06_Net Assessable Income - s - Unit 6 Computation of Net...

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Unformatted text preview: Unit 6 Computation of Net Assessable Income (NAI) 1 LEARNING OBJECTIVES After this lecture, you should be able to: distinguish between allowable and disallowable expenses describe the loss treatment compute the net assessable income (NAI) Compute the net assessable income after Concessionary deductions 2 Deductions from Assessable Income (AI) In calculating the net assessable income (NAI), a TP is allowed to deduct from AI: Outgoings and expenses ( ) s:12(1)(a) Depreciation allowance ( ) of plant & machinery: s.12(1)(d) Losses: s.12(1)(c), s.12(1)(d) Self-education expenses ( ) : s.12(1)(e) 3 Addition to NAI charge ( ) (BC) of plant & machinery: s.12(5) Balancing charge will be discussed in details in Taxation 2 Balancing 4 E.g. Balancing charge Motor car Cost Initial allowance 60% Annual allowance 30% Written down value Sale proceeds Balancing charge 100,000 -60,000 -12,000 28,000 -30,000 2,000 5 FORMAT FOR COMPUTATION OF NET ASSESSABLE INCOME Income from principal employment {s9, s11B} (eg: salary, bonus, commission, leave pay, gratuity not paid upon termination) Less: Outgoing and expenses {s12(1)(a)} (wholly, exclusively, necessarily incurred in the production of assessable income) Less: D epreciation allowance {s12(1)(b)} Add: Rental value of residence {s9(1)(b)(c )} Less: R ent suffered Excess rental value over rent paid Add: Share Option benefit Lump sum received on termination of employment Income from other employment Less: Self-education expenses {s12(1)(e)} Less: Loss b/f and set-off {s12(1)(c )} NET ASSESSABLE INCOME E (F) G H I J K L (M) N (O) P A (B) (C) D Deduction Rule s12(1) must satisfy each of the followings: (a) not domestic, private or capital expense (b) incurred (c ) wholly and exclusively (d) necessarily in the production of assessable income 7 Domestic, Private or Capital Expense personal expense capital expense usually is non-recurring 8 Outgoings & expenses: Not domestic, private or capital ( ) Wholly, exclusively and necessarily incurred in the production of AI: s.12(1) (a) 9 “Incurred” ( ) Actual payment or An established liability or a definite commitment of ascertainable amount Contrast: A mere contingent liability or an anticipated future outgoing? - not constitute ‘incurred”. 10 “Wholly ( ) and exclusively ( Entire )” Amount For the Sole Purpose of producing assessable income For Dual Purpose Apportionment E.g. in practice motor vehicle expenses can be split into employment related & private use portion. 11 Necessarily ( ) fundamental and essential to the conduct of employment not sufficient to satisfy if just “facilitate” the production of income e.g. subscription fee paid to join social club to foster business contact is not deductible 12 In the Production of Assessable Income emphasize on the need for expenditure direct connection between the expenditure and the production of income 13 Test of necessity: “Whether the expenditure is so vital that it would not be possible to produce the income without incurring that expenditure” Expenses are required to be incurred by employer 14 Test of necessity: Can duties be performed without incurring the expenses? Is employee required under the contract to bear such expenses? Necessity must arise from employment and not from personal circumstances. 15 Brown V Bullock (40 TC 1) Bank manager was required by employer to join a club for the purpose of fostering business contracts Not deductible (The test is whether the TP’s duties could not be performed without incurring the expense) 16 D 19/78 (p. 73) A stockbroker’s runner engaged assistants to deal with and attend to clients Deductible 17 In the Production of Assessable Income “In” is not the same as “to enable” CIR v ROBERT BURNS (HKTC 1181) Jockey claimed legal expenses of a successful appeal against disqualification Not deductible as not incurred in the production of assessable income 18 KNIGHT v PARRY (48 TC 580) A solicitor incurred legal expenses in defending that he had not committed a breach of duty of good faith Not deductible 19 BR 9/78 Payment in lieu of notice to terminate contract and take up new employment. Payment to enable him to take up new employment Not deductible 20 CIR v Sin Chun Wah (HKTC) Payment in lieu of notice was held that payment was not wholly, exclusively and necessarily incurred in the production of AI. 21 Example of non-deductible expenses Legal expenses to recover remuneration Legal cost against dismissal Expenses to acquire employment Social entertainment 22 Reimbursement of expenses (expense allowances) Reasonable amount to cover cost on subsistence, travelling and accommodation when working away is not assessable 23 Reimbursement of non-deductible expenses is assessable D11/88 –a civil servant required by employer to move to new residence Removal expense is not allowed Removal allowance is taxable 24 Professional subscriptions Not strictly deductible because not incurred in producing income In practice, allow subscriptions to ONE professional body if: Holding of professional qualification is a prerequisite of employment & Retention of membership & keeping abreast of current developments are of regular use & benefit in the performance of duties 25 Claim for deductions Onus of proof on the taxpayer Must be supported by documentary proof Flat rate allowance is pre-determined for specified employment including Police Force, Fire Services, Immigration Department, seafarers / airline pilots/crews 26 Summary - Examples of Allowable Expenses Traveling expense Home to office (disallowed) one working place to another (allowed) only allow subscription to one professional body holding the qualification is a prerequisite of employment, e.g. HKICPA, CFA, HK Law Society, HK Engineering Society Subscription to professional associations 27 Summary - Examples of Disallowable Expenses Entertainment disallowed if mere social entertainment disallowed as the purpose of payment is to avoid possible action for damages for employer generally disallowed only allow special clothes required by employment (e.g. lawyer) 28 Salary paid to employer in lieu of notice Payments to assistants Clothing expenses Deduction of Depreciation Allowance for Capital Expenditure On plant & machinery only, not on building Essential to the production of AI, i.e. essential to performance of duties Rules for computation – Part VI of the IRO 29 Depreciation allowance Apportionment use Balancing Charge on disposal is added back to AI as assessable income (balancing charge = disposal proceeds – tax written down value) but limited to original cost. of DA between business & private 30 Example: Depreciation Allowances for Capital Expenditure e.g. motor car used for both private and employment purposes IRD will apportion the motor car expense, e.g. 1. 2. 3. total motor car running expenses: $12,000 depreciation allowance for the car: $9,000 assessor agreed 1/3 for employment purpose Answer: Deductible amount: $ $ for motor car running expenses; and depreciation allowance 31 Deduction from AI – LOSSES Loss arises when total outgoings {s12(1)(a)} & depreciation allowance {s12(1)(b)} exceed total assessable income The following are NOT included in calculating losses to be c/f: Self-education expenses Concessionary deductions Personal allowances (see Unit 7) 32 Treatment of losses Individual C/F, deducted from AI in subsequent years in strict chronological order until completely set off 33 Current year Losses: Husband & Wife (w.e.f. 1989/90) Only when joint assessment is elected in any Y/A Set off against: -AI of the spouse who incurred loss, then -spouse’s AI before c/f the 34 Losses b/f: Husband & Wife Balance b/f to be deducted from (a) AI of the spouse who incurred the loss first, then (b) from AI of other spouse if joint assessment is elected Same set off priority continues until loss is completely set off. 35 Deduction from AI – Selfeducation expenses w.e.f. 1996/97 Fees incurred on prescribed courses of education attended at approved institution deductible Maximum deduction per year $12,000 (1996/97), $20,000 (1997/98), $30,000 (1998/99 to 2000/01), $40,000 (01/02 to 05/06), $60,000 (07/08) 36 Self Education Expenses paid by the taxpayer on fees Including tuition and examination fees Excluding: (a) expenses for which deduction is allowable under any part of IRO or (b) expense reimbursed by employer or other person, unless reimbursement is taxable. 37 “Prescribed courses of education” means course undertaken to gain or maintain qualification for use in employment that is a course of education provided by university, college, or other approved institutions a training or development course provided by a trade, professional or business association for its members. 38 Net Chargeable Income s12B = Net Assessable Income - Concessionary Deductions - Personal Allowances 39 Concessionary Deductions starting from 1998/99 four types: (1) approved charitable donation (2) elderly residential care expense (3) home loan interest (4) contributions to recognized retirement scheme 40 FORMAT FOR COMPUTATION OF NET ASSESSABLE INCOME Income from principal employment {s9, s11B} (eg: salary, bonus, commission, leave pay, gratuity not paid upon termination) Less: Outgoing and expenses {s12(1)(a)} (wholly, exclusively, necessarily incurred in the production of assessable income) Less: Depreciation allowance {s12(1)(b)} Add: Rental value of residence {s9(1)(b)(c )} Less: Rent suffered Excess rental value over rent paid Add: Share Option benefit Lump sum received on termination of employment Income from other employment Less: Self-education expenses {s12(1)(e)} Less: Loss b/f and set-off {s12(1)(c )} NET ASSESSABLE INCOME E (F) G H I J K L (M) N (O) P A (B) (C) D FORMAT FOR COMPUTATION OF NET CHARGEABLE INCOME NET ASSESSABLE INCOME Less: Concessionary Deductions : Approved charitable donation (limit to 25% of L, see part 1) Elderly residential care expense Home loan interest Contribution to recognized retirement scheme (start from 2000/01) Less: Personal allowances NET CHARGEABLE INCOME Tax payable: Lesser of : U at standard rate (16% for year 05/06) W at progressive rate P (Q) (R) (S) (T) U (V) W OR Foreign­sourced employment If visit exceeds 60 days, we will time apportion the income S8(1A); But for outgoings/expenses, depreciation allowances, self education expenses, concessionary deductions and personal allowances, we will grant full amount for the taxable year under concern (no time apportionment). 43 Concessionary deductions under Part IV A A claim for concessionary deductions should be made in the specified form [Tax Return – Individuals (Form BIR 60)] Giving particulars and documentary proof as CIR may require – s26B Concessionary deductions are not included in calculating losses for c/f i.e. excess of deductions over income will lapse. 44 Approved Charitable Donation (ACD) s26 Aggregate of ACD made during the Y/A by person & spouse provided that: It is not < $100 It has not been allowed under profits tax 45 Restrictions on deduction of ACD Restricted to 10% (before 02/03) (25% up to YA 07/08) (35% 08/09 onwards) of his/her AI (or aggregate AI if joint assessment is elected) as reduced by expenses & DA under s12(1)(a) & (b) There is no duplication of claims (i.e.not allowable to more than 1 person). In case of dispute amongst more than 1 eligible person, ACD claim will not be allowed until settlement is reached or CIR decides on reasonable basis. 46 Meaning of ACD: a donation of money to any approved charitable institution or trust of a public character which is exempt from tax under s88 or to the government for charitable purposes. 47 ACD Pure donation: A gift made voluntarily & without valuable consideration i.e. no advantage of material character is received by donor in return Sanford Yung Tao Yung v. CIR (HKTC 959 & 1081) Inflated price paid to charity for tickets to a social event does not constitute a donation 48 Examples: Donates $90 to Community Chest – Each spouse donated $90 to community chest – Purchase charity raffle tickets costing $500 – Donate bibles costing $8,000 – 49 Elderly Residential Care Expenses (ERCE) s26D w.e.f. 1998/99 elderly residential care expenses paid by the person or his/her spouse to a residential care home in respect of the person’s or his/her spouse’s parent or grandparent is deductible from a person’s AI 50 Conditions for allowing ERCE: Parent/grandparent is aged 60 or above, or under 60 but eligible to claim the Government Disability allowance; and Residential care home is licensed or exempted from licensing under the Residential Care Homes (Elderly Persons) Ordinance, or is a nursing home ( ) registered under the Hospital, Nursing Homes and Maternity Homes Registration Ordinance RCE paid 51 Meaning & Deduction of “residential Care Expenses” any expenses payable in respect of the residential care received at a residential care home ( ) and paid to that residential care home or any other person acting on its behalf A maximum of $60,000 for each parent/grandparent for a Y/A (1998/99 - 2003/04) Deduction allowed to one person ONLY (NO apportionment) See Example 3, p. 79 52 Restriction ERCE Where a deduction is allowed, Dependent / additional dependent parent allowance or dependent / additional dependent grandparent allowance shall not be granted in respect of the same parent / grandparent. However, Disabled Dependent Allowance can still be claimed if the same parent/grandparent is eligible for government disability allowance. 53 Home Loan Interest (HLI) s.26E ( ) w.e.f. 1998/99 HLI paid is deductible from a person’s AI 54 Conditions for deducting HLI: The person is the owner of dwelling ( ) (sole owner, joint tenant or tenant in common). The dwelling is situated in HK and is for use exclusively or partly for residential purposes. The dwelling is wholly or partly used by the person as his place of residence (or as principal place of residence if > one place of residence at the same time in the Y/A). 55 Conditions for deducting HLI: HLI is paid by the person on a loan wholly or partly for acquisition of the dwelling; Loan is secured by a mortgage or charge over the dwelling or over any other property in HK. 56 Conditions for deducting HLI: The lender is the government, a financial institution, registered credit union, a licensed money lender, the HK Housing Society, the person’s employer, or any organization or association approved by the CIR ( ) 57 Amount of deduction of HLI: If sole owner: home loan interest actually paid by him in the Y/A; subject to a maximum of $100,000 (98/99 00/01); $150,000 (01/02 -02/03); $100,000 (03/04 04/05) If joint tenant / tenant in common: interest paid in proportion to the no. of joint tenants/share of ownership; subject to a maximum of $100,000 or $150,000 reduced proportionally for each tenant/owner [i.e. overall maximum for the same dwelling is $100,000 or $150,000] 58 Reduction of deduction of HLI If home loan is applied, or the dwelling is used, partly for other purposes: home loan interest to be reduced proportionally If dwelling is not used as a place of residence for whole year: interest to be reduced proportionally If car park is valued together with the dwelling as a single tenement: interest on car park is deductible 59 Amount of HLI If a person owns more than one place of residence: deduction is only allowed for the principal place of residence If a person changes dwelling in a Y/A resulting in more than one home loan for more than one dwelling, and these dwellings are used exclusively or partly as his/her place of residence for some time during that Y/A, deduction is given for aggregate of interest paid for these home loans 60 HLI: Husband and wife If husband and wife each owns a dwelling separately: only one of them can claim the deduction of the dwelling which they regard as their principal place of residence 61 HLI: Home loan interest deduction is only granted to each person for any 7 Y/A, whether continuous or not Where the deduction is granted to a person, his deduction position is shown in a notification from CIR 62 HLI: Husband & wife In the case of married persons: If under separate taxation: husband and wife claim the deduction separately in their respective tax returns, against respective AI If under joint assessment: home loan interest to be deducted from aggregate AI – beneficial when either husband or wife has income less than the total of allowable home loan interest and basic allowance 63 HLI: Husband & wife - nomination: s.26F If only one spouse (not being the owner) has income and the owner has no income at all (salary nor profits nor property income) : the owner may nominate the income-earning spouse to claim the deduction – the owner is regarded as having been allowed the deduction and will receive written notification from CIR. 64 How Is Home Loan Interest Granted? amount of deduction depends on: the share of ownership the extent it is used as residence the extent of the loan used for acquisition of the dwelling the duration it is used as residence 65 HLI: Revocation of claim Claim can be revoked in writing within 6 months after the date of the CIR’s notification or notice of assessment: s.26F(4) 66 Contributions to Recognized Retirement Schemes (CRRS) s26G: from 1 Dec 00 Where a deduction has not been allowed under Profits Tax “Recognized Retirement Scheme” means: a recognized occupational retirement scheme; or a mandatory provident fund scheme 67 Deduction of RORS or exempt scheme deduction re contributions to recognized occupational retirement scheme (RORS)is the least of: the contributions paid by the person as employee to the RORS; the mandatory contributions that the person would have to pay as a participant in a MPFS $12,000 p.a: s.26G(2) & s.26G(3)(a) 68 Conclusion NAI = AI - Allowable deductions Allowable deductions Outgoings & expenses Depreciation allowances Losses Self-Education Expenses Concessionary deductions Approved Charitable Donations Home Loan Interest Elderly residential care expenses Contributions to Recognised Retirement Schemes NAI after Concessionary Deductions 69 ...
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This note was uploaded on 03/21/2011 for the course ACCOUNTING 110 taught by Professor Mcwilliams during the Spring '09 term at San Jose State University .

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