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ACCT 3006
TAXATION
Lecture 6: Profits Tax: Receipts & Expenditures
and Computation of Profits Tax I
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SCOPE OF CHARGE OF PROFITS TAX
Charging section is s.14(1):
Profits tax is charged for each year of assessment on every person
carrying on a trade, profession or business in Hong Kong in respect of
his assessable profits arising in or derived from Hong Kong for that
year from such trade, profession or business.
Therefore, the following 3 conditions must be satisfied before a charge
to profits tax can arise:
a. taxpayer must carry on a trade, business or profession in Hong
Kong;
b. profits must be profits arising in or derived from Hong Kong;
c. profits must arise from such trade, profession or business.
However, profits/gains arising from the sale of capital assets are
excluded from the charge, unless the profits/gains are deemed to be
taxable under other provisions of the IRO (s. 14(1)).
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SCOPE OF CHARGE OF PROFITS TAX
Meaning of “Person”
“Person” includes:
a. corporation;
b. partnership;
c. trustee whether incorporated or unincorporated;
d. body of persons (s.2(l)).
Meaning of “Trade”
Trade in its ordinary sense connotes buying and selling.
It is statutorily defined to include “every trade and manufacture, and
every adventure and concern in the nature of trade” (s.2(1)).
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Meaning of “Business”
Business, according to its ordinary meaning, includes a trade, profession
and manufacture carried on for the purpose of making profits. It is
statutorily defined to include:
a. agricultural undertaking, poultry and pig rearing;
b. letting or sub-letting by any corporation;
c. sub-letting by any other person under a lease or tenancy other than
from the Hong Kong SAR Government (s.2(l)).
Meaning of “Profession”
Profits derived by a person practising his profession e.g., a self-practising
solicitor or a partnership of certified public accountants are subject to
profits tax.
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BADGES OF TRADE
In 1955, Royal Commission on the Taxation of Profits and Income
in the United Kingdom, set out six badges of trade in determining
whether a particular activity or a series of transactions constitutes
trading. No one factor is conclusive.
Six badges of factors are:
a. Subject matter of the realisation;
b. Length of period of ownership;
c. Frequency or number of similar transactions by the same person;
d. Supplementary work on, or in connection with, the property
realised;
e. Circumstances responsible for the realisation;
f. Motive.
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BADGES OF TRADE
Subject matter of the realisation
If holding an asset yields no income nor personal
enjoyment, it is more likely to have been acquired for
trading.
Following transactions have been held to be a trade:
a. Isolated transaction of buying and selling a large quantity
of whisky by a wood cutter which was too large for his
consumption (CIR v Fraser (1942) 24 TC 498);
b. Isolated purchase and resale of a large quantity of toilet
rolls (Rutledge v CIR (1929) 14 TC 490);
c. Purchase of 44 million yards of linen by an agricultural
merchant, followed by the setting up of an organisation to
advertise and sell the linen (Martin v Lowry (1926) 11 TC
297).
