e_dipn13a_Interest Expense_s16(2ABC)

Despite such right of the bankers the balances in

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Unformatted text preview: hat customer in the case of default in repayment of the loan. Despite such right of the bankers, the balances in deposit accounts of a customer who also borrows money from the bank would not be taken as a security of the loan if the customer’s right to withdraw the deposit is not restricted at any time before he defaults in repayment of the loan. Such deposit, which the depositor has unrestricted right to operate before the bank exercises the right of set-off, does not appear to be, by nature, a security for the loan. Restriction under section 16(2A) [The secured-loan test] 23. Restriction of deduction under section 16(2A) applies to interest deduction claims on loans satisfying the conditions under section 16(2)(c), (d) or (e). The provision is triggered when the following situation exists at any time during the basis period of the borrower in respect of which interest deduction is claimed – (i) the payment of any interest or the repayment of any principal of the loan in question is secured or guaranteed by a deposit (or a loan); the said deposit (or loan) is made by the borrower or an associate of his with (or to) a specified person; (ii) 10 (iii) the specified person is either – a. the lender or an associate of the lender; b. a financial institution or an associate of a financial institution; or c. an overseas financial institution or an associate of an overseas financial institution; and (iv) the deposit or loan generates interest income that is not chargeable to tax in Hong Kong. The term “associate” has the same meaning before and after the 2004 Amendment Ordinance, as defined in section 16(3). 24. This section, when applicable, will reduce the interest deduction by an amount calculated on a basis as is most reasonable and appropriate in the circumstances of the case, having regard to the amount of interest income arising from deposit or loan in question. The following examples illustrate the Department’s practice. Example 5 Taxpayer F borrowed $1M from Bank G at 5% interest rate p.a. The loan...
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