make recommendations to help future candidates improve their performance in the examination.) (I) Section A Case Questions General Comments The case study comprehensively covered topics on profits tax computation, source of profits, tax free benefit-in-kind, stamp duty analysis and ethical considerations for tax practitioners. The overall performance in this section was diverse. Generally, candidates were able to get fair and satisfactory results in questions regarding profits tax computation and ethical considerations. The performance in the rest of the questions was unsatisfactory and considerably below expectations. Specific Comments Question 1(a) 4 Marks This question required candidates to compute the total amounts of taxable and non-taxable income respectively based on the information provided in the case. The performance in this question was quite satisfactory. Candidates were generally able to differentiate the taxability of the incomes in accordance with their nature, and prepared the computation accordingly. Some candidates mistakenly provided a pure qualitative analysis on the taxability of the incomes, which was irrelevant to the question. Question 1(b) 6 Marks In connection with Question 1(a) above, this question further required candidates to compute the total amounts of deductible and non-deductible expenses as provided therein. The performance in this question was also satisfactory. Again some candidates provided a pure qualitative analysis on the deductibility of the expenses. Some candidates did not correctly handle the tax treatment of annual and special contributions to a recognized occupational retirement scheme. Question 1(c) 3 Marks This question required candidates to compute the amounts of depreciation allowance and commercial building allowance. The performance in this question was fair. Many candidates did not correctly identify the amount of balancing allowance under commercial building allowance. Some candidates wrongly included the addition of computer equipment into the 30% pool in computing the depreciation allowance. Module D (June 2016 Session) Page 1 of 8
Question 1(d) 2 Marks This question required candidates to compute the amount of tax liability based on their computations in prior parts of Question 1 and some other information provided therein. The performance in this question was below expectations. Many candidates were not able to identify the deduction of Prescribed Fixed Assets (computer equipment) in preparing the computation. Some candidates wrongly used the tax rates applicable to salaries tax computation in their calculations. Question 2(a) 4 Marks This question required candidates to analyse the taxability of the income derived from money lending activities with reference to the principle and practice established by the Inland Revenue Department. The performance in this question was also below expectations. Candidates generally were able to explain the concept of provision of credit test. However, only a few candidates could further discuss the taxability of the interest income in the context of carrying on a money lending business from the perspective of operation test. Some candidates wrongly analysed the taxability of the interest income in the context of the interest income exemption order and the six badges of trade. Question 2(b) 6 Marks This question required candidates to analyse the taxability of the listing advisory service income as provided therein. The performance in this question was considerably below expectations. Although candidates were generally able to discuss the broad guiding principle in determining the source of profits, only very few candidates could precisely present their answers in identifying the relevant principles, elaborating them in greater detail, and applying them to the case. Answers provided by candidates were generally very brief. Some candidates wrongly analysed the income in the context of trading activities. Question 3 5 Marks This question required candidates to discuss the issue of providing tax free benefit-in-kind from a salaries tax perspective in the context of the relevant Inland Revenue Ordinance ( IRO ) provisions. The performance in this question was below expectations. Some candidates evaluated the rental reimbursement scheme even though the question specifically excluded this requirement. Some candidates did not analyse the benefit-in-kind in the context of the relevant IRO provisions. Some candidates did not discuss the exclusion of child education and holiday journey benefits from tax-free treatment as stipulated specifically in the IRO. Module D (June 2016 Session) Page 2 of 8
Question 4(a) 5 Marks This question required candidates to analyse stamp duty implications with respect to the transfer of immovable property between companies. The performance in this question was not satisfactory. Answers prepared by candidates were generally brief, and did not discuss in greater detail the chargeable instruments and the timeframe of stamping. Some candidates wrongly stated that Co. A and Co. C were associated companies and should therefore be exempted from the stamp duty requirement. Many candidates failed to analyse Ad Valorem Stamp Duty ( AVD ), Special Stamp Duty ( SSD ) and Buyer s Stamp Duty ( BSD ) separately. Question 4(b) 3 Marks This question required candidates to analyse stamp duty implications with respect to the transfer of immovable property effected through liquidation by distribution in specie. The performance in this question was fair. Some candidates were able to analyse the distinctive nature of beneficial ownership in liquidation by distribution in specie, and could obtain satisfactory marks for doing so. Question 4(c) 7 Marks This question required candidates to analyse stamp duty implications with respect to the transfer of immovable property by way of gift. The performance in this question was considerably below expectations. Only some candidates could discuss precisely the applicability of SSD and the chargeability of AVD. Many candidates could not correctly analyse the relationship between and amongst the transferor and transferees in the context of the Stamp Duty Ordinance. Only a few candidates correctly mentioned the chargeable instruments and the timeframe of stamping. As a result, many candidates could only obtain very low marks. Question 5 5 Marks This question required candidates to discuss the ethical considerations of a tax representative in providing tax services. The performance in this question was satisfactory. Candidates were generally able to identify the respective fundamental principles. Some candidates failed to differentiate the respective ethical considerations before and after accepting the tax services engagement. Module D (June 2016 Session) Page 3 of 8
(II) Section B Essay/Short Questions General Comments The topics covered in this section included property tax, deductions under salaries tax and profits tax, personal assessment, tax administration and China Individual Income Tax ( IIT ). The overall performance of the candidates in this section was far from satisfactory. In comparison with profits tax and salaries tax, the charging section of property tax was relatively simple. That said, most of the candidates were unable to have a thorough understanding of it. Some of them even mixed up profits tax with property tax. As to the other parts in this section, many candidates came to a conclusion without any analysis or with only limited analysis. Besides, it is quite obvious that many candidates only know part of the relevant provisions but not all. Candidates are urged again to have a comprehensive understanding of the provisions. Specific Comments Question 6 6 Marks This question required candidates to analyse whether the fees derived from the letting out of the roofs of the residential buildings ( the Receipts ) were chargeable to tax; if so, the type of tax chargeable, the chargeable person, the chargeable amount and the available deductions. The performance of the candidates was not good. A lot of the candidates were unaware that the question was about property tax and turned to profits tax instead. It follows that they were unable to ascertain the relevant chargeable persons, the chargeable amount and the available deductions, i.e., the net assessable value of the properties. Besides, some candidates referred to Departmental Interpretation and Practice Notes ("DIPN") No. 21 in discussing the chargeability of the Receipts. This note was not relevant in this case. For those candidates who rightly pointed out that the Receipts were chargeable to property tax, quite a number of them said the chargeable person was the incorporated owner of the housing estate. There is, however, no mention of incorporated owners in the facts of the case. The candidates have to read the question carefully. That aside, some candidates included management fees in the net assessable value, which is not correct. This question demonstrated that candidates were not cognizant of the relevant provisions of property tax. Module D (June 2016 Session) Page 4 of 8
Question 7 8 Marks This question required candidates to elaborate and apply the relevant provisions in the IRO and compute the amount of interest to be allowed for deduction under salaries tax. The performance of the candidates was fair. However, although most of the candidates were able to ascertain the correct amounts of home loan interests that were allowable or not allowable for deduction in respect of Loan A and Loan B, many of them did not provide any analysis in their conclusion, not to mention that they did not elaborate the relevant provisions. Question 8 12 Marks This question required candidates to analyse, with reference to the relevant tax principles, whether the payment of HK$60 million ( the Sum ) in consideration for the entering into of a lease for a term of 15 years was allowable for deduction as an expense and an entitlement of capital allowance respectively under the IRO. Candidates who were well prepared for the examination had a good result, but the overall performance of the other candidates was poor. Many candidates only managed to refer to s.16(1) of the IRO; they were not able to refer to s.17(1)(c), nor were they able to refer to the relevant legal principles or precedents. That aside, many candidates were unable to note that the taxpayer was not entitled to capital allowance in respect of the Sum because it was not incurred on the construction of a building. Rather, they gave the wrong explanation that the taxpayer was not entitled to capital allowance as it was not the owner of the relevant property. Question 9(a)(i) 3 Marks The taxpayer let out his two solely owned properties. In acquiring the properties, he respectively took out two mortgage loans and had interest payable arising therefrom. The taxpayer and his wife ( the Couple ) elected to have their income assessed under personal assessment for the year of assessment 2012/13. This question required candidates to analyse, with reference to the relevant tax principles, the amount of mortgage interest that was allowable for deduction to the taxpayer for that year of assessment. The performance of the candidate was fair. Some candidates did not provide any analysis of the relevant tax principles. Some candidates mixed up mortgage interest under proviso to s.42(1) of the IRO with home loan interest under s.26e. Some of them even applied s.16(1)(a), s.16(2)(d), s.16(2a) and s.16(2b) in the present case. Further, some candidates did no computation notwithstanding that they were requested to do so. Candidates are urged to read the questions carefully. It is also noted that although many candidates came to the correct conclusion that the mortgage interest allowable for deduction should be capped at the net assessable value of the respective property, some of them allowed the mortgage interests in full without any restriction on the deduction. Module D (June 2016 Session) Page 5 of 8
Question 9(a)(ii) 2 Marks This question required candidates to analyse with reference to the relevant tax principles, whether the taxpayer was entitled to the deduction of additional dependent parent allowance in respect of his mother for the year of assessment 2014/15. It was a simple and straight-forward question. The performance of the candidates was satisfactory. That said, some candidates were unable to note that the taxpayer s mother did not reside with the taxpayer she resided at a property which was on an upper floor of the taxpayer s residence. Question 9(b) 7 Marks This question required candidates to compute the net chargeable income of the Couple under s.42a(1)(b) of the IRO for each of the years of assessment 2012/13 and 2014/15. It was a straight-forward question but the performance of the candidates was below expectations. First, in computing the net chargeable income for the year of assessment 2014/15, only a few candidates were aware of the provisions under s.19c(1) and s.42(1)(c) of the IRO on the setting off of loss brought forward from the year of assessment 2013/14. Second, many candidates computed the net chargeable income under s.12b instead of s.42a(1)(b) of the IRO. Third, many candidates even had no idea of how to compute the net chargeable income under s.42a(1)(b). The Couple should be entitled to the deduction of married person s allowance. Many candidates, however, allowed a personal allowance to each of the taxpayer and his wife; they then further allowed child allowance and/or dependent parent allowance, as the case may be, to either one of them. The candidates simply had no idea that the income as well as the allowances of the Couple should be aggregated in the computation of net chargeable income under s.42a(1)(b). Fourth, some candidates wrongly copied the amount of allowances. Last but not the least, some candidates lost precious time in computing the net chargeable income for the year of assessment 2013/14 and the tax payable for the years of assessment 2012/13 and 2014/15, both of which had not been requested in the question. It had been categorically set out in the last paragraph of the facts of the case and in Question 9(c) that the Couple forgot to elect to have their income assessed under personal assessment for the year of assessment 2013/14. Question 9(c) 3 Marks The Couple forgot to indicate in their individual tax returns their intention to have their income assessed under personal assessment for the year of assessment 2013/14. The Commissioner of Inland Revenue did not allow them a further period of time to make the election. This question required candidates to identify, with explanations in support, the last date on which the Couple have to elect to have their income assessed under personal assessment for that year of assessment. The performance of the candidates was far from satisfactory. Module D (June 2016 Session) Page 6 of 8
Many candidates just copied the relevant provisions without any analysis. Candidates should know that mere copying without analysing does not help in the examination. Besides, although most of them were able to point out that the Couple had to make their application on 31 March 2016, they were unable to identify 4 October 2014 as the date which was one month after the assessments concerned became final and conclusive. This demonstrated that candidates had difficulties in applying the relevant provisions in the IRO. Question 10 4 Marks This question required candidates to analyse, with reference to the relevant provisions in the IRO, whether the course fee incurred by a chemistry teacher in her attendance of a course on fine art provided by a university in Hong Kong was allowable for deduction from the perspective of salaries tax. It was a simple and straightforward question. The performance of the candidates was satisfactory. Most of them were able to point out that the school fee was not allowable for deduction under s.12(1)(e) of the IRO. Nevertheless, most of the candidates were unable to point out that the course fee was not allowable for deduction under s.12(1)(a) of the IRO as well. It would be much better if, in coming to the conclusion, the candidates could have a comprehensive review of all the relevant provisions in the IRO. Question 11 5 Marks This question required candidates to analyse whether the income derived by the taxpayer from the representative office and the foreign investment enterprise was chargeable to IIT in mainland China; if so, they had to explain the China tax reporting obligations of the taxpayer and his employers in relation thereto. This was not a difficult question, but the performance of the candidates was not satisfactory. Some candidates provided answers on Value Added Tax which was completely irrelevant. Most of the candidates were unable to distinguish the treatment of a representative office from that of a foreign investment enterprise from the perspective of IIT, in particular, they were unable to note that the 90-day exemption was not applicable to the taxpayer as he was the chief representative of a representative office and his remuneration was deemed to have been borne by the representative office. As to the compliance requirements, many candidates simply said the taxpayer had to report his income to the local tax bureau whereas his employers had to withhold his IIT. They did not provide any elaboration. Module D (June 2016 Session) Page 7 of 8
(III) Conclusion and Recommendation Candidates should cover different topics in the taxation framework instead of selective preparation prior to attempting the examination. Divergence of performance in different questions indicated that candidates may not have adequate preparation on some important topics, e.g. stamp duty, source of profits, etc. Candidates should also improve their ability in elaborating the relevant provisions in the IRO or principles established in the DIPNs, and applying them to the case as provided. In general, irrespective of the complexity or difficulties of the questions, the performance of the candidates showed that it was a real challenge for them in analysing cases. Again, candidates are urged to read the questions carefully to identify the facts of the cases and the requirements of the questions. Candidates should not add any facts which had never been mentioned in the questions. They should not give any irrelevant answers and should instead focus on what was requested. That aside, the mere copying of provisions without applying or analysing certainly does not help; the copying of irrelevant provisions only wastes the candidates precious time. Candidates should be well aware that they have to manage their time in examinations. Module D (June 2016 Session) Page 8 of 8