Ans 7. Profits 1

Ans 7. Profits 1 - BUSI 0018 Hong Kong Taxation Tutorial...

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TA_U7_Profits_1 1 BUSI 0018 – Hong Kong Taxation Tutorial Questions Unit 7 – Profits Tax (1) Answer 17 Whether or not Mr. and Mrs. Leung are subject to Hong Kong profits tax in respect of the gain arising from the sale of property depends on whether or not they are deemed as carrying on a ‘trade’ under Section 14 of the IRO. The question of whether a person is carrying on a trade or not is a question of fact. It is always necessary to consider all the relevant circumstances objectively and the person’s intentions in carrying out the activities. The Royal Commission on the Taxation of Profits and Income has identified the ‘six badges’ of trade, which are factors normally used for determining whether a transaction or a series of transactions constitute a ‘trade’ or ‘an adventure in the nature of trade’. The six factors are: 1. Subject matter The nature or characteristic of the asset, which is the subject matter of the issue, may give indication as to the purpose of holding it by the owner. An asset which does not give an owner an income or personal enjoyment is likely to be for trading purpose. In this case, the property is the subject matter. Given the booming property market and speculative environment recently in Hong Kong, transaction involving property purchase and sale would be a sensitive subject for this purpose. 2. Length of period of ownership In general, a long period of holding between the acquisition of an asset and its disposal may show an intention that the holding is for investment purpose. A short period of holding may reflect the intention to acquire the asset(s) for speculation or trading purposes. In this case, the property in Wanchai was only held by the couple for approximately 2 months (from Oct 09 to Dec 09). This short period of ownership tends to give a ‘trading’ intention. 3. Frequency of similar transactions A repetition of similar activities by the same person would indicate that the person is carrying on a trade in those activities. However, in some situations, a stand- alone activity may still be regarded as an adventure in the nature of trade. In this case, it was known that the couple did enter into similar transactions in Year 2009. Unless proved otherwise, this again confirms the ‘trading’ intention of the couple in these transactions. 4. Supplementary work done If special efforts were made to enhance the value of the property, or to increase its saleable value, or to secure its saleability, it could be considered as evidence of trading intention. There is no sufficient information given in the question. Perhaps the couple could provide more information in this aspect for the analysis.
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This note was uploaded on 02/23/2012 for the course BUSI 0018 taught by Professor C.ng during the Spring '11 term at HKU.

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Ans 7. Profits 1 - BUSI 0018 Hong Kong Taxation Tutorial...

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