2. What are “assessable profits”? How to interpret the “basis period” for Profits Tax purposes?

2. What are “assessable profits”? How to interpret the “basis period” for Profits Tax purposes?

The term “profit” is not clearly defined in the Inland Revenue Ordinance. In general, the assessable profits (or adjusted loss) are calculated by normal accounting principles with further reference to the statutory allowable income/receipts and deductions for the basis period. The basis period is not necessary the same as the year of assessment (1 April to 31 March of the following year).

The basis period of your business can be either: 

1. the year ended 31 March during the relevant year (i.e. same as the year of assessment);
2. where the annual accounts are made up to any day other than 31 March, the year ended on that day in the relevant year (e.g. if your company's annual accounts closed on 31 May every year, the account you have to submit in the year of assessment 2022/23 will be from 1 June 2021 to 31 May 2022);
3. where the accounts are made up for each lunar year, the lunar year ended in the relevant year;
4. for cessation or transfer of business, special rules apply where the business does not cease but is transferred to or carried on by another person and where a business which commenced before 1 April 1974 ceases; or 
5. where you commence a new business, please refer to the following:

"Basis period" for Profits Tax in the case of a new business 

Suppose your business commenced on 1 July 2020 and your company's accounting period ends on 31 December every year (i.e. the first accounting period ends within the year of assessment 2020/21), the basis periods would be: 

• Year of assessment 2020/21: 1 July 2020 – 31 December 2020;
• Year of assessment 2021/22: 1 January 2021 – 31 December 2021

If your business commenced on 1 July 2020 but the accounting period ends on 31 May every year (i.e. the first accounting period does not end within the year of assessment 2020/21), the basis periods would be: 

• Year of assessment 2020/21: Nil
• Year of assessment 2021/22: 1 July 2020 – 31 May 2021
• Year of assessment 2022/23: 1 June 2021 – 31 May 2022