Examiners’ report
T9 Preparing taxation computations (HKG) December 2008
The examination consisted of four compulsory questions with an approximate 60:40 split for computation and narrative respectively. Most candidates attempted all four questions although most avoided answering the narrative type questions. Short answers were provided by most candidates to each part of the questions which involved a discussion of the current legislation or obligations as required under the requirements of the Inland Revenue Ordinance. Contrary to a narrative-type question, most candidates attempted all computational questions where a tax computation was normally required to compile. Candidates continue to answer questions without carefully reading the content and requirements of the questions. Question 1 This 32-mark question tested candidates’ knowledge about the ascertainment of total income and tax computed under personal assessment and the circumstances under which an assessment which would otherwise be final and conclusive could be reopened. In Part (a), candidates were confused on the assessment basis applicable to a married couple electing for personal assessment. Only a few candidates commented correctly on the criteria applicable and persons eligible for electing personal assessment in Part (i) of the question. Common mistakes included the failure to apply the joint assessment basis in the computation of various sources of income derived by Mr and Mrs Siu. The tax computation was usually appeared in the form that Mr and Mrs Siu were assessed separately on the respective income derived by them. Other candidates computed the tax payable by the couple as if they were assessed on a scheduler basis, i.e. separate taxes computed under profits tax, salaries tax and property tax. Many candidates failed to calculate the correct type of income which should be assessed under personal assessment, e.g. share of partnership profits and director’s fee derived from a company centrally managed and controlled in Hong Kong. Some candidates had computed the tax liability of the couple twice by treating them as individuals and as a married couple. In the tax computation, candidates were unable to correctly spell out the tax treatment under personal assessment applicable to the claim for deduction of charitable donations by Mrs Siu in respect of the excessive portion made by Mr Siu. Many candidates were found to have an inadequate understanding of the various deductions/allowances eligible to be claimed by taxpayers under personal assessment. It is clear that some candidates were not familiar with the conditions for granting of child allowance, dependent parent allowance and the deduction of elderly residential care expenses. Some candidates failed to state the correct amounts of deductions/allowances as specified by the Inland Revenue Ordinance, despite the provided table. In Part (b), some candidates were able to advise Mr Siu the time limit and conditions to invoke section 70A of the Inland Revenue Ordinance. However, it was disappointing to note that not one candidate was able to mention all the conditions under which an assessment was to become final and conclusive. The finality of assessments is always said to be an important area in tax administration. The poor results achieved in this question clearly demonstrated that candidates were not prepared for answering questions concerning the administrative aspects of our taxation law. Question 2 The question was on the subject of property tax. Knowledge on the assessment of lease premium and the conditions applicable to the deduction of irrecoverable rent are of particular importance in approaching this question. However, candidates failed to identify the statutory mechanism in the apportionment of lease premium into the respective lease period or a period of 36 months, which is the shorter. Candidates were unable to Examiners’ report – T9 (HKG) December 2008 1
calculate the deduction of irrecoverable rent having regard to the fact that the irrecoverable portion could only be allowable for deduction for the year of assessment 2007/08, but not in the year of incurrence in 2006/07. Several candidates seemed to have overlooked the one-month “rent free period” as offered by the landlord and started to accrue the rent in the computation as early as during the rent-free period. Other candidates failed to understand the meaning of annual rent as charged by the landlord in Property B and have multiplied the annual rent by a factor of 12 in their computations. The deduction of rates paid during the vacant period of a property also required discussion. As held in a Board of Review decision, rates paid during a vacant period were not deductible for property tax purpose. With regard to the tax obligations of a property owner on matters required to notify the Commissioner of Inland Revenue, this part of the question was poorly answered. As noted in previous examiner’s reports, candidates continue to avoid answering narrative type questions. The performance was not satisfactory. Candidates paid no regard to the record keeping requirement of rental income received by an owner of property in Hong Kong. Candidates lacked knowledge on the various aspects under which a property owner was under a statutory duty to inform the Commissioner of Inland Revenue. Question 3 This question comprised two parts, a profits tax computation in Part (a) and a narrative question on the source of profits issues relating to certain types of profits or income in accordance with the Departmental Interpretation and Practice Notes No. 21 (DIPN 21) issued by the Inland Revenue Department. The compilation of a profits tax computation was the best answered question on the paper. However, some candidates answered the adjustments made to various items referred to in the question. Common errors in Part (a) included: Failure to calculate the disallowable amount of initial and annual contribution made to a recognised retirement scheme by the employer. Failure to distinguish the taxable from non-taxable interest income. Failure to adjust bad debts and consequential recovery expenses in respect of loans advanced to employees. Failure to recognise the special deduction of patent right and its incidental expenses for profits tax purpose. Failure to exclude the dividend income, irrespective of the place of listing of the underlying shares, for profits tax purpose. Failed to distinguish the revenue expenses from the capital expenses. In Part (b), few candidates were able to demonstrate their knowledge in the assessing practice as promulgated by the Inland Revenue Department in DIPN 21. Some candidates simply commented generally on the procedures relating to the purchase of properties and shares in Hong Kong but without putting any focus on the determination of the locality of such trading profits. It is surprising that candidates approaching the source of profits issues could be successful without resorting to the guidelines set out by the Inland Revenue Department in DIPN 21. Question 4 This question comprised two parts. Part (a) tested candidates’ knowledge on the eligibility to claim industrial building allowance having regard to the nature of businesses carried on by the occupiers of an industrial building. Part (b) tested candidates’ arithmetic calculation of balancing allowances in respect of the industrial building and/or commercial building disposed of during the year. In Part (a), candidates were able to comment the eligibility for industrial building allowance having regard to the nature of business carried on by the occupiers of the building. However, some candidates failed to recognise that the cleansing and packaging of coal could amount to the subjection of goods to a process which was a qualifying trade for the purpose of industrial building allowance. Examiners’ report – T9 (HKG) December 2008 2
Part (b) was the most poorly answered. Candidates failed to demonstrate the need to segregate the qualifying expenditure into the respective portions for industrial building allowance and commercial building allowance. In addition, candidates were not aware of the provisions of the Inland Revenue Ordinance relating to the computation of qualifying expenditure in respect of land or building acquired from a property developer. The step by step requirement in the computation of “residue before sale” and the computation of balancing allowance was also clearly not understood. It is not surprising that candidates failed to demonstrate their knowledge in the antiavoidance aspects applicable to the granting of balancing allowance in situations where the vendor is a related party, contrasting to the case where the vendor is an independent third party, e.g. the HKSAR Government.
Examiners’ report – T9 (HKG) December 2008
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