THE UNIVERSITY OF HONG KONG

HKU Business School

ACCT3107 – Hong Kong Taxation

Tutorial Questions
Unit 6 –Salaries Tax (4) and Personal Assessment
Question 15

Mr. Mak was employed by Beta Ltd as marketing manager since 1990. Beta Ltd paid Mr.
Mak a monthly salary of $50,000 during the year ended 31 March 2024. In addition, he was
provided with a flat which was leased by Beta Ltd at a monthly rent of $25,000. The
company only charged Mr. Mak $1,000 per month as a deduction from his salary. According
to Mr. Mak's employment contract, he was entitled to a commission of 1% on the sales
solicited by him during a year. The sales solicited by Mr. Mak during the year ended 31
March 2024 amounted to $4,000,000.

On 1 September 2023, Mr. Mak, pursuant to Beta Ltd's staff share option scheme, acquired
10,000 shares in Alpha Ltd at the price of $8 per share (market value on the same day being
$10 per share). The option was granted at no cost to Mr. Mak on 31 March 2022, the share
market value on that day being $8.5 per share. Alpha Ltd is the holding company of Beta Ltd
and is listed in the London Stock Exchange. The shares were all subsequently sold on 1
February 2024 at $12 per share.

Mr. Mak was married with two children. His son was 15 and his daughter was 17 on their
birthdays during the year of assessment 2023/24. His daughter was married on 20 February
2024 with a Mr. Wong. Mr. Mak had a grandmother living in London and he remitted
$2,000 each month to support her living. His grandmother was 60 on her last birthday.

Mr. Mak's wife had a part time job in a trading firm and received salary of $50,000 during the
year ended 31 March 2024.

During the year ended 31 March 2024, Mr. Mak has made a monthly contribution of $1,500
to Mandatory Provident Fund and a donation of $5,000 to Hong Kong Red Cross.

Required:
(a) Compute Mr. and Mrs. Mak's salaries tax liabilities under separate taxation for the
year of assessment 2023/24 (ignore provisional tax and ignore the salaries tax relief in
2023/24 of “HK$3,000 or 100% of the tax chargeable” in your calculations). Provide
brief explanations to your tax treatments of various items.

(b) Advise Mr. and Mrs. Mak whether they can minimize their overall salaries tax
liability by electing joint assessment and compute the amount of tax saving, if any
(ignore provisional tax and ignore the salaries tax relief in 2023/24 of “HK$3,000 or
100% of the tax chargeable” in your calculations).

Check Figures:
Net assessable income:
Mr. Mak: $712,000
Mrs. Mak: $50,000
By electing joint assessment, the couple saves tax in the sum of $13,940 (ignoring the salaries
tax relief in 2023/24)
TQ_U6_Salaries_4_master_20244 1
Question 16

Mr. Chan has been working for a Hong Kong company for many years. His monthly salary
was $30,000 as from 1 January 2021 and $38,000 as from 1 January 2022. On 1 January
2023, he was promoted to manager with a monthly salary of $50,000 and was provided with
a free quarter.

After promotion, he was provided with a company car in order to facilitate his duties. The
car was acquired in the name of the employer company at a cost of $400,000 and its second
hand market value as of January 2023 was $180,000. However, the company did not pay for
his car running expenses. Mr. Chan successfully reached an agreement with the Inland
Revenue that 50% of the car usage was for his employment purpose. On average, he spent
$2,000 per month in running and operating his car.

Mr. Chan was granted a holiday warrant of $20,000 for the year ended 31 March 2024. He
used the warrant to redeem air-ticket and hotel accommodation for holiday taken with his
wife and children. The warrant was purchased by the employer from Wing On Travel
Agency and has a re-sale value of 14,000.

On 2 March 2023, in consideration of Mr. Chan’s good performance in a project, a resolution

was passed at the board of director's meeting to pay him a bonus of $40,000 before the end of
March 2023. Due to a mistake made by the Personnel Department, the bonus was not
received by Mr. Chan until 20 April 2023.

With effect from 1 September 2023, Mr. Chan's salary was increased to $60,000 per month.
Meanwhile, he was re-assessed by the Inland Revenue on the car usage, and agreed that the
percentage usage for employment purpose was to be revised to 40% as from 1 September
2023.

During a business trip to the USA in December 2023, Mr. Chan was approached by a US
corporation and entered into a new employment contract. Upon his return from the trip, he
submitted his resignation effective from 1 April 2024. On 15 April 2024, he received a
gratuity of $180,000 from the company.

Mr. Chan was covered by the company’s medical insurance scheme with a local insurance
company. Any medical expenses incurred by him would be reimbursed by the insurance
company up to a certain limit. The company has paid an annual premium of $1,000 for each
employee. During the years ended 31 March 2022, 2023 and 2024, he received as
reimbursement in the total of $8,000, $10,000 and $12,000 respectively from the insurance
company.

During each of the years, Mr. Chan has made a mandatory contribution of $18,000 to the
MPF scheme.

Mrs. Chan was a housewife. Mr. and Mrs. Chan maintain two children: an adopted son,
John, born on 15 November 2003 (who is working but unmarried) and their own daughter,
Ann, born on 16 December 2020.

TQ_U6_Salaries_4_master_20244 2
Required:

Calculate the salaries tax liabilities of Mr. Chan for the years of assessment 2021/22,
2022/23 and 2023/24 without relating back of his gratuity (ignore tax relief for all the
relevant years of assessment and ignore provisional tax in your calculations).

Check Figures:
Net assessable income without relating back:
Y/A 2021/22: $384,000
Y/A 2022/23: $544,700
Y/A 2023/24: $927,340

TQ_U6_Salaries_4_master_20244 3
 THE UNIVERSITY OF HONG KONG
HKU Business School

ACCT3107 – Hong Kong Taxation

Tutorial Questions
Unit 7 – Profits Tax (1)

Question 17

Mr. and Mrs. Leung entered into a sale agreement in December 2023 in respect of a
residential property located in Wanchai, Hong Kong. The property was acquired by them
under joint names in October 2023. As a result of the 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
2023 to December 2023, they have entered into similar transactions of buying and selling
two other properties in Hong Kong. Total gain earned was around HK$2.5 million.

Required:

As a tax consultant, advise Mr. and Mrs. Leung whether or not the gain earned from the
property transactions would be subject to any tax in Hong Kong. You should also mention
what additional information is required for your analysis.

TQ_U7_Profits_1_2024 1
Question 18

Discuss if the following activities amount to trading:

(a) Mr. Lau is an employee of an Art Gallery. He bought two paintings at an attractive
price. One of them was sold at a profit two weeks after the purchase. Another one
was sold ten years afterwards.

(b) Mr. Poon bought a flat in Pokfulam Gardens and intended to move into the flat
with his fiancée, Miss Wong, when they get married by the end of the year.
However, she did not like the flat and so he sold the flat at a profit.

(c) Mr. Wong, a police constable, operates an illegal casino inside a police station
during his off duty hours, and makes a profit therefrom.

(d) Within a period of fifteen months, Johnny Wong established three restaurants and
then sold them. He made a profit of $300,000.

TQ_U7_Profits_1_2024 2
 THE UNIVERSITY OF HONG KONG
HKU Business School

ACCT3107 – Hong Kong Taxation

Tutorial Questions
Unit 8 – Profits Tax (2)

Question 19

Part I

State and explain whether the following items of income derived during the year of
assessment 2023/24 are chargeable to Hong Kong profits tax:

(a) Sums received by a foreign film production company for allowing a Hong
Kong television company to show in Hong Kong certain designated films it
produced offshore Hong Kong. The film production company has no
representative office or agent in Hong Kong.

(b) Sums representing royalty received by a foreign patent owning company under
a licensing agreement with its associate company in Hong Kong. The patent
was previously owned by the Hong Kong associate which subsequently sold
the patent right to the foreign patent owning company. The patent was then
licensed to the Hong Kong associate for its use in Hong Kong at a royalty.

(c) Profits earned by a manufacturing company from its sale of products in Hong
Kong. The products were partly manufactured in Hong Kong and partly in the
PRC. The manufacturing activities conducted in the PRC were greatly
involved by the manufacturing company in terms of expertise, machinery, raw
materials and quality control.

Part II

Discuss whether or not the compensation payment received by a company in respect

of the following is taxable:

(a) Insurance compensation received in respect of the cost of trading stock

damaged in fire.

(b) A supplier cancelled his supply agreement with Company A. As a result,

Company A received a compensation from this supplier in pursuance to the
agreement.

TQ_U8_Profits_2_master_2024_2024 1
Part III

(a) HK Textiles Co. Ltd. has decided to cease business in the near future. The
board of directors has announced such an intention. As a result of which, each
of the staff is entitled to receive a severance payment which is to be calculated
on a basis suggested in the Employment Ordinance. Discuss the deductibility
of such severance payment in the final tax return of HK Textiles Co. Ltd.

(b) CK Property Development Co. Ltd had incurred interest expenses in financing
the development of a housing estate for sale. Before the completion of the
construction, the relevant interest expenses were capitalized in the account
“property under development’. Discuss whether such expenses are deductible
for profits tax purpose during the period of construction.

TQ_U8_Profits_2_master_2024_2024 2
 THE UNIVERSITY OF HONG KONG
HKU Business School

ACCT3107 – Hong Kong Taxation

Tutorial Questions
Unit 9 – Profits Tax (3)

Question 20

State and explain whether the following items of income derived during the year of
assessment 2023/24 are chargeable to Hong Kong profits tax:

(a) Interest on money placed on a 24-hour call deposit by the sole proprietor of a
bakery business (carried on in Hong Kong) with the Tsimshatsui Branch of Bank
of China (Hong Kong). The money was intended for settling the flour bill upon
receipt of the demand note from the supplier. The deposit was not used to pledge
for any bank borrowing. Instead the sole proprietor had made personal guarantee
to the bank for obtaining fund to finance the bakery business.

(b) Interest on money placed on call deposit by Tasty Bakery Company Limited with
the Shenzhen branch of Bank of China. Tasty Bakery Company Limited carries on
business in Hong Kong and the deposit money represents its daily sale money
earned from the Hong Kong shops.

(c) Interest on money placed on fixed deposit by a Mr. Chan with a local branch of
Bank of China (Hong Kong). The deposit money represents Mr. Chan’s daily
personal savings.

(d) Interest from fixed deposits placed with the Causeway Bay branch of HSBC Bank
by an oversea company’s Hong Kong branch. The branch was responsible for
promoting the company’s toy products in the Hong Kong market. The deposits
have been used to secure for the bank borrowings and interest expenses on such
borrowings are deductible under profits tax.

TQ_U9_Profits_3_master_2024_2024 1
Question 21

Printing Co. Ltd. (“PC”) commenced a printing business in Hong Kong from July 2020.
All of its profits derived from the printing business have been returned as assessable
profits. Its ultimate holding company, Holding Company (“HC”) was incorporated in the
USA. PC has a wholly owned subsidiary, Sub Co. (“SC”), which was incorporated in
Taiwan and is carrying on a business of paper manufacturing there. SC was one of PC’s
paper suppliers. Both HC and SC have no business activities in Hong Kong. Mr. CFO is
the Chief Financial Officer of PC. During the year ended on 30 June 2023, PC incurred
the following interest expenses:

(a) $100,000 paid to a local bank in respect of a loan borrowed for the purpose of
acquiring new factory units in Kwun Tong. The loan was secured by a mortgage
over these properties. The factory units have been used for PC’s printing business.

(b) $200,000 paid to a local bank. The bank loan was used to buy an office in Central
and was secured by a fixed deposit with another local bank registered in the name
of HC.

(c) $90,000 paid on debentures issued by PC. The debentures were listed on the
Luxembourg Stock Exchange.

(d) $50,000 paid to a bank in the USA. The loan was used to finance purchases of
materials from a supplier in the USA. Repayment of the loan was guaranteed
personally by Mr. CFO.

(e) $20,000 paid to SC in respect of the outstanding trade debts due to SC.

Required:

Discuss the deductibility of each of the above interest expenses incurred by PC for Hong
Kong profits tax purposes.

TQ_U9_Profits_3_master_2024_2024 2
 THE UNIVERSITY OF HONG KONG
HKU Business School

ACCT3107 – Hong Kong Taxation

Tutorial Questions
Unit 10 – Profits Tax (4)

Question 22

Mr. Lee has been carrying on a sole proprietorship business in Hong Kong as a distributor
of micro-computers for many years. The main activities are performed in Hong Kong.
The operating results of Mr. Lee’s sole proprietorship for the year ended 31 December
2023 were as follows:
$ $
Gross Profit 3,600,000
Interest received (Note 1) 80,000
Commission received (Note 2) 55,000
Profit on disposal of fixed asset 15,000
Sundry income (Note 3) 25,000
3,775,000
Less: Expenses
Salaries and bonuses to staff 550,000
Rent and rates 350,000
Telephone, telex and postage 21,000
Entertainment and travelling (Note 4) 100,000
Legal and professional fee (Note 5) 65,000
Interest expenses (Note 6) 105,000
Repairs and maintenance (Note 7) 162,000
Insurance (Note 8) (23,000)
Salaries to proprietor 162,000
Provision for bad debts (Note 9) 30,000
Depreciation for fixed assets 85,000
Donations (Note 10) 6,000
Miscellaneous expenses (Note 11) 8,000
1,621,000
Net profit 2,154,000

Additional information:

(1) Interest received from

(i) US$ deposits placed with a bank in Singapore $40,000
(ii) Euro$ fixed deposits with a local bank 16,000
(iii) Debentures registered in US 8,000
(iv) HK$ deposits placed with a local bank (deposits were
used to secure for bank borrowings and interest expenses
on the borrowings are deductible – see note 6) 16,000
$80,000

TQ_U10_Profits_4_master_20244_2024 1
(2) Commission received from a company in Malaysia for the sale of certain products.
Sale contracts were negotiated and concluded by Mr. Lee’s staff in Malaysia.

(3) Sundry Income

Dividend from shares investment $10,000
Sale of scrap inventory to staff 15,000
25,000

(4) Entertainment and travelling

Air tickets and hotel charges for sales manager’s trip to $60,000
attend an exhibition in US
Entertainment of local customers 30,000
Travelling expenses in respect of commission income
mentioned in note (2) above 10,000
100,000

(5) Legal and professional fee

Solicitor fees and stamp duty for the purchase $45,000
of a new office
Solicitor fees for litigation to recover debts
from – customers 12,000
– staff (loan to staff) 3,000
Registration of trade mark in HK 5,000
65,000

(6) Interest expenses

Interest on bank overdrafts (secured by a
personal guarantee given by Mr. Lee) $50,000
Interest paid to Mr. Lee for capital injection 25,000
Interest on bank borrowings secured by the
bank deposits as mentioned in (1)(iv) above 30,000
105,000

(7) Repairs and maintenance

Decoration of new office $150,000
Repairs and maintenance of office equipment 12,000
162,000

(8) Insurance account included a credit entry for a compensation of $28,000 received
from the insurance company for the loss of inventory in a fire. The cost of the
inventory loss of $32,000 was written off in the trading account. Mr. Lee paid
an annual insurance premium amounting to $5,000.

TQ_U10_Profits_4_master_20244_2024 2
(9) Provision for bad debts
General Provision b/f $(30,000)
Bad debts recovered (previously allowed for tax
deduction) (7,000)
Specific provision for bad debts - trade debts 12,000
- staff loans 5,000
Bad debts written off - loans to customers (the
loans were not trade debts) 10,000
General Provision c/f 40,000
Charged to profit and loss accounts 30,000

(10) Donations
Paid to the Tung Wah Group of Hospitals, HK $1,000
Paid to a hospital in Shenzhen, PRC 5,000
6,000

(11) Miscellaneous expenses

Including office expenses of $6,000 and government traffic fines of $2,000.

(12) Depreciation allowance for fixed assets (including plant and machinery and
buildings) for the year of assessment 2023/24 as agreed with the IRD is $92,000.

Required:

(a) Compute the profits tax liability of Mr. Lee in respect of his sole proprietorship
business for the year of assessment 2023/24. Assume Mr. Lee does not elect
personal assessment for the year.

(b) Explain the tax treatments you have accorded to the issues arising in the above
notes.

Check figure for Question 22:

Assessable profit: $2,430,000

TQ_U10_Profits_4_master_20244_2024 3
Question 23

Part I
(a) Referring to Question 19 [Part I (a)], discuss whether or not the sum paid by the
Hong Kong television company is deductible for HK profits tax purposes.

(b) Referring to Question 19 [Part I (c)], assuming that the IRD has agreed that the
manufacturing company is subject to HK profits tax in respect of 50% of its profits
derived from the sale of its products; discuss the deductibility of the cost incurred
in the PRC activities in terms of :
(i) cost of machinery;
(ii) cost of staff who regularly visited the PRC factory; and
(iii) cost of raw materials used in the PRC manufacturing.

Question 19 (Part I)
(a) Sums received by a foreign film production company for allowing a Hong
Kong television company to show in Hong Kong certain designated films it
produced offshore Hong Kong. The film production company has no
representative office or agent in Hong Kong.

(c) Profits earned by a manufacturing company from its sale of products in Hong
Kong. The products were partly manufactured in Hong Kong and partly in
the PRC. The manufacturing activities conducted in the PRC were greatly
involved by the manufacturing company in terms of expertise, machinery,
raw materials and quality control.

Part II
Evaluate the deductibility of expenditure/loss incurred in each of the following cases:
(a) Company A placed the sale proceeds it received from a local customer into a three
month time deposit account with a bank in Tokyo. The account was in Japanese
Yen. However, owing to fluctuation in the exchange rate, it suffered an exchange
loss when converting the deposit back to Hong Kong dollars.

(b) Company B is an international medicine manufacturer. One of its chief researchers

retired and the company paid him a substantial sum of money for entering into an
agreement whereby he agreed not to become involved in any activities which
might compete directly or indirectly with the company’s business.

(c) In order to maintain a constant source of supply of raw materials, Company C

made a large loan to one of its main suppliers which had a serious financial
problem. However, the supplier later went into liquidation and the company could
not recover this loan which was later written off as bad in its accounts.

Additional Question
Self Test Questions on Profits Tax Computation

TQ_U10_Profits_4_master_20244_2024 4