ACT B414F (2024 Autumn Term)
Assignment
Due date: 8 November 2024 (Friday)
Weighting: 15% of the total marks for this course
This is a group-based assignment. Students have to form. their groups (a maximum of three members in a group). Please write down the names and student IDs of all the group members on the cover of the assignment. Only ONE group member uploads the assignment to the OLE for submission.
Question 1 (80 marks)
Smart Toy Company Ltd (“Smart Toy”) is a toy manufacturer since 2012. All the products are manufactured in its factory in Tai Po. 80% of the sales are made to customers in Hong Kong and the remaining 20% are made to overseas customers through its website.
The following is Smart Toy’s statement of profit or loss for the year ended 31 December 2023:
Note $ $
Turnover 25,360,000
Cost of goods sold (12,349,700)
Gross profits 13,010,300
Investment income 1 89,500
Interest income 2 105,000 194,500
Expenses
Insurance 35,000
Donation 3 45,000
Sundry expenses 4 60,200
Finance expenses 5 76,300
Bad debt and provision for bad debt 6 107,000
Utilities 134,000
Legal and professional fees 7 138,000
Marketing and promotion 190,000
Products research expense 8 440,000
Repair and maintenance 9 566,000
Rent - office and warehouse 800,000
Directors' remuneration 860,000
MPF contribution 10 863,500
Depreciation charge 1,596,000
Staff cost 11 4,880,000 (10,791,000)
Profits before tax 2,413,800
Further details of the Smart Toy’s operations are provided in the following notes:
1. Investment income comprised:
$
Dividend from listed shares in Hong Kong stock market 60,750
Exchange gain realised from trade debts settlement 28,750
89,500
2. Interest income comprised:
$
Interest on HKD deposits placed with HSBC in Hong Kong 28,000
Interest on AUD deposits placed with Bank of China in Hong Kong 26,000
Interest on US dollar deposits placed with Citibank, New York branch 24,000
Interest on overdue accounts receivable from customers in UK 27,000
105,000
3. Donation for the year:
$
Donation of inventory of toys to The Community Chest of Hong Kong 22,000
Donation of cash to Po Leung Kuk 7,000
Cash paid for tickets of charity banquet as donation to Tung Wah Group of Hospitals 16,000
45,000
4. Sundry expenses comprised:
$
Office consumables (tax deductible) 57,200
Surcharge of late filing of profits tax return 3,000
60,200
5. Finance expenses comprised:
$
Bank charges on daily operations of the business 4,500
Bank interest paid to HSBC on loan secured by a personal guarantee from the director to finance the settlement of trade payable and daily operation 63,800
Hire purchase interest on motor van 5,000
Interest paid to a supplier for overdue accounts payable 3,000
76,300
6. Bad debt and provision for bad debt comprised:
$
Amount recovered from a Hong Kong client written off in 2022 (26,000)
Increase in provision - 2% on total trade debtors' balance 44,000
- on specified trade debtors 53,000
Loan to an employee written off on his resignation 22,000
Trade debt written off 14,000
107,000
7. Legal and professional fees comprised:
$
Audit fee 60,000
Legal fees for litigations with customers in Netherlands in the recovery of debts 30,000
Legal fee for renewal of warehouse lease 3,000
Legal fee and stamp duty on arranging the new lease of office 33,000
Taxation service fee for tax return filing 12,000
138,000
8. The research expense was incurred in the development of artificial intelligence chat for a new model of toy watch. It comprised $240,000 staff salaries and $200,000 acquisition cost of new research equipment.
9. Repair and maintenance comprised:
$
Repairing of the machines 296,000
Replacement of a significant part of a projector in office for upgrading 270,000
566,000
10. MPF contribution comprised:
$
Regular contributions, representing 15% of eligible employees’ total salary 669,500
One-off special contribution 194,000
863,500
11. Staff cost comprised:
$
Salaries and wages 4,480,000
Severance payment to staff 300,000
Compensation to a sales manager for not joining any company in the same industry for 1 year after his resignation 100,000
4,880,000
12. The depreciation allowance agreed by IRD for the year of assessment 2023/24 was $998,000.
Required:
(a) Compute the profits tax payable of Smart Toy for the year of assessment 2023/24 (Ignore the provisional tax and assume that Smart Toy is eligible for the two-tiered profits tax rates regime). (42 marks)
(b) Explain the tax treatments for notes:
(1) Investment income; (6 marks)
(2) Interest income; (4 marks)
(5) Finance expenses; (8 marks)
(6) Bad debt and provision for bad debt; (10 marks)
(9) Repair and maintenance; (4 marks)
(11) Staff cost. (6 marks)
Question 2 (20 marks)
With reference to the Budget for 2024/25 of the Hong Kong Government, discuss any THREE issues which are related to Hong Kong tax and explain their implications (you may illustrate with examples). (20 marks)