Profits Tax Part 1 & Part 2

Tutorial Questions

Question 1

Mr and Mrs Leung entered into a purchase and sale agreement in January 2022 to dispose of a
property located in the Central. The property was acquired by them under joint names in December
2021, and since then, the property was left vacant. As a result of the purchase and sale, Mr and Mrs
Leung earned a gain of HK$1 million.

In a meeting with Mr and Mrs Leung, you also found that during the period from January 2015 to
January 2022, they have entered into similar transactions of buying and selling another 2 properties
in Hong Kong. Total gain earned was around HK$2.5 million.

Required:
As a tax consultant, advise Mr and Mrs Leung whether the gain earned from the sale in January 2022
would be subject to profits tax in Hong Kong. You should also mention what additional
information is required for your analysis. Ignore stamp duty.

Question 2

State and explain whether the following income is chargeable to HK profits tax:

a. The company has been holding some blue-chip securities in Hong Kong for years and earns
regular dividend income. (NTless) During the year, it also bought and sold certain securities
over the Hong Kong Stock Exchange and made a net profit of $200,000. (Tno adjust)

b. During the year, the company bought and sold several foreign currencies and made a significant
profit due to the weakening of US$. (Trading profitcontract effected testthe purchase and
sales contracts are sourced in HKTaxable)

c. The company operated a retail outlet in Hong Kong selling computer products. During the year, it
recorded a sale of $300,000 made to foreigner tourists who have declared that the products would
be exported outside Hong Kong. (Service income  operation test  Since the retail outlet is in
HK, the profit from its operation is sourced in HKTaxable) A further $100,000 was recorded
as sales based on telephone orders placed. (receives the telephone orders in HK, the profits
arising from the sales would also be sourced in HK Taxable)
Question 3

Which of the following statements are TRUE for assessing trading profits in HK?

(1) Where both the contract of purchase and contract of sale are effected in HK, the profits are fully
taxable. (True)
(2) Where either the contract of purchase or contract of sale is effected in HK, half of the profit is
taxable. (False)
(3) Where goods are purchased from non-Hong Kong suppliers and sold to non-Hong Kong
customers, the profits are fully non-taxable. (False)
(4) While purchase and sale contracts are important factors, the totality of facts based on the merits
of the case should also be looked at in order to determine the locality of the profits. (True)

A. 1 and 4 only
B. 2 and 3 only
C. 1, 2 and 4
D. All of the above

Question 4 [You may use the workings template to guide you.]

Determine whether, and to what extent, the following interest expense is deductible (Unless
otherwise stated, assume that the company and the bank are carrying on business in HK, the
company is not engaged in intra-group financing business, and the bank loan money has been used
for the production of the company’s assessable profits):

(1) The company paid interest $100 on a bank loan which is secured by a personal guarantee from
the company’s director.

(2) The company paid interest $100 on a bank loan which is secured by a personal deposit placed
with the bank in HK by the company’s director. Interest income earned from the deposit is $80.

(3) Re case (2), what about if it was a corporate director carrying on business in HK?

(4) Re case (3), what about if the deposit was placed with the bank’s overseas branch?

(5) The company paid interest $100 on a bank loan which is partly participated by another loan
made from the company’s associate in HK. The associate receives $60 interest from the bank
on the sub-participation loan. The associate carries on business in HK.

(6) Re case (5), what about if the associate is an overseas associate not carrying on business in HK?
(7) The company paid interest $100 on an unsecured bank loan used to acquire trading stock.

(8) Re case (7), what about if the loan was obtained from an overseas company owned by the
company’s director? (associates16(2)(e) fail) The overseas company is not a financial
institution, and it does not carry on business in HK. (non-FI but not taxed on interest
incomes16(2)(c) fail)
 S16(1)? S16(1)(a)? S16(2)? S16(2A)? S16(2B)? Amount deductible Adjust?
1 ok ok S16(2)(d) ok N/A N/A $100 No
2 ok ok S16(2)(d) ok applies N/A $100-80=20 Yes, add $80
3 ok ok S16(2)(d) ok N/A N/A $100 No
4 ok ok S16(2)(d) ok applies N/A $100-80=20 Yes, add $80
5 ok ok S16(2)(d) ok N/A N/A $100 No
6 ok ok S16(2)(d) ok N/A applies $100-60=40 Yes, add $60
7 ok ok S16(2)(d) ok N/A N/A $100 No
S16(2)(e) ok
8 ok ok S16(2)(c) fail N/A N/A $0 Yes, add
S16(2)(e) fail $100
Question 5 (Common Expense Items)

State whether each of the following items is commonly treated as deductible expense, or
commonly disallowed for tax purposes; and why. Dno adjust, NDadd

Item Deductible? Why? How?

1 Cost of repairing an existing asset due to wear and tear D: Recurring
2 Commission/rebates for the purpose of trade D
3 Commission/rebates to undisclosed recipients ND: DIPN12
4 Special contribution to ORSO fund to make up loss in D: 20% over 5 years
investment
5 Annual contribution to retirement fund D: max 15%
6 Legal fee for formation of company ND: one-off
7 Legal fee to collect debt D if trade debt, ND if not trade debt
8 Legal fee to acquire fixed asset ND: fixed capital
9 Legal fee to dispute over trading contracts D: current capital
10 Legal fee on drafting new office lease ND for tenant & one-off
D for landlord
11 Legal fee on renewing lease D: recurring & normal business
12 Penalties and fines ND: breach of law
13 Loss due to theft or fire on trading stock D: revenue in nature
14 Loss due to theft or fire on capital assets ND: capital in nature
15 Profits tax or property tax paid D: s17(1)
16 Profits tax penalties or late surcharges. ND: breach of law
17 Salaries tax for staff or director D: staff benefits
18 New Year red pocket money D: staff benefits
19 Gratuities to leaving staff D: staff cost
20 Payment to leaving staff for restrictive covenants ND: enduring benefit
21 Registration of trademark D: s16(1)(g)
22 Provisions (bonus, bad debts, stock) ND: if general (estimate); D if specific
23 Bad debts D if trade debts; ND if non-trade debts
24 Costs for tax return filing and general advice D: recurring
25 Professional/legal costs for tax disputes/appeals. ND: one-off, not in production of AP
26 Penalties on late delivery of goods D: recurring, operational
Question 6 (Modified from ACCA J02 F6HKG Q6)

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 January 2021 and
its first set of accounts prepared for the period ended 31 December 2021 shows the following:

Note $ $
Service income 2,900,000
Profit/loss from investments (1) 680,120
Interest income (2) 57,000
3,637,120
Donation (3) (188,000)
Director’s remuneration (4) (910,000)
Staff costs (5) (1,644,000)
Rent and rates (6) (481,000)
Legal and professional fees (7) (74,000)
Interest expenses (8) (42,000)
Depreciation (9) (331,000)
Office consumables (all deductible) (9,000) (3,679,000)
Loss for the year (41,880)

Notes:

(1) Profit/loss from investments:

$
Gain from trading in Hong Kong listed shares 690,120
Loss from trading in China listed shares (offshore loss, NDadd back) (30,000)
Dividends from Hong Kong listed shares (capital gain, NTless) 20,000
Total per accounts 680,120

(2) Interest income comprises:

$
Interest on HK$ deposit with a bank in Hong Kong (exemption orderNTless) 19,000
Interest on RMB deposit with a bank in China, used as security for a
bank overdraft (see 8 below) 20,000
Interest on HK$ loan made to a director (the loan amount was remitted to
the director’s bank account in Hong Kong) 18,000
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 2021.

(4) Director’s remuneration comprises:

$
Director’s fee 850,000
Utilities of director’s apartment 60,000
Total per accounts 910,000

(5) Staff costs comprise:

$
Salaries and allowances 1,580,000
Regular contributions to registered pension fund 64,000
Total per accounts 1,644,000
(6) Rent and rates comprise:
$
Rates for DTL’s office 73,000
Rent and rates for the director’s apartment 408,000
Total per accounts 481,000

(7) Legal and professional fees comprise:

$
Incorporation fee (one off, NDadd back) 4,000
Legal fee for setting up DTL (one off, NDadd back) 40,000
Audit and tax filing fees 30,000
Total per accounts 74,000

(8) Interest expenses comprise:

$
Interest on a bank loan, secured by a personal guarantee from DTL’s
director; the loan money was used to acquire DTL’s office (see 9(v)
below)) 27,000
Interest on a bank overdraft secured by the RMB deposit (see 2 above) 12,000
Bank charges on daily transactions 3,000
Total per accounts 42,000

(9) DTL acquired all of its fixed assets after 1 April 2021, as follows:
Cost
$
(i) Microwaves and distilled water dispensers for use in the office by
staff 29,000
(ii) Computer laptops for use by staff (PFADless) 176,000
(iii) Energy saving lighting system for the office (EnvirDless) 24,600
(iv) Car for use by DTL’s director 232,000
(v) Commercial building acquired from a property developer and used
as DTL’s office (CBAD 4%less) 5,000,000

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) State the general rules regarding the deductibility of interest and explain whether the interest
incurred on the bank overdraft under item (8) above is or is not deductible for profits tax purposes.

(b) Prepare Digital Technology Ltd’s profits tax computation for the year of assessment 2021/22,
showing the assessable profit/adjusted loss and profits tax payable, if any. Clearly identify the basis
period and show full details of the depreciation allowance calculations.

You may use the template provided as a guide.

(Check figures: depreciation allowance for plant and machinery: $186,760; commercial building
allowance: $100,000; assessable profits: $10,894)

[Hint: Items not required to be adjusted in the tax computation will still score marks if they do NOT appear
in the tax computation. You are NOT required to separately show or explain these items unless the
question specifically requires you to do so.]
 Digital Technology Ltd
Profits tax computation
for the year of assessment 2021/22
Basis period: 1 January 2021 to 31 December 2021
$ $
Loss for the year (41,880)
Add: Donation 188,000
Depreciation 331,000
Loss from trading in China listed shares 30,000
Incorporation fee (one-off) 4,000
Legal fee for setting up DTL (incurred once) 40,000
Interest expense on bank overdraft 12,000 605,000
563,120
Less: Dividends from Hong Kong listed shares (20,000)
Interest on HK$ deposit with a bank in Hong Kong (19,000)
Interest income in China (offshore) (20,000)
Prescribed fixed assets-computer laptop (176,000)
Energy saving lighting system for the office (24,600)
Commercial building allowance (5,000,000x50%x4%) (100,000)
Depreciation allowance for machinery and plant (186,760) (546,360)
16,760
Less: Approved charitable donation (24760x35%) 5,866
Net assessable profits 10,894
Profits tax payable at 8.25% 898

DA schedule 20% 30% Total DA

Additions:
-Microwaves and distilled water dispensers 29,000
-Car 232,000
IA 60% (17,400) (139,200) 156,600
11,600 92,800
AA (2,320) (27,840) (30,160)
Total DA 186,760
WDV c/f 9,280 64,960

Question 7 (Modified from ACCA J16 F6 Q6)

Winner Ltd (WL) carries on business in Hong Kong as an investment company. WL’s statement of profit or
loss for the year ended 31 March 2022 is as shown below:

Notes $ $
Gain from trading in Hong Kong listed shares 500,000
Loss from trading in China listed shares (30,000)
Dividends from Hong Kong listed shares 23,000
Dividends from China listed shares 11,000
Gain from buying and selling foreign currencies 150,000
Exchange gain (unrealised) from the year-end conversion of
foreign currency deposits 20,000
Interest income (1) 24,000
 Rental income (2) 120,000 818,000

Salaries and wages (3) (300,000)

Rent and rates (4) (350,000)
Contributions to retirement funds for staff (5) (36,000)
Donation (6) (5,000)
Interest expenses (7) (31,000)
Audit and tax filing fees (13,000)
Depreciation (8) (40,000)
Loss on the disposal of a fixed asset (8) (5,000)
Miscellaneous expenses (all deductible) (5,000) (785,000)
Net profit 33,000

Notes:

(1) Interest income comprises: $

Interest on RMB deposit with a bank in Hong Kong 6,000
Interest on HK$ deposit (HK$100,000) with a bank in Hong Kong;
used as security for a loan (as referred to in note (7) below) 1,000
Interest on HK$ loan made and remitted to a director in Canada 17,000
Total 24,000

(2) WL leased out part of its office for a short period and received total rentals of $120,000 for the year.

(3) Salaries and wages comprise: $

Salaries and bonuses to staff 200,000
Wages to a domestic helper for use by WL’s director 100,000
300,000

(4) The rent and rates were paid in respect of: $

WL’s office 200,000
The director’s residence 150,000
350,000

(5) Contributions to retirement funds comprise: $

Mandatory contributions to MPF schemes, 5% of basic salary 10,000
Voluntary contributions to MPF schemes, for a director 4,000
Special contributions to MPF schemes, one-off payment 22,000
36,000

(6) The donation was made in cash to the Community Chest of Hong Kong.
 (7) Interest expenses comprise: $
Interest on a loan from WL’s shareholder Ms Wong 17,000
Interest on a bank overdraft and credit line 12,000
Interest on a bank loan of HK$100,000 for operational use;
secured by the HK$ deposit (as referred to in note (1) above) 2,000
31,000

(8) The total accounting depreciation charge for the year of $40,000, was calculated based on the book
value of WL’s fixed assets as at 31 March 2022.

During the year, the following additions/disposals were made:

Date Particulars
1 April 2021 Replaced the office carpets at a cost of $70,000
4 March 2022 Sold a motor car for $31,000. The net book value of the car was $36,000

(9) The tax depreciation schedules in WL’s 2020/21 tax return showed tax written down values carried
forward to 2021/22 for its 20% and 30% plant and machinery pools of $20,000 and $30,000
respectively. 30% pool: WDV$ 30000<sales proceeds $31,000 balance charge

Required:

Prepare Winner Ltd’s profits tax computation for the year ended 31 March 2022, showing the net
assessable profit/adjusted loss and profits tax payable, if any. Clearly identify both the year of
assessment and the basis period and show all workings, including the depreciation allowance
calculation.

You may use the template provided as a guide.

[Check figures: Depreciation allowance for plant and machinery: $4,000; Balancing charge: $1,000;
Adjusted loss: $2,400]

[Hint: Items not required to be adjusted in the tax computation will still score marks if they do NOT appear
in the tax computation. You are NOT required to separately show or explain these items unless the
question specifically requires you to do so.]

$ $
Profit for the year per accounts
Add:
 20% 30% Total Allowance
WDV b/f 20,000 30,000
Disposal of motor car 31,000
20,000 (1000)
Annual Allowance 4,000 4,000
Balancing charge 1,000 (1,000)
WDV carried forward 16,000 0

Question 8 (Extracted from ACCA D08 F6 Q6)

Snow Ltd (Snow) is a Hong Kong-incorporated company carrying on business in Hong Kong, which makes
up its accounts to 31 March each year. Snow imports products from South-East Asia and sells them to
customers in both Hong Kong and Mainland China.

The following is Snow’s statement of profit or loss for the year ended 31 March 2022:

Notes $ $
Turnover 3,000,000
Cost of goods sold (800,000)
2,200,000
Profit from securities trading (1) 300,000
Dividends from securities (2) 10,000
Interest income (3) 12,000
Rental income (4) 120,000 442,000
2,642,000
Salaries and wages (800,000)
Rent and rates (5) (740,000)
Contributions to mandatory provident fund (MPF) scheme (6) (100,000)
Donations (7) (200,000)
Sundry write-offs (8) (580,000)
Depreciation (9) (100,000)
Interest expense (10) (19,000) (2,539,000)
Net profit 103,000

Notes:

(1) Profit/(loss) from the trading of securities using Snow’s surplus funds comprises: $
Loss from trading on the Hong Kong Stock Exchange (100,000)
Profit from trading on the China Stock Exchange 400,000
300,000

(2) Dividends received from securities purchased on the Hong Kong and China Stock Exchange are $4,000
and $6,000 respectively.

(3) The interest income was received on an overdue accounts receivable from a customer on sales made to
him in the year ended 31 March 2021.

(4) The rental income was received from a property located in China.

(5) Rent and rates all relate to Snow’s office in Hong Kong.

(6) The contribution to MPF schemes represents 20% of the basic salary of all staff.

(7) The donation of $200,000 was made to the Hong Kong Red Cross for the China earthquake.
 (8) Sundry write-offs comprise: $
Cost of a country club debenture written off due to the club’s closure 260,000
(the club membership was for business entertainment)
Loan to an employee written off on his resignation 300,000
Undisclosed commission charged by a China agent 20,000
580,000
(9) The total accounting depreciation charge for the year is $100,000 based on the book value of fixed assets
as at 31 March 2022.

During the year, Snow bought the following assets:

(i) A fax machine under hire purchase. $5,600 in cash was paid upon placing the order, and the
balance is payable by ten monthly instalments of $2,200 each, starting on 2 March 2022. The cash
price of the machine was $25,600. The machine was delivered to the Hong Kong office for
immediate use on 31 March 2022.

(ii) An electronic vehicle which satisfies the environmental control requirement under the Air
Pollution Control Ordinance for $400,000.

(10) The interest expense comprises: $

Finance charge on the purchase of the fax machine 200
Interest on the company’s bank overdraft and credit line 13,800
Interest on a personal loan from a shareholder, who is a China resident 5,000
19,000

(11) Snow’s tax depreciation schedule from its 2020/21 tax return shows tax written down values for its 20%
and 30% pools of $20,000 and $30,000 respectively.

Required:
Assuming that no offshore claim is made by Snow Ltd, prepare the company’s profits tax computation
for the year ended 31 March 2022, showing the net assessable profits/adjusted loss and profits tax
payable, if any. Clearly identify both the year of assessment and the basis period and include a full
depreciation allowance schedule.

You may use the template provided as a guide.

[Check figures: Depreciation allowance for plant and machinery: $21,768; Assessable Profit: $39,801]

[Hint: Items not required to be adjusted in the tax computation will still score marks if they do NOT appear
in the tax computation. You are NOT required to separately show or explain these items unless the
question specifically requires you to do so.]

Snow Ltd
Profits tax computation
for the year of assessment 2021/22
Basis period: 1 April 2021 to 31 March 2022
$ $
Profit for the year per account 103,000
Add: Donation 200,000
Depreciation 100,000
Interest expense on a personal loan from a China shareholder 5,000
Excess MPF contribution (max 15%) 25,000
Cost of a country club debenture written off 260,000
Loan to staff written off 300,000
Commission to undisclosed agent 10,000 910,000
1,013,000
Less: Profit from trading on the China Stock Exchange (400,000)
Dividends from securities (10,000)
 Rental income in China (120,000)
Electronic vehicle (400,000)
Depreciation allowance (21,768) (951,768)
61,232
Less: Donations (21,431)
Assessable profits 39,801
Profits tax payable at 8.25% 3,283

20% 30% HP 20% Total DA

WDV b/f 20,000 30,000
Additions
-Fax machine 25,600
IA (4,560) 4,560
20,000 30,000 21,040
AA (4,000) (9,000) (4,208) 17,208
Total DA 21,768
WDV c/f 16,000 21,000 16,832

*IA=5,600+[(25,600-5,600)/10]x1=7,600x60%=$4,560

Question 9 (Modified from ACCA D04 TX Q6)

Purple Ltd (PL) carries on business in Hong Kong providing financial planning advisory services. PL’s
statement of profit or loss for the year ended 31 March 2022 is as shown below:

Notes $ $
Income
Advisory service fee 3,300,000
Income from sub-letting part of office area (1) 120,000
Interest income (2) 21,000
Finance income (3) 865,000 4,306,000

Less: Expenses
Salaries and wages (4) (1,140,000)
Rent and rates (5) (810,000)
Donations (6) (70,000)
Interest expenses (7) (6,000)
Audit and tax filing fees (43,000)
Depreciation (8) (40,000)
Loss on the disposal of a fixed assets (8) (15,000)
Miscellaneous expenses (all deductible) (19,000) (2,143,000)
Net profit 2,163,000

Notes:

(1) PL sub-lets part of its office to its director for rental at $10,000 per month.

(2) Interest income comprises:

$
Interest on HK$ loan to a member of staff for financing his HK accommodation 18,000
Interest on HK$ deposits with a bank in Hong Kong 1,000
Interest on RMB deposits (HK$200,000) with a bank in Hong Kong; used as
security for a loan (as referred to in note (7) below) 2,000
Total 21,000
 (3) Finance income comprises:
$
Gain/(loss) from trading in Hong Kong listed shares 800,000
Gain/(loss) from trading in People’s Republic of China (PRC) listed shares (300,000)
Dividends from Hong Kong listed shares 13,000
Dividends from China listed shares 22.000
Gain/(loss) from trading in foreign currencies 330,000
Total 865,000

(4) Salaries and wages comprise:

$
Salaries and bonuses paid to staff 800,000
Mandatory provident fund (MPF) contribution for staff: 5% basic salary 45,000
MPF voluntary contributions for director 30,000
Wages paid to a driver for PL’s director 265,000
Total 1,140,000

Note: PL made a special contribution to MPF in the year ended 31 March 2020 in the amount of
$300,000.
(5) The rent and rates were paid in respect of:
$
PL’s office 360,000
The director’s residence 450,000
Total 810,000

(6) The donations included cash of $50,000 to the Community Chest of Hong Kong and $20,000 gift
coupons as a prize for the Financial Planners Club’s lucky draw at their annual conference.

(7) Interest expense comprise:

$
Interest on a bank overdraft and credit line 2,000
Interest on a bank loan of HK$200,000 for operational use; secured by the RMB
deposit (as referred to in note (2) above) 4,000
Total 6,000

(8) The total accounting deprecation charge for the year of $40,000, was calculated based on the book
value of PL’s fixed assets as at 31 March 2022. During the year, PL incurred $300,000 to acquire an
electric vehicle and $50,000 on carpet replacement. The old carpet was scrapped with zero value, given
rise to the loss on the disposal of a fixed asset of $15,000.

(9) The tax depreciation schedules in PL’s 2020/21 tax return showed the tax written down value carried
forward to 2021/22 for its 20% plant and machinery pool to be $20,000.

Required:

Prepare Purple Ltd’s profits tax computation for the year ended 31 March 2022, showing the
assessable profit/adjusted loss and profits tax payable, if any. Clearly identify both the year of
assessment and the basis period and show all your workings, including the depreciation allowance
calculation.

You may use the template provided as a guide.

[Check figures: Depreciation allowance for plant and machinery: $4,000; Assessable Profit: $2,088,000]

[Hint: Items not required to be adjusted in the tax computation will still score marks if they do NOT appear
in the tax computation. You are NOT required to separately show or explain these items unless the
question specifically requires you to do so.]
 Purple Ltd
Profits tax computation
for the year of assessment 2021/22
Basis period: 1 April 2021 to 31 March 2022
$ $
Profit for the year per account 2,163,000
Add: Donations 70,000
Depreciation 40,000
Loss from trading in PRC listed shares 300,000
Loss on disposal of fixed asset 15,000

Less: Interest on HK$ deposits with a bank in Hong Kong (1,000)

Dividend income from HK listed shares (13,000)
Dividend income from China listed shares (22,000)
Gain from trading foreign currencies (330,000)
Special contribution to MPF (300,000x20%) (60,000)
Environmental electric vehicle (300,000)
Carpet replacement (50,000)
Depreciation allowance (4,000) (450,000)
2,138,000
Less: Donations (50,000)
Assessable profits 2,088,000
Profits tax payable first $2,000,000 at 8.25% 165,000
remainder at 16.5% 14,520
179,520

20% Total DA
WDV b/f 20,000
AA (4,000) 4,000
WDV c/f 16,000

Question 10 (Modified from ACCA D13 F6 Q2)

Mr Chen, a resident of Mainland China, wholly owns a limited company carrying on business in Hong Kong,
CC Ltd (the Company). The Company purchases second-hand leather products in Hong Kong and sells
these products to individual customers in Mainland China. The Company’s statement of profit or loss for the
year ended 31 March 2022 is shown below:

Notes $ $
Sales income 8,900,000
Cost of goods sold (3,200,000)
5,700,000
Gain from trading in Hong Kong listed shares 400,000
Loss from trading in China listed shares (30,000)
Dividends from Hong Kong listed shares 33,400
Dividends from China listed shares 11,600
Gain from buying and selling foreign currencies 150,000
Exchange gain (unrealised) from the year-end conversion of
foreign currency deposits 22,000
Interest income (1) 14,000
Rental income (2) 240,000 841,000
6,541,000
Salaries and wages (3) 1,700,000
Rent and rates (4) 550,000
Director’s remuneration (5) 252,000
Travelling and entertainment expenses 12,000
Contributions to retirement funds (6) 96,800
Donations (7) 5,000
Interest expenses (8) 31,200
Legal and professional fees (9) 138,000
Depreciation (10) 100,000
Miscellaneous expenses (11) 60,800 (2,945,800)
Net profit 3,595,200

Notes:

(1) Interest income comprises the following: $

Interest on a RMB deposit with a bank in Hong Kong 2,000
Interest on a HK$ deposit (HK$100,000) with a bank in Hong Kong;
used as security for the loan referred to in note (8) below 1,500
Interest on other foreign currency deposits with a bank in Hong Kong 3,500
Interest from a China customer on his long overdue account 3,000
Interest on a HK$ loan made to Mr Chen’s wife in China 4,000
Total 14,000

(2) The Company owns a residential property in Hong Kong, which has been leased to its director for a
rental of $20,000 per month.

(3) Salaries and wages comprise: $

Salaries and bonuses to staff 1,500,000
Wages to a driver for use by the Company’s director 200,000
1,700,000
(4) The rent and rates were paid in respect of the following: $
Management fee and rates for the leased residential property
(see note (2) above) 35,000
Management fee, rent and rates for the Company’s office 455,000
Management fee, rent and rates for the store in China 60,000
550,000

(5) Director’s remuneration includes: $

Director’s fee 230,000
Hong Kong salaries tax paid on behalf of the Company’s director 22,000
252,000

(6) Contributions to retirement funds comprise: $

Mandatory contributions to MPF schemes, 5% of basic salary 74,000
Voluntary contributions to MPF schemes, 1% of basic salary 14,800
Special contributions to MPF schemes, one-off payment 8,000
96,800

(7) The donations were all made to the Community Chest of Hong Kong.

(8) Interest expenses comprise: $

Finance charge on the purchase of a photocopying machine 200
Interest on a loan from the Company’s shareholder Mr Chen 17,000
Interest on the bank overdraft and credit line 11,800
Interest on a bank loan of HK$100,000; secured by the HK$ deposit
referred to in note (1) above 2,200
31,200

(9) Legal and professional fees comprise: $

Audit and tax filing fee 50,000
Legal fee relating to disputes with customers 88,000
138,000

(10) The total accounting depreciation charge for the year of $100,000, was calculated based on the book
value of the Company’s fixed assets as at 31 March 2022. During the year, the following
additions/disposals were made:

Date Particulars
3 April 2021 Spent $40,000 to replace the office carpets
2 July 2021 Bought a microwave for $6,000 and a computer for $38,000.
1 October 2021 Bought a truck for $200,000.
2 March 2022 Paid $5,000 in cash for a photocopying machine acquired under hire purchase.
The balance is repayable by ten monthly instalments of $1,200 each, starting
on 2 March 2022. The cash price of the machine was $15,000. The machine
was delivered to the office for use on 31 March 2022.
4 March 2022 Bought a motor car for $240,000. The car qualifies as an environment-friendly
vehicle under the tax incentive scheme administered by the Environmental
Protection Department of Hong Kong.

As shown in the Company’s tax depreciation schedules, the tax written down values for its 20% and
30% plant and machinery pools carried forward to 2021/22 are $20,000 and $30,000 respectively. The
qualifying cost and written down value for commercial building allowance purposes are $3,000,000 and
$2,640,000 respectively.
 (11) Miscellaneous expenses comprise the following: $
Refurbishment to the Company’s office 28,800
Stock loss due to fire 20,000
Other office consumables and petty cash 12,000
60,800

(12) The Company’s profits tax return for 2020/21 shows a tax loss carried forward to 2021/22 of $640,180.
The Company has been reporting all of its sales income as sourced and taxable in Hong Kong.

Required:

Assuming that no offshore claim is made by CC Ltd, prepare CC Ltd’s profits tax computation for the
year ended 31 March 2022, showing the net assessable profits/adjusted loss and profits tax payable, if
any. Clearly identify both the year of assessment and the basis period and show all your workings,
including the hire purchase depreciation allowance calculation.

You may use the template provided as a guide.

[Check figures: Depreciation allowance for plant and machinery: $166,960; Commercial building
allowance: $120,000; Assessable profit: $3,090,180; Profits Tax payable: $239,250]

[Hint: Items not required to be adjusted in the tax computation will still score marks if they do NOT appear
in the tax computation. You are NOT required to separately show or explain these items unless the
question specifically requires you to do so.]

CC Ltd
Profits tax computation
for the year of assessment 2021/22
Basis period: 1 April 2021 to 31 March 2022
$ $
Profit for the year per account 3,595,200
Add: Donations 5,000
Depreciation 100,000
Loss from trading in China listed shares 30,000
Special contributions to MPF (8,000x80%) 6,400
Interest expense on a loan from shareholder Mr Chen 17,000
Refurbishment to the Company’s office (28,800x80%) 23,040 181,440
3,776,640
Less: Dividends from HK listed shares (33,400)
Dividends from China listed shares (11,600)
Exchange gain unrealised (22,000)
Interest income on a RMB deposit (2,000)
Interest income on other foreign currency deposits (3,500)
Interest income on a loan made to Mrs Chen (4,000)
Replacement of the office carpets (40,000)
Prescribed fixed asset-computer (38,000)
Environmental motor car (240,000)
Depreciation allowance (166,960)
Commercial building allowance (120,000) (681,460)
3,095,180
Less: Donations (5,000)
Assessable profit 3,090,180
Less: Losses brought forward (640,180)
Net Assessable Profits 2,450,000
Profit tax payable 165,000
74,250
239,250
 20% 30% HP under 30% Total DA
WDV b/f 20,000 30,000
Additions:
-Microwave 6,000
-Truck 200,000
-photocopying machine 15,000
26,000 230,000 15,000
IA 60% (36,000) (120,000) 123,600
IA-HP (3,600) 3,600
22,400 110,000 11,400
AA (4,480) (33,000) (2,280) 39,760
166,960
WDV c/f 17,920 77,000 9,120

* IA=5,000+[(15,000-5,000)/10]x1=6,000x60%=$3,600

QE WDV CBA
$ $ $
Bal b/f 3,000,000 2,640,000
AA (3,000,000x4%) (120,000) 120,000
WDV c/f 2,520,000