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5% method
2014/15
2015/16
1400000 X 5%
1800000 X 5%
Life insurance
70,000
90,000
160,000
1b)
Value of life fund 30.6.2015
Actuarial liability 30.6.2015
Deficit, 30.6.2013
(255,000)
(120,000)
(4,000)
(13,000)
3,053,000
3,200,000
305300014000003200000
305300018000003200000
106,000
266,000
12,800,000
(10,500,000)
1,100,000
3,400,000
Add :
Transfer to reserve
Provision for doubtful debts
Less :
Management expenses(fire insurance)
Depreciation allowances
Profit on sale of FA
Transfer from reserve
adjusted surplus after Management expenses and DA
2014/15
2015/16
fire insurance
(29,000)
135,000
20,000
25,000
Life insurance
1,335,688
1,717,313
3,053,000
fire insurance
(29,000)
135,000
106,000
The adjusted surplus method provided a higher tax payable amount to company.
2a)
Tax avoidance, in a strict sense, is still legal, but it is generally
considered to be overly-aggressive tax planning, to the point of
abusing the original intention of certain provisions of the IRO. When
certain tax avoidance transactions or activities happen frequently,
relevant anti avoidance provisions are typically enacted to
counteract those practices. This is natural because tax authorities
worldwide try to protect their tax revenues.1
Tax evasion, at the other end of the scale, is a criminal offence; it
includes deliberate under-reporting of income, over-claiming of
expenses, falsifying accounting records, deliberate non-filing of
returns, etc. Tax evasion is clearly illegal, and the taxpayer involved
can be subject to penalty and imprisonment.2
Difference 1)
Tax avoidance is using the legal method to reduce tax liabilities, but
tax evasion is using illegal method to reduce tax liabilities. People
who donate money (>$100) to qualified charity is deductible. This
method can reduce taxpayers tax liabilities and legal. These is tax
avoidance. Another taxpayer received a tax return and do not fill the
return. These method also can reduce taxpayers liabilities in short
time. However, IRD will punish the taxpayer further fine on future.
These is tax evasion.
Difference 2)
Tax avoidance is made an arrangement before tax liabilities occur.
Tax evasion is made an arrangement to reduce tax after tax
liabilities occur. Peter has employ a domestic helper. He negotiate
with his company. After negotiation the company signed a new
contract with Peter. Company accept to employ domestic helper to
Peter. Due to this welfare the company decrease Peters salary. This
arrangement is occur before Peters tax liabilities occur. These is tax
avoidance. Another taxpayer Tom make an artificial document. The
artificial document is to proof he has study in this year. Tom use this
document to apply study allowance to reduce his tax. This
arrangement is occur after Peters tax liabilities occur. These is tax
evasion.
2b)
Under the Inland Revenue Ordinance, there are two section about
1 The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P.3, Hong Kong: OUHK
2 The Open University of Hong Kong (2010) Profit tax II in ACT B415 Taxation
II,P.3, Hong Kong: OUHK
5
HKSA,http://www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA94
825755E0033E532/723975FF1759B42E482575EE003C10AA/
$FILE/CAP_112_e_b5.pdf
6 The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P11, Hong Kong: OUHK
3a)
Under salary tax the deduction expenses need to fulfill section 12 of
the IRO wholly, exclusively and necessarily incurred in the
production of the assessable income7. It is very difficult to proof that
expenses is fulfill section 12.
Under profit tax the deduction expenses need to fulfill section 16 of
the IRO there shall be deducted all outgoings and expenses to the
extent to which they are incurred during the basis period for that
year of assessment by such person in the production of profits in
respect of which he is chargeable to tax under this Part for any
period, including8.
Wholly, exclusively and necessarily concept is stricter than incurred
during the basis period for that year of assessment by such person
in the production. Therefore Mr Leung can deduct more expenses
under profit tax than salaries tax. When Mr Leung transferred his
income from salaries tax to profit tax, he can deduct more outgoing
expenses.
3b)
Commissioner may challenging Mr Leung is contract of service. If Mr
Leung cannot proof he is provide contract for service, he also
subject to salary tax. Under DIPN 25 it has three test to test people
who are contract of service or contract for service. The three tests
are control text, the integration or organization test and the
economic test.
Under control test and integration or organization test, more no
answers in the test
more likely that this is considered contract for service. Under
economic test more Yes answers in the test more likely that this is
considered contract for service.
Mr Leung need to pass these test and proof he is contract for service
IRO also has section 9A to against these tax avoidance, if section 9A
applicable to Mr Leung, he also subject to salary tax. Section 9A
mentioned Type I service companies are used to disguise employeremployee relationships in order to avoid taxes, while Type II service
companies are companies (or trusts) controlled by the proprietor or
partners of a business and to which inflated management fees are
7 HKSA,
http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B348256
4840019D2F9/671AEB9E750A13B948257C91000C9AF7?
OpenDocument
8 HKSA,
http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B348256
4840019D2F9/671AEB9E750A13B948257C91000C9AF7?
OpenDocument
Total income
%income from member
13/14
$
170000
108000
200000
478000
14/15
$
160000
132000
242000
100000
342000
279000
100000
379000
820000
58.3%
671000
43.5%
292000
13/14
100000
20000
80000
12000
14/15
100000
20000
80000
12000
65000
80000
10725
12000
22725
4c)
Assuming that approximately 30% of Baseball Promotion Clubs
members are corporate members, Baseball Promotion Clubs income
is less than 50% come from members. Baseball Promotion Club is
deeded carry on business in Hong Kong.
10
HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B3
482564840019D2F9/805418E125B8636C482579C700084BC1?
OpenDocument
11
HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B3
482564840019D2F9/805418E125B8636C482579C700084BC1?
OpenDocument
The club carry on business in Hong Kong need to pay profit tax and
other tax. When the club suffer a loss, the loss can set off to another
tax. Such, Baseball Promotion Club in 2014/2015s assessable profit
is -$100000, assessable vale is $50000, the loss off assessable profit
can be set off the assessable vale. Therefore Baseball Promotion
Club need not pay any tax in 2014/2015.
If Baseball Promotion Club deeded as not carry on business in Hong
Kong it also need to pay property tax.
Reference
1: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P.3, Hong Kong: OUHK
2: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P.3, Hong Kong: OUHK
3:HKSA,http://www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA
94825755E0033E532/723975FF1759B42E482575EE003C10AA/
$FILE/CAP_112_e_b5.pdf
4: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P7-8, Hong Kong: OUHK
5:HKSA,http://www.legislation.gov.hk/blis_pdf.nsf/6799165D2FEE3FA
94825755E0033E532/723975FF1759B42E482575EE003C10AA/
$FILE/CAP_112_e_b5.pdf
6: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P11, Hong Kong: OUHK
7: HKSA,
http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B348256
4840019D2F9/671AEB9E750A13B948257C91000C9AF7?
OpenDocument
8:HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47B
3482564840019D2F9/671AEB9E750A13B948257C91000C9AF7?
OpenDocument
9: The Open University of Hong Kong (2010) Profit tax II in ACT
B415 Taxation II,P.25Hong Kong: OUHK
10:HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47
B3482564840019D2F9/805418E125B8636C482579C700084BC1?
OpenDocument
11:HKSA,http://www.legislation.gov.hk/blis_ind.nsf/D2769881999F47
B3482564840019D2F9/805418E125B8636C482579C700084BC1?
OpenDocument