Reference no: EM13488392

Assignment 1

Question 1

Read the following article, which is an extract from a press release by the Hong Kong Institute of CPAs, titled ‘Hong Kong Institute of CPAs' budget submission asks government to use tax policies and budget measures to help families and lower income groups and boost support for SMEs and overall business competitiveness,' and then answer the questions required.

Hong Kong Institute of CPAs

Hong Kong, 10 January 2013

The Hong Kong Institute of CPAs says that, financially, Hong Kong remains in a sound position. The Institute expects a budget surplus in excess of HK$25 billion for 2012-13 and fiscal reserves of about HK$695 billion by 31 March 2013. In its budget proposals for 2013-14, it calls on the government to offer more help to families and to increase the city's international competitiveness.

According to the Institute's submission, one of the main concerns of the city's taxpayers is keeping up with rising costs. The proposal suggests a range of measures to help families and individuals, including widening the marginal tax bands from HK$40,000 to HK$50,000, increasing child allowances from HK$63,000 to HK$70,000, allowing deductions for voluntary MPF contributions with an annual cap of HK$60,000, allowing deductions for private healthcare insurance premiums with an annual cap of HK$12,000, offering a rental payment deduction as an alternative to the home loan interest deduction, adjusting the price thresholds of different stamp duty rates in line with property price inflation, providing a waiver on property rates of up to HK$2,500 per quarter, and an electricity subsidy of HK$1,800 for the coming year.

Florence Chan, chair of the Institute's taxation faculty executive committee, says, ‘Lower and middle income groups face continuing pressure from rising costs. The Institute's proposal would give a helping hand to families with children and other dependants, in relation to significant costs such as education, housing and health care. Families are the building blocks of the Hong Kong community and the heart of future generations, so tax measures devised to assist them should always be a priority,' she adds. 2 ACT B414 Taxation I The Institute's proposals also call for tax incentives focusing on the city's international competitiveness. The recommendations include: a reduction of the corporate profits tax rate to 15% for companies with gross income not exceeding HK$2 million, a tax waiver on assessable profits up to HK$500,000, a business registration fee waiver, an extension of the profits tax exemption for offshore funds and exemptions for onshore funds meeting specific criteria, an extension of tax deductions for research and development and intellectual property usage, and tax concessions for regional headquarters and offices.

Required:
a Discuss the objectives of a good tax system and the characteristics it should possess.
b Comment on the proposals as submitted by the HKICPA and evaluate whether they are desirable or undesirable in terms of the ideal objectives and characteristics of a good tax system.

Question 2

Mr Leung has been an active investor in properties in Hong Kong. In addition to his home in Causeway Bay, he owns the following three
properties:

Hung Hom flat

The Hung Hom flat was first rented to Ms Lam and subsequently to Mr Pok. The details of the leases are as follows:

• Lease to Ms Lam: The lease was for a three-year period from 1 January 2009 to 31 December 2011. The agreed rent was for $20,000 per month with Mr Leung being responsible for the rates of $2,500 per quarter and the management fee of $1,000 per month.
However, Ms Lam vacated the property early on 31 May 2011 with four months of rent in arrears. In November 2011, Mr Leung found out that Ms Lam had gone to Shanghai and the Assessor was satisfied that the debt became irrecoverable. Mr Leung did not ask for any rental deposit at the time of signing the lease.

• Lease to Mr Pok: The lease was for a five-year period from 1 July 2011 to 30 June 2016. The agreed rent was for $15,000 per month. Mr Leung agreed to the lower monthly rent on condition that Mr Pok paid an initial premium of $60,000. Also, after his previous unhappy experience with Ms Lam, Mr Leung demanded a rental deposit of $30,000 from Mr Pok. He also required that Mr Pok pay the rates of $2,500 per quarter and the management fee of $1,000 per month. Mr Leung incurred repairs and decoration expenses of $30,000 in June 2011 prior to handing over the flat to Mr Pok.

Assignment File 3

Chai Wan flat

This property has been occupied by Mr Leung's son since Mr Leung bought the property in 2009. His son contributed $30,000 a year to Mr Leung for Mr Leung's living expenses for the years of assessment 2010/11 and 2011/12 respectively.

Shenzhen flat

This property has been rented out to Mr Lee, a Hong Kong resident, at a monthly rent of HK$8,000 since 2009. The tenancy agreement was negotiated and signed in Hong Kong, and Mr Lee paid the monthly rent directly into Mr Leung's bank account in Hong Kong. The monthly management fee of RMB$200 and other charges were paid by Mr Lee.

Required:

a Determine the Hong Kong property tax liabilities for Mr Leung for the years of assessment 2010/11 and 2011/12. Ignore provisional
property tax and any tax waiver or refund. The standard tax rate for years of assessment 2010/11 and 2011/12 is 15%.

b Provide a brief comment on the treatment of significant items where appropriate.
c In December 2012, Mr Pok ran into financial difficulty and negotiated with Mr Leung on whether he could sublet part of the flat to relieve his financial burden. Mr Leung agreed. Explain whether Mr Pok would be chargeable to property tax in doing so and include in your answer the definition of ‘owners' under Hong Kong property tax.

Question 3
Fireplace Restaurant is a well-established restaurant solely owned by Mr Lam. It makes up its accounts to 31 December annually. During the two years ended 31 December 2012, Fireplace Restaurant had the following transactions in respect of plant and machinery:

i Tax written-down values brought forward from year of assessment 2010/11:
10% pool 100,000
20% pool 200,000
30% pool 300,000

ii 1 February 2011 - Purchased additional tables and chairs for $360,000.

4 ACT B414 Taxation I

iii 2 March 2011 - Installed a new air-conditioning plant on hire-purchase terms as follows:

Cash price: $2,000,000
Down payment: 10%

Balance: by 12 equal monthly installments of $160,000 commencing
2 April 2011.

iv 31 March 2011 - Sold an old air-conditioning plant for $10,000. The plant was purchased in 2001 for $400,000 on hire-purchase terms, with all instalments completely paid in early 2003.

v 15 May 2011- Replaced kitchen utensils, crockery and cutlery for $180,000.

vi 1 September 2011 - Sold a bunch of assets in the 30% pool for $75,000. The proceeds of the individual assets were all less than their respective costs, except for a washer, which was bought in 2009 for $4,000, and was sold for $5,000.

vii 10 January 2012 - The sole proprietor, Mr Lam, donated his private car for the exclusive use of the business. The car was acquired in
May 2010 for $250,000. Its second-hand value as at 10 January 2012 was $70,000.

viii 12 February 2012 - Mr Lam took some furniture for his personal use. The furniture was purchased for $25,000 three years ago and had a market value of $7,600 as at 12 February 2012.

Required:

In accordance with the relevant provisions of the Inland Revenue Ordinance, determine the depreciation allowances to which Mr Lam's business, Fireplace Restaurant, is entitled for the years of assessment 2011/12 and 2012/13.

Question 4

Mr Orlando is a US citizen and has been working in the Finance Department of Clever Inc. in Los Angeles since 2008. In April 2012, he was relocated to the Hong Kong office as the regional financial controller. In his new role, he has to travel to other Asian countries on a regular basis to review the financial and related matters. The Hong Kong subsidiary of Clever Inc. did not sign a new employment contract with him but did provide him with administative and support services he needed in carrying out his responsibilities. Mr Orlando's salary was deposited into his bank account opened in Hong Kong right after his arrival in Hong Kong. Mr Orlando continues to work closely with his superior in the S on important direction and policy matters.

Assignment File 5

Required:

a State the factors which are used by the IRD in determining the source of employment and discuss whether Mr Orlando's employment should be considered as a Hong Kong employment or not.

b Explain the significance of the source of employment in terms of taxability of employment income under Hong Kong salaries tax.