Profits tax is charged for each year of assessment on every person
carrying on a trade, profession or business in Hong Kong for that year
from such trade, profession or business, excluding profits arising from
the sale of capital assets.
Two criteria must be satisfied:
a) the profits must be from a trade, business or profession carried on
in Hong Kong, and
b) the profits must arise in or be derived from Hong Kong, ie the
profits must have a Hong Kong source.
What is a trade?
Trade includes ‘every trade and manufacture and every adventure
or concern in the nature of trade’.
See Cape Brandy Syndicate v.CIR (2TC358)
CIR v.Fraser (24TC498).
Edwards v.Bairstow & Harrison
(36TC207)
CIR v.Sincere Insurance & Investment
Co.Ltd.(HKTC602)
What is a business?
Business includes:
a) farming,
b) poultry,
c) pig rearing,
d) letting of any premises by a corporation,&
e) sub-letting by any other person.
What is a profession?
Profession involves the exercise of intellectual and/or manual
skill, controlled by intellectual
knowledge.eg.accountancy,journalism,etc.
Excluded Income.
a) Profits from the sale of capital assets,
b) a dividend from a corporation which is not chargeable to profits tax,
c) income already charged elsewhere to profits tax,
d) interest paid or payable on Tax Reserve Certificate,
e) interest paid or payable on a Government bond issued under the Loans
Ordinance,
f) any profit on the sale of such a Government bond as referred to in e)
above,
g) interest received and profits on the disposal of securities by trustees
under an authorized unit trust.
Example
A puzzled taxpayer wrote the following letter to the IRD. Draft a reply.
Dear Sirs,
My chief accountant tells me that I cannot claim as an expense for profits
tax purpose the fine I incurred for forgetting to license my car. The car is
used in the business and the fine was an expense I had to pay in the course
of running my business. If it wasn’t a business expense then what was it?
Without the car, I cannot deliver goods to my client and solicit sales at all.
Furthermore, it is not a private expense because the cash payment for the
fine came out of the business fund.
Yours faithfully
Mr. S. H. Kong
Badges of Trade
These are factors to be considered when deciding whether a particular
activity constitutes trading or not.
a) The nature of the asset realized.
b) The motive.
c) The length of period of ownership.
d) The frequency of the transaction.
e) Organization to secure sale.
f) Work done on the asset pending sale.
g) The manner of. acquisition of the property sold.
h) Existence of trading interests in the same field.
i) Method of financing the transaction.
j) Circumstances leading to the sale.
The list is not exhaustive. Other badges of trade may need to be considered.
The following points have to be noted when computing profits for tax
purpose:
a) The items brought into the computation of profits should conform to
ordinary commercial principles.
b) Capital items must be excluded.
c) The allowable expenses must be incurred in the production of profits of
the trade.
Case 1. Mr. Au inherited a piece of land in Tsuen Wan on the death of his father. He
immediately sold it to a property developer. He then bought some more land in the
Tsuen Wan area at a government auction, constructed roads and drainage, advertised
the land for sale and employed staff to deal with inquiries. He finally sold all the land
at a large profit.
Was Mr. Au trading in both instances? If he sold the second piece of land to the same.
Developer, was he still trading?
Case 2.Ms. Chan wanted to live near the place where she was working. She tried to buy
on flat in this area, but the vendor was only willing to sell if she purchased all six flats
which he had redeveloped. She therefore bought all six flats and immediately resold
four of them, kept one for her own use and leased one for rental purposes. She used the
money derived from the resale to finance the original purchase.
On 2 December 2020, the IRD found out the. Above details and assessed Ms. Chan.to
profits tax on the profits derived from the sales and the rental income received for the
flat which was leased out.
Write a letter to Ms. Chan advising her what course of action should she take and advise
her whether, or to what extent, the assessment was correctly raised.
Distinction between capital and revenue receipts:
a) Sale of fixed asset is a capital receipt. Sale of circulating asset is a
revenue or trading receipt.
b) Any-sum received for-permanent loss or destruction of a fixed asset is a
capital receipt.
c) Any sum received for temporary loss of use of capital asset or payment
for loss of profits is revenue receipt.
d) Any sum received for repairable damage to a fixed asset is a capital
receipt.
e) Any sum received for loss of trading stock is a trading receipt.
f) Any sum received for the cancellation of trading contract is a revenue
receipt.
g) Any sum received for the cancellation of one of a number of agency
contracts is revenue receipts.
h) Any compensation received for a cancellation which led to the
cancellation of a company’s whole business operation is a capital receipt.
Distinction between capital and revenue expenditures:
a) The cost of acquiring raw materials in their natural state is capital
expenditure.
b) The cost of acquiring or disposing of an agreement or lease which is part
of the fixed assets of a trade is capital expenditure.
e) The cost of replacing part of an asset is revenue expenditure.
d) The cost of replacement by an entirely new asset is capital expenditure.
e) If, instead of repairing the asset, an alternative or improved part is
constructed, then the expenditure incurred is capital expenditure and no
allowance is due for the hypothetical repairs which might have been carried
out.
f) As for repairs to newly acquired assets, if the repairs are reflected in the
cost price and the assets have to be repaired to be usable, the cost of these
repairs will be capital expenditure.
However, recurring repairs expenditures not reflected in the purchase price
and which does not prevent the immediate use of asset, would be deductible.
g). A lump sum payment to dispense with a continuing revenue expense is
revenue expenditure. Since it does not create any new intangible asset.
h) When an expenditure is made, not only once and for all, but with a view
to bringing into existence an asset or an advantage for the enduring benefit
of the trade, it is treated as capital expenditure.
i) A payment to get rid of an unsatisfactory director is normal revenue
expense which.is regarded as a part of the cost of engaging and dismissing
servants.
j) However, a payment to retiring directors for agreeing not to compete
with the company would increase the company’s goodwill by buying off
potential competitors and is therefore capital expenditure.
Allowable Deductions in Section 16(1)
Section 16(1) (a) Interest expense
allowable on how loan is used
Section 16(1) (b) Rent paid for the purpose of
producing profits deductible
Section 16(1) (c) Foreign tax paid
allowable
Section 16(1) (d) Bad debts
allowed on for specific
provisions
Section 16(1) (e) Repairs
allowable on premises,plant,
machinery,implement,utensil
or article
Section 16(1) (f) Replacement
allowable if no depreciation
allowance has been claimed
Section 16(1) (g) Registration fees
allowable on trademarks,
designs or patents
Other Deductible items
In addition to those specifically mentioned in Section 16(1)(a) to (g),the
IRO also gives rules on the treatment of the following items:
Section 16A Approved Retirement Scheme
Section 16B Scientific Research
Section 16C Technical Education
Section 16D Approved Charitable Donations
Section 16E Patent Rights
Section 16F Building Refurbishment Expense
Section 16G Capital Expenditure on Prescribed Fixed Assets
Section 16 Management Fees
Summary for Calculation of Assessable Profits
In order to familiarize yourself with the necessary adjustments to be made when ascertaining
assessable profits, the following computation pro forma is for your reference.
Hong Kong Profits Tax Computation Pro Forma
X Company Profits tax liability for the year of assessment 20X0/20X1
IRO Section
Profit/（loss）per account
XXX
- Excluded income
X
14
- Offshore income
X
14
- Profits from sale of capital assets
X
26(a)
- Dividends
X
26(b)
- Share of profit from a partnership
X
26A(1)
-Interest from government bonds
X
+ Income assessable not vet credited in accounts
X
15(2)
+ Released debts not credited in accounts
X
19E(1)
+ Balancing charge
X
+ Expenditures not deductible
X
17(1)(b)
+ Expenses incurred for producing offshore income
X
17(1)(c)
+ Losses on sale of capital assets
X
17(1)(c)
+ Depreciation of fixed assets
X
17(1)(c)
+ Amortization of lease
X
17(1)(d)
+ General provision for doubtful debts
X
17(1)(b)
+ Traveling and entertainment not for producing assessable profits
X
16D
+ Actual charitable donations made
X
- Deductible expenditures not included in accounts
X
PartV1
- Depreciation-allowances.
X
16(1)(f)
- Cost of implements and utensils capitalized in accounts now
claimed on replacement basis
X
(XXX)
XXX
XXX
(XXX)
AAA
19C(4)
- Charitable donations. limited to 10% of AAA (assessable profit or
adjusted loss)
(XXX)
- Loss unrelieved brought forward
(XXX)
et assessable profit (or adjusted loss）
BBB
Profit tax is then charged at the standard rate on BBB (net assessable profit).
Expenditures not allowed
Below is a summary of certain items of expenditure which may appear in the financial accounts of
a business. These are not allowed to be taken into the calculation of profits tax and therefore have
to be either added back to the profit or deducted from the loss disclosed by the annual accounts in
order to arrive at the profit or loss for profits tax purpose.
a) Expenses not wholly and exclusively laid out for the purpose of the trade. profession, or business
b) Expenses for domestic and private purpose.
c) The cost of entertainment, other then for entertaining business customers and their agents.
d) The rent of property which is not used for business purposes.
e) Any capital sums used in or withdrawn from the business.
f) The cost of improvements to premises.
g) Debts, other then bad debts or those estimated to be doubtful.
h) Profit tax paid.
i) Depreciation (capital depreciation allowances are available instead)
j) Withdrawals by proprietors
k) Penalties for breaking the law and legal expenses in connection therewith.
l) Reserves (except for discounts or for specific doubtful debts)
Allowable expenditures
Any sums expended wholly and exclusively for the purpose of the business may usually be deducted
in the computation of profits tax unless the outlay was of à capital nature. The following list is not
intended to be comprehensive but is indicative of this type of expenditure which may be deducted
from business profit in order to arrive at the figure on which profits tax will be imposed.
a) Advertising expenses, but not the cost of permanent signs.
b) Bad and doubtful debts.
c) Interest incurred for business purposes.
d) Insurance for business purposes (does not include life insurance and recoveries under the policy
which must usually be included in assessable profit).
e) Legal expenses incurred for recovering debts and in connection with other non-capital business
matters.
f) Redundancy payments made to former employees.
g) Rent of business premises.
h) Reasonable payments for the hire of assets.
i) Repairs to premises, excluding improvements and alterations.
j) Subscriptions and donations to societies.
k) Wages, salaries, and pensions paid to employees and past employees or their dependent.
1) Insurance contributions ,such as workers' compensation, etc.
Examples of calculation of assessable profits
Illustration 1
This is an example of adjusting the annual accounts of a sole trader. A retail tradesman, using a van to deliver goods
and living over his shop premises, submits the following profit and loss account for the accounting period ended 31
March 2021.It should be noted that certain items appearing in the accounts are not allowable deductions for profits
tax purposes and have to be added back to arrive at the assessable profit. Adjustment has also to be made in respect
of the trader’s living accommodation.
Profit and loss account for the period ended 31 March 2021
Gross profit from trading
$68,677
Dividends from local shares
$3,560
$72,237
Less: Wages
$24,600
Rent
$5,800*
Rates
$3,034*
Lighting and heating
$1,850*
Repairs to premises
$3,270*
Postage and telephone
$1,230
Stationery and printing
$845
General expenses
$1,050
Electric name sign
$3,740
Depreciation for van
$5,240
Running cost of van
$9,070
Erection of garage for van
$8,800
Net profit
($68,519)
$3,718
it has been agreed with the IRD that depreciation allowances are $4,786 and one-third of the expenses marked * are
considered to be of private nature.
Adjustments for profits tax purpose for the year of assessment 2020/2021
Net profit as per profit and loss account
$3,718
Less: Items not taxable,i. e. dividends
($3,560)
$158
Add: Items not allowed as deduction
Electric name sign (capital in nature)
$3,740
Erection of garage for van (capital in nature)
$8,800
Depreciation of van
$5,240
Living accommodation (1/3 of living expenses)
Rent
$1,933
Rates
$1,008
Lighting and heating
$617
Adjusted profit
$22,586
Less: Depreciation allowance
($4,786)
Net assessable profit
$17,800
Profits tax is then payable at 15% on net assessable profit of $17,800,i. e. $2,670.
Illustration 2.
Mr. Jansen opened a small engineering business on 1 April 2020 and his accounts up to 31
March 2021 were as follows:
Sales
Purchases
Workmen’s compensation
Wages to book-keeper (wife)
Wages to self
Rent and rates
Provisional profits tax paid
Bank charges (including $30 interest on overdraft)
Depreciation
Legal charges
Bad debt written off
Bad debt provision (5%of outstanding debts)
Repairs
General expenses
Net profit
$21,600
$14,000
$2,800
$400
$1,500
$780
$160
$62
$200
$160
$20
$200
$800
$220
$21,402
$198
1.Legal charges consist of $80 for purchase of property, $40 for debt collection, and $40 for fine
under Factories Ordinance.
2.Repairs consist of $200 for machinery repairs and $600 for building an extension to the workshop.
3.General expenses were $150 for entertainment of mother-in-law. and a donation of $70 to the
Community Chest.
4.Depreciation allowance of $140 bas been allowed by the IRD.
Adjustments for profits tax purpose for the year of assessment 2020/2021
Net profit per account
$198
Add: Items not allowable
General expenses: entertainment
$150
Donations
$70
Cost of building extension
$600
Bad debt general provision
$200
Legal charges: property purchase and fine.
$120
Depreciation
$200
Provisional profits tax paid
$160
Wages to self and wife
$1,900
Less: Depreciation allowance
($140)
Net assessable profit
$3,458
Profits tax payable for the year of assessment 2020/2021＝$3.458×15%＝$519
Actual profits tax payable＝$519－$160 provisional tax paid＝$359
Profits Tax Calculation Problem
Mr. Wong is a retail merchant who makes up his accounts to 31 March each year. The following is
his profit and loss account for the year ended 31 March 2020.
Gross profit
Profit on sale of equipment
Bank interest
Compensation
Dividend
Less: Salary for Mrs. Wong
Office salaries
Rates and insurance
Light and heat
Repairs
Motor car expense
Bank interest
Loan interest
Bad and doubtful debts
General expenses
Depreciation of equipment
Management salary for Mr. Wong
Net profit
$254,460
$390
$450
$1,000
$1,570
$257,870
$16,000
$41,520
$16,000
$10,000
$11,250
$15,000
$500
$11,200
$690
$19,070
$4,000
$60,000
($205,230)
$52,640
The following further information is available:
1.The bank interest of $450 was received on the savings deposit account held in the name of Mr.
Wong. It is the personal savings of Mr. Wong.
2.The dividends were derived from the shares held by Mr. Wong. The money came from business
funds.
3.In May 2020,the shop next door renovated the office. The renovation damaged Mr. Wong’s shop
and some of the merchandise. Compensation was received by Mr. Wong for the damaged
merchandise.
4.Mr. Wong’s wife carried out clerical work in the shop. Her salary was paid monthly at the rate of
$750.A further $7,000 bonus being paid in April 2020.
5.Mr. Wong’s father lives on the premises and it has been agreed with the IRD that one quarter of
the rates and insurance and of the lighting and heating bills are due to-usage by Mr. Wong’s father.
6.Repairs comprised of $6,250 for work on shop toilet and $5,000 for office conversion. The toilet
was usable although it was in bad state of repair when the shop was purchased in 2020.The office
conversion was a division of a large room into three private offices. Had the large room not been
converted into three private offices, the ceiling would have required repairs at a cost of $2,000.
7.General expenses comprised of:
Explanations:
1.Legal expenses incurred for the purchase of property are of a capital nature. and therefore not
allowed as deductible expenses. This applies also to the building extension cost of $600.
2.The fine is not an expense incurred for the production of assessable profit. General expenses in
respect of entertainment for mother-in-law is private expenditure not incurred for the production
of assessable profits.
3.Community Chest is a charitable institution approved under Section 88 of the IRO but no
deduction is allowed since the sum does not exceed $100.
4.Provisional profits tax paid is not an allowable deduction since it is an advance payment of the
profits tax liability under the IRO and will be adjusted to effect the final liability upon the
settlement of the profits tax return.
Profits Tax Calculation Problem
Avec Piano Limited, a manufacturing company, produced the following profit and loss account for the year ended 31 March 2021.
Expenditure
$
Income
$
Salaries and wages
199,100
Gross profit
602,070
Directors’ fees
42,600
Dividend received
6,000
Superannuation fund contributions
10,800
Bad debts recovered
1,000
insurance
4,040
Transfer from provision for bad debts
1,230
Freight charges
39,560
Profit on sale of investment
3,000
Legal and audit fees
9,900
Profit on currency exchange in respect
2,200
(annual)
of trade transactions
Subscriptions and donations
3,020
Repairs
3,890
Traveling and entertainment
13,000
General sundries
2,090
Advertising
1,970
Printing and stationery
2,341
Bank charges and interests
989
Bad debts
1,090
Amortization of lease
11,000
Depreciation
49,540
Net profit
220,570
Total
615,500
Notes:
1.The company's superannuation (pension) fund is an approved one.
2.Repairs include the cost of work done on repairing the property of a director of the company, estimated at $1,200
3.A breakdown of the legal and audit fees as follow:
Audit fee
$2,000
Legal charges for debt collection
$1,450
Customer agreements
$380
Acquisition of patent rights
$3,050
Registration of trademark
$3,020
Total
$9,900
4.Subscriptions and donations contain the following:
Subscriptions to trade journals
$1,090
Donation to Community Chest
$1,130
Details of balance unknown
$800
Total
$3,020
5.Traveling and entertainment include allowance and airfare to a director's wife in respect of a trip to Tokyo to attend a wedding reception
($5,150) and airfare for another director to the United Kingdom to open a local sales office ($6,000).
6.All the sundry expenses and advertising are allowable deductions.
7.The depreciation allowance agreed by the IRD is $47,080.
Calculate the profits tax payable by Avec Piano Limited for the year of assessment 2020/2021.Provide explanations to your adjustments.
Printing and stationery
Legal costs for debt collection
Legal costs for negotiation of loan
Accountancy
Mr. Wong’s personal VISA card
Donation to Community Chest
Entertainment
Total
$2,500
$250
$580
$3,550
$150
$450
$11,590
$19,070
8.The bank interest of $500 was paid on overdraft of the business bank account.
9.Loan interest was paid oi a loan borrowed to finance the purchase of trading merchandise. The
loan was secured by the bank deposits of Mr. Wong.
10.Bad debt amount was derived after an increase in the general debtor reserve.
11.The motor car was used by Mr. Wong both for business and private purposes. It was agreed that
half of the motor car expense is due to business purpose
12.The depreciation allowance agreed by the IRD for the year was $11,000.
Calculate the profits tax payable by Mr. Wong for the year of assessment 2020/2021.
Provide explanations to your adjustments.
Profits Tax Calculation Problem
Powelectronic Company Limited has carried on an electronic manufacturing business Hong Kong.
Its profit and loss account for the year ended 31 March 2020 as follow:
Sales
Less: Cost of goods sold
Gross profit
Other income
Less: Rent and rate:
Branch office expenses
Depreciation
Office salaries
Special contribution to approved retirement scheme
Repairs and renewals
Professional charges
Bad and doubtful debts
Bank interest
Sundry expenses
Net profit:
$6,277,180
(S4,590,540)
$1,686,640
$66,300
$1,752,940
$245,000
$300,000
$63,800
$505,800
$200,000
$16,320
$21,700
$31,400
$12,980
$11,510 ($1,408,600)
$344,340
Additional information:
1.Powelectronic Company Limited opened a factory in China in April 2019. Before that, all the
production was done in Hong Kong and the finished products were exported to Australia and
the United States. After the production line in China was established part of the assembly work
was transferred to China with the finishing work still being carried out by the factory in Hong
Kong. All the administrative work related to the sales was done in the Hong Kong office, It was
estimated that sales related to such operations amounted to $650,000. The expenditures related
to the operations in China were debited into the branch office expense account.
2.Other income comprises:
Commission income
$50,000
Interest received from a local bank
$4,300
Dividend from shares of local subsidiary
(the cost of the shares was $200,000)
$12,000
Total
$66,300
The company eared the commission by introducing a buyer to one of the China garment factories.
One of the directors was in Australia on business and by chance discovered that an Australian
company wanted to import garments from China. He took the representative of that Australian
company to China and introduced the representative to the Chinese manufacturer.
3.Bank interest was paid on bank overdraft and was secured by the property of the managing director.
4.Professional charges were:
Legal charges for debt collection
Legal charges for setting up a retirement scheme for staff
(the scheme was an approved one)
Accountancy fee for tax appeal
Audit and accountancy fees
Total
5.Bad debts were:
Amount written off
General provision increased
Defalcation by staff
Less: Loan to staff previously written off now recovered
Total
6.Sundry expenses comprise:
Cost of sending staff on production management courses
Staff annual dinner
Donations to Tung Wah Group Hospitals
Miscellaneous allowable expenses
Total
$5,400
$8,000
$5,000
$3,300
$21,700
$21,000
$5,000
$26,400
$41,400
($10,000)
$31,400
$4,000
$2,000
$5,000
$510
$11,510
7.The depreciation allowance for the year is $35,000.
Prepare the profits tax computation for the year of assessment 2019/2020 for Powelectronic
Company Limited and briefly explain your adjustments in the computations. With reference to
decisions from tax cases, discuss the taxability of the profit from the China operations and the
commission under Hong Kong Profits Tax.
Figure 23.1
Summary of Personal Assessment for an Individual
1.Net assessable value of property assessable 1o property tax
2.Net assessable income under salaries tax
3.Assessable profit (after deduction of loss set-off under profits tax)
under Part TV
A1
B1
C1
D1
Less:
4.Interest expense
5.Approved charitable donations
6.Business loss
(E1)
(F1)
(G1)
H1
(I1)
(J1)
(K1)
(L1)
7.Loss brought forward
8.Personal allowances entitled
Reduced total income
Tax is then levied at progressive tax rates on L1 but limited to standard rate on J1.
Figure 23.2
Summary of Personal Assessment for husband and wife
Husband
1.Net assessable value of property assessable to
property tax
2.Net assessable income under salaries tax
3.Assessable profit (after deduction of loss set-off
under profits tax) under Part TV
Less:
4.Interest expense
5.Approved charitable donations
6.Business loss
Wife
A1
B1
A2
B2
C1
D1
C2
D2
(E2)
(F2)
(G1)
H1
7.Loss brought forward or loss from other spouse
(I2)
J2 ＝ J3
8.Personal allowances entitled Reduced Total Income
(K3)
L3
(a)Tax is then levied at progressive tax rates on L3 but limited to standard rate on J3
(b)Tax as computed under (a) above is apportioned in the ratio
J1 J2
:
J3 J3
between husband and wife
(E1)
(F1)
(G1)
H1
(I1)
J1 ＋
Joint
Personal Assessment Example
Mr. P received the following income for the year of assessment 2020/21:
Salary from a Hong Kong employment
Dividends from Hong Kong shares
Rents received from a flat in Shatin
Interests from a fixed deposit with a local bank
Profits from his solely owned boutique
$108,000
$8,740
$60,000
$8,200
$24,000
Mr. P incurred the following expenses during the year ended 31st March 2021:
Rates for the property in Shatin
Expenses allowable for salaries tax purposes
Depreciation allowance available for profits tax purpose
$8,000
$3,000
$2,500
Mr. P. incurred the following interest expenses during the year of assessment 2020/21:
Mortgage paid in respect of the Shatin property
Mortgage interest paid in respect of his own residence
$70,000
$45,000
During the year of assessment 2020/21, Mr. P donated $20,000 to an approved charitable
organization $2,000 out of the $20,000 donations has been deducted from the profits of the boutique
under profits tax.
Mr. P is a partner in a partnership business. During the year of assessment 2020/21, his share of loss
from the partnership business was $20,000.
Mr. P is a married man with one child aged 7. For the year of assessment 2020/21,he has paid the
following taxes already:
Property tax
Profits tax
$6,240
$3,225
Husband and Wife Persona! Assessment Examples
Mr. and Mrs. M had the following income and outgoings in the year of assessment
2020/21:
Mr. M
Mrs. M
Property income (net assessable value)
$40,000
$20,000
Salaries income
$50,000
$20,000
Business income (before approved charitable donations)
$70,000
$30,000
Total approved charitable donations
$14,000
$6,000
Share of a partnership business loss
$20,000
They have two children aged 8 and 10 respectively. They also live with Mr. M’s father who is aged
70 during the year of assessment.
Compute the personal assessment tax liability for Mr. and Mrs. M for the year of assessment 2020/21.
Mr. and Mrs. Z had the following income and outgoings in the year of assessment
2020/21:
Mr. Z
Mrs. Z
Property income (net assessable value) (property tax already paid
$4,800)
$32,000
Salaries income (no salaries tax paid)
$102,800
Profits from proprietorship. (donations of $11,000 have been allowed
and profits tax of $16,950 already paid)
$113,000
Share of partnership loss
$50,000
Mortgage interest paid in respect of property
Total donations made
$35,000
$18,000
$4,000
The couple has one child aged 10 during the year of assessment 2020/21.
Compute the personal assessment tax liability for Mr. and Mrs. Z for the year of assessment 2020/21.
Personal Assessment Exercise
Mr. Kwok supplies you with the following information related to the year ending 31s March 2020.
a) He was employed as an accountant by Jim Chase and Co (JC), a firm carrying on construction
business in Hong Kong, and received an annual salary of $200,000.
b) He was provided with a flat in Kowloon by the firm at a monthly rental of $1,000. He also paid
management service charges amounting to $2,000 per annum.
c) He received an annual salary of $60,000 from an unincorporated business operated by his wife.
d) He received a holiday warrant from JC for $20,000 which he spent as follows: air ticket to
Singapore for himself and his wife ($5,000×2),accommodation in Singapore ($10,000).
e) It is a condition of his employment with JC that he joins the EA Club to help promote the firm’s
business interests. Annual subscription for the club members is $20,000,of which the firm
refunded him $10,000.
f) JC provides him with a company credit card which he used to purchase petrol for private motoring
for a total value of $5,000.
g) He received a cash scholarship of $3,000 from JC to study advanced accounting at an evening
course run by the Baptist University.
h) He made a donation of $25,000 to the Community Chest.
i) He received interest of $10,000 paid by the administrator of his late father's estate for delayed
payment of a legacy.
j) He owns a flat in Kowloon Bay which is leased for $4,000 per month. He paid rates on this flat
of $3,000 for the year. He also took out a mortgage to purchase the flat and total interest payments
amounted to $50,000.
k) At all times during the year he was married and maintained two children aged 17 and 20. The 20year-old finished schooling in September 2019 and is still looking for a job.
l) His wife operated a bakery business in Sai War, and the agreed assessable profits for the year
ending 31st March 2020 were $60,000
Calculate Mr. Kwok’s tax liability for the year of assessment 2019/2020.Assume Mr. Kwok has not
yet paid any tax for 2019/2020 and has elected for personal assessment.
(Adapted from ACCA/HKSA 3.3H D89Q6)