04 Profits Tax_Ans1

04 Profits Tax_Ans1 - As the loan is secured by a deposit...

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BUSI 0018 – Hong Kong Taxation Self Test Question – Profits Tax Computation Answer 1 Readers Ltd Profits Tax Computation For the year of assessment 2006/07 Basis period: year ended 31 March 2007 $ $ Profits as per accounts 2,675,600 Add: Depreciation 85,400 Legal fees 54,000 Salaries paid for non-competition 80,000 Property tax 42,000 Non-deductible portion of annual contribution to Registered scheme [39,000 – 39,000/0.18x0.15] 6,500 Non-deductible portion of special contribution to Registered scheme [30,000 x 4/5] 24,000 291,900 2,967,500 Less: Offshore Interest Income 65,000 Profit from sale of fixed assets 1,000 (66,000) 2,901,500 Less: Depreciation Allowances (157,000) Net Assessable Profits 2,744,500 Tax Liability @ 17.5% 480,287 Brief Explanation (1) The compensation received from the Singapore customer in the normal course of business is revenue in nature and therefore taxable. (3) Since the loan is used for purchasing machinery which is used for generating chargeable profits, it satisfies s.16(1)(a) and s.16(2)(e).
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Unformatted text preview: As the loan is secured by a deposit placed by the company with a bank in HK, and the deposit interest income is taxable under s.15(1)(f), the restriction for interest expense deduction under s.16(2A) does not apply. There is also no indication that there is interest flow back as the lender is unrelated with Readers Ltd. (s.16(2B)). Hence the loan interest is deductible under s.16(1)(a) and s.16(2)(e). (Note: the Exemption Order doesn’t apply to exempt the interest income of the secured deposit from profits tax) (5) The severance payment is incurred as a normal revenue expense. It is deductible following the Cosmotron Case. The payment for the covenant is however capital in nature (generating enduring benefit to the company) and non-deductible: see Associated Portland Cement case. (7) The compensation paid to the supplier would amount to a revenue expense incurred in the normal course of trading and therefore deductible....
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