TAXATION

2. I bought two machines for $200,000 and a second-hand lorry for $50,000. The purchase costs are capital expenditure and cannot be deducted from my assessable profits. Is there any relief that I can claim?

You can claim for depreciation allowances. Please refer to the summary below: 

• Initial Allowance ("IA")is 60% of the cost of the machinery or plant, to be granted in the year of asset purchase.
• Annual Allowance ("AA")is by nature a "wear and tear" allowance, granted annually on the reducing value of machinery or plant at 10%, 20% or 30% as laid down in the Inland Revenue Rules, a subsidiary legislation under the Inland Revenue Ordinance.
• Some examples of the rates of Annual Allowance for the more common machinery or plant:

• A "Pooling System"was introduced in 1980/81. All items of machinery and plant qualifying for Annual Allowance at the same rate are brought together in one “Pool”, with additional items added to, and disposal proceeds subtracted from, the “Pool”.
• A balancing chargearises where the disposal proceeds exceed the reduced value of the "Pool".
• A balancing allowancecan only be granted to you on the cessation of the business.
• The allowances that you may claim for your machines and lorry for the year of purchase and the next two years are shown in the table below.

Notes:

* Your assessable profits for Year 4 will be increased by the balancing charge of $3,040.

** An Annual Allowance will be given in respect of the sold machines every year until the balance of the “20% Pool” is reduced to zero. (In practice, this will rarely happen. Under normal circumstances, there would be new assets added to this “20% Pool”.)

3. Are all properties bought by my company for business purposes qualified for building allowances?

No. Certain specified conditions have to be satisfied before an allowance is granted. Broadly speaking, the relevant allowances are classified into 2 groups: “industrial buildings allowances” and “commercial buildings allowances”. For details, please refer to the Inland Revenue Department's Departmental Interpretation & Practice Notes No. 2 (Revised). 

D. Scenarios on partnership business

1. I started a partnership business with my brother and our first accounts closed on 31 March 2023. How should I report my share of the profits of the partnership to the Inland Revenue Department?

For Profits Tax purposes, a partnership is treated as a separate legal “person”. As such, the assessable profits of a partnership are calculated as a single amount and the tax in respect of the profits is charged in the name of the partnership (but not charged to your or your brother's individual name).

Normally, the precedent partner of the partnership should complete for the partnership a “Profits Tax Return – Persons Other Than Corporations” (B.I.R.52) for the year of assessment 2022/23.

The “net profits” shown in the accounts of the business have to be converted into its "assessable profits" and declared in B.I.R.52. Normally, a Profits Tax Assessment would be raised on the partnership at the standard rate. However, if Personal Assessment is elected, the partners' tax liabilities may be reduced.

Where it is apparent that a partner will obtain a tax advantage by electing Personal Assessment, Profits Tax (and Provisional Profit Tax) is not, in practice, charged on his/her share of assessable profits from the partnership (tax is separately charged under Personal Assessment). 

2. Under a partnership agreement (with 2 partners in total), I draw a monthly salary of $10,000 from the business and the balance of the profits is divided between my partner and myself in equal shares. How will the assessable profits of the business be allocated between us?

The allocation of the assessable profits (or adjusted loss) between partners takes into account any salary or interest on loans or capital invested which has been paid to a partner or his/her spouse. Such a payment is treated as though it were a distribution of profits to the partner concerned and the balance of the assessable profits is then apportioned on the basis of the agreed profit-sharing ratio. The following examples illustrate how this is done:

Example 1

Example 2

As the partnership in Example 2 was in a profitable position overall (i.e. it had assessable profits of $100,000), no partner could be allocated any loss. Hence, the notional loss ($10,000) of Partner B was re-allocated to Partner A who was in a “profit position” after the initial allocation.

You do not have to separately report the salary you draw from the partnership business in a Tax Return - Individual (B.I.R.60) as the amount will be included in the assessable profits of the business.

3. Our partnership business had an assessed loss in the previous year of assessment and one of the partners, who is an individual, retired at the end of that year. In this regard, can the share of the loss allocated to the partner who retired be used to set off the profits of the partnership of this year and subsequent years?

Where an individual incurs a share of a loss in a business carried on by a partnership and does not choose Personal Assessment for that year of assessment, the amount may be carried forward and set off against his/her share of the assessable profits from the partnership business in subsequent years of assessment until it is fully set off.

However, any remaining balance of the loss lapses if the partner retires before the loss is fully set off, i.e. the balance cannot be utilized to reduce the subsequent profits of the partnership.

Please note that you are required to inform the Business Registration Office of any admission or retirement of partners within 1 month of such change. You may use the Form I.R.B.R.64 as provided by the Inland Revenue Department.

4. One of the partners has a separate employment, and mandatory contributions (for a MPF scheme) have been made by him both in the capacity of a self-employed person and an employee. How should tax deductions be claimed under profits tax?

In arriving at the deductible amount, sums already deducted in the partner's Salaries Tax assessment, and Profits Tax assessments of his other businesses have to be taken into account. In other words, the aggregate amount to be deducted for that partner in respect of MPF contributions should not exceed $18,000 in any year.

E. Objection and Appeal

1. I received a Profits Tax assessment and found that the profits assessed and the tax charged are too high. Can I object to this assessment?

Yes, but you must lodge a written notice of objection with the Inland Revenue Department within one month after the date of issue of the assessment, stating the grounds for your objection clearly. You may complete the relevant parts of the Form I.R.831 for objection / application for revision of assessment, and return it to the Inland Revenue Department either by post ( P.O. Box 28777, Concorde Road Post Office, Kowloon, Hong Kong ) or by fax (2877 1232).

Alternatively, if you have opened your eTAX account, you can lodge a notice of objection against the assessment under Profits Tax for sole proprietorship businesses via your eTAX account.

If it is against an estimated assessment issued because of the failure to lodge a return, a properly completed return together with the accounts, where applicable, must also be submitted with the notice of objection.

Pending the ultimate settlement of the objection, you should pay the sum indicated on the demand note, or follow the Assessor's advice regarding how much tax you should pay (whether you have to pay the full tax initially assessed, or are allowed to pay a lesser amount while the objection is being investigated). The Commissioner of the Inland Revenue Department may impose a surcharge on any tax not settled by the due date.

If you are still not satisfied with the determination of the Commissioner of Inland Revenue Department, you may further lodge an appeal against the determination to the Board of Review (Inland Revenue Ordinance) which is an independent tribunal. Your appeal should be made in writing to the Clerk to the Board of Review (Inland Revenue Ordinance) within one month of the date of issue of the Commissioner's written determination.

F. Anti-Avoidance measures concerning Profits Tax payment

1. What happens if I fail to file my tax return or provide false information to the Inland Revenue Department?

Similar to Salaries Tax matters, any person who fails to file Tax Returns for Profits Tax or provide false information to the Inland Revenue Department is guilty of an offence and liable to prosecution result in penalties or even imprisonment.

In addition, section 61 of the Inland Revenue Ordinance addresses any transaction which reduces or would reduce the amount of tax payable by any person where the Assessor is of the opinion that the transaction is artificial or fictitious or that any disposition is not actually in effect. When it applies the Assessor may disregard any such transaction or disposition and the person concerned shall be assessed accordingly.

Also, section 61A of the Inland Revenue Ordinance applies to any transaction entered into after 13 March 1986 for the sole or dominant purpose of enabling a person to obtain a tax benefit. Where it applies, the section provides for an assessment to be made i) as if the transaction had not been entered into or carried out, or ii) in such other manner as the Assistant Commissioner considers appropriate to counteract the tax benefit which would otherwise be obtained.

III. Property Tax

Under section 5(1) of the Inland Revenue Ordinance, Property Tax is charged on the owners of land and/or buildings in Hong Kong who let out their properties in return for rental income and/or other charges. This tax is payable by the owner(s) at the standard rate (15% for the year of assessment 2008/09 onwards) for the relevant year of assessment on the net assessable value of the relevant property.

The net assessable value is the assessable value (after deduction of rates paid by the owner, if applicable), and then less an allowance of 20% of that assessable value for repairs and outgoings.

The assessable value is computed by reference to the rent and other charges payable to the owner in respect of the right of use of the property. Such items include:

• rent, including rent received or receivable (due but not yet received);
• payment for the right of use of premises under licence (i.e. licence fee);
• a lump sum premium;
• service charges and management fees paid to the owner;
• owner's expenditure (e.g. repairs) borne by the tenant; and
• sums previously deducted as irrecoverable rent but now recovered.

The above calculation is generally described as follow:

A year of assessment runs from 1 April to 31 March of the following year.

Similar to the situations in Salaries Tax and Profits Tax, provisional property tax would be raised during the course of the year as the rental income for any particular year cannot be confirmed until after the year end. 

Properties for Owner's Business Use

If the income from property chargeable to Property Tax is included in the taxpayer's assessable profits for Profits Tax purposes (e.g. the rental income is received from a trade/business), or if you occupy the property you own for business purposes, the amount of Property Tax paid may be deducted from the amount of Profits Tax assessed. Corporations carrying on a trade, profession or business in Hong Kong, on application made in writing to the Commissioner of Inland Revenue, may be exempted from paying the Property Tax which would otherwise be set off against their Profits Tax.