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:
- the year ended 31 March during the relevant year (i.e. same as the year of assessment);
- 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 A/C closed on 31 May every year, the account you have to submit in the year of assessment 2015/16 will be from 1/6/2014 to 31/5/2015);
- where the accounts are made up for each lunar year, the lunar year ended in the relevant year;
- 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 2014 and your company's accounting period ends on 31 December every year (i.e. the first accounting period ends within the year of assessment 2014/15), the basis periods would be:
- Year of assessment 2014/15: 1 July 2014 – 31 December 2014;
- Year of assessment 2015/16: 1 January 2015 – 31 December 2015
If your business commenced on 1 July 2014 but the accounting period ends on 31 May every year (i.e. the first accounting period does not end within the year of assessment 2014/15), the basis periods would be:
- Year of assessment 2014/15: Nil
- Year of assessment 2015/16: 1 July 2014 – 31 May 2015
- Year of assessment 2016/17: 1 June 2015 – 31 May 2016
(Note: For cessation of business, the basis period for your tax return depends on whether or not the business commenced on or after 1 April 1974. It involves complex calculation rules so you should seek advice from the Inland Revenue Department or a certified accountant.)