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SECTION B – ESSAY/SHORT QUESTIONS (Total: 50 marks)
Answer ALL of the following questions. Marks will be awarded for logical argumentation and appropriate presentation of the answers.
Question 2 (20 marks – approximately 36 minutes)
Mr. Wang is a sales manager with a Hong Kong company, Hana Trading Limited (“Hana”). He has provided you with the following information relating to the year ended 31 March 2006:
His annual salary was $420,000 (HK$ unless otherwise specified). Hana provided a flat to Mr. Wang as his living accommodation for the whole year and deducted 7.5% of his monthly salary as rent payment. Mr. Wang is single and lived in the flat with his 56-year old mother for the whole year. He paid $4,000 per month towards his mother’s maintenance.
According to the terms of the employment, Hana has to bear Mr. Wang’s Salaries Tax. During the year, Hana made a payment of $49,000 for settlement of his Salaries Tax liabilities.
On 13 December 2005, Hana granted Mr. Wang a right to subscribe to 4,000 shares of Hana Inc., Hana’s overseas parent company, at $15 each. On 2 February 2006, he exercised the option and paid $1,000 for the option to acquire 4,000 shares of Hana Inc. On 9 February 2006, he sold the shares making a profit of $8,500. He incurred Stamp Duty and a brokerage fee of $2,500 in the transaction. The market price of the shares on 13 December 2005, 2 February 2006 and 9 February 2006 was respectively $16, $20 and $18.
Hana provided a company car for Mr. Wang’s business and personal use: half of the time the car was used for business purposes necessary for his employment and the other half for private use.
During the year, Mr. Wang made a payment of $500 to subscribe to a monthly journal. This journal provides him with up-to-date market information, which is of use and benefit in the performance of his duties. He also undertook a university degree course which will allow him to qualify for a more senior position in Hana. Mr. Wang paid $38,000 in tuition and examination fees.
Required:
With the information provided, compute, with necessary explanations, Mr. Wang’s Salaries Tax liability for the year of assessment 2005/2006.(20 marks)
Question 3 (15 marks – approximately 27 minutes)
Gary is a US resident. After visiting Hong Kong several times, he decided to acquire a luxury property in Hong Kong for rental income purposes.
He has the following in mind:
(1) He plans to finance 50% of the cost of acquisition with his own savings, while the remaining 50% of the acquisition cost will be financed by a loan obtained from a bank in New York. The loan will be secured by personal guarantee given by Gary.
(2) He plans to appoint a service company in Hong Kong as his agent to handle matters related to his letting activities.
(3) The property is to be let in a furnished state. He believes that furnishing the property is more likely to attract long-term tenants. He estimates that he has to spend around $100,000 on refurbishing the property and providing the necessary furniture.
Gary is now debating whether to hold the property in his own name or in the name of a limited company incorporated in Hong Kong and wholly owned by him. However, he is unsure of the tax implications of each of the investment alternatives.
Required:
(a) Advise Gary how rental income derived from the property is to be taxed under each of the alternatives.(3 marks)
(b) Based on the information above, advise Gary which alternative is more tax advantageous to him. Your answer should include an analysis of the deductibility of loan interest, service fees paid to the agent and expenses incurred in connection with refurbishing the property as mentioned in (1) to (3) above.(12 marks)
Question 4 (15 marks – approximately 27 minutes)
A UK company, Global Trading Limited (“Global”) has expanded its business to Far East Asia and has set up a wholly owned subsidiary, Far East Trading Limited (“Far East”) in Hong Kong for trading in Asia. All the trading profits will be offered for Hong Kong Profits Tax. Initially, in order to finance Far East’s operations, Global provided an interest-free loan of US$1 million to Far East.
Far East closed its first year account on 31 December 2005. It includes, among other things, the following information:
(1) An amount of HK$500,000 was spent on purchasing a new computer system. The acquisition cost was wholly financed by the loan advanced from Global.
(2) Far East has deposited its surplus funds with a bank to earn interest. During the year,interest income of GBP 620 was derived from a foreign currency deposit with a bank in Hong Kong and US$693 was derived from another foreign currency deposit with a Singapore branch of the bank.
(3) Apart from selling goods to Hong Kong customers, Far East sold goods to customers located in Singapore, Taiwan and other Asian countries (“overseas customers”). Normally, Far East would allow a credit period of 30 days for customers to settle their accounts. On negotiation, Far East would agree to extend the credit period to certain creditable customers provided that interest was charged. During the year, interest accrued from the Hong Kong customers and overseas customers respectively was US$25,000 and US$18,000.
(4) To comply with Hong Kong accounting standards, the trade receivables denominated in foreign currencies had been converted to the Hong Kong dollar using the exchange rate as at 31 December 2005. The exchange gain of HK$354,000 was credited to the profit and loss account for the year ended 31 December 2005 and classified under the heading of “Unrealised exchange gain” as the customers had not yet settled their accounts.
Required:
(a) Is the acquisition cost of the computer system deductible under Profits Tax?(1 mark)
(b) Discuss the general principles regarding the taxability of interest income under Profits Tax for persons other than a financial institution.(5 marks)
(c) Advise Far East whether the following interest income is taxable under Profits Tax:
(i) GBP 620 derived from the deposit with the bank in Hong Kong; and
(ii) US$693 derived from the deposit with the Singapore branch of the bank.(2 marks)
(d) Compare the differences, if any, regarding the chargeability of the interest income derived from the Hong Kong customers and overseas customers as stated in (3) above.(3 marks)
(e) Explain the proper Profits Tax treatment including the timing of assessment regarding the “Unrealised exchange gain” of HK$354,000.(4 marks)
高顿网校小编为HKICPA考生介绍香港景点：跑马地赛马场
景点地址：香港湾仔及铜锣湾的之间
景点主题：主题体验骑马
建于1846年。香港的*9次正式赛马就是在此地举行。全草地的赛马场，单一跑道长1417米，马场内设置有巨型电脑屏幕和各式先进设施。由2005年赛马季开始，马场特别在公众席广场设立啤酒园，紧贴草地跑道，马匹冲刺的场面近在咫尺，且免费入园，是观赏赛事的a1位置。
