60,000 Mr Nam runs a restaurant in Hong Kong under the tradename Nam Kee' as a sole proprietorship business. During a recent meeting with a tax consultant, Mr Nam presented the following financial results of Nam Kee for the year ended 31 December 2020: Notes $ $ Turnover from restaurant 5,000,000 Cost of good sold (3,700,000) Gross profit 1,300,000 Loan interest income from staff 1 Loan interest income from sole proprietor 2 20,000 Compensation on cancellation of contract 3 500,000 1,880,000 Staff costs 4 (600,000) Office utilities (160,000) Staff quarter expenses 5 (90,000) Legal and professional expenses 6 (180,000) Interest expenses 7 (200,000) Other office consumables 8 (50,000) Depreciation expenses 9 (300,000) (1,580,000) Operating profit 300,000 The following explanatory notes are provided by Mr Nam in support of his business' results: (1) Mr Nam treats all staffs as valuable assets of the business. When any staff gets married, Mr Nam offers a low interest rate loan to help him/her buy a property to live in. All the staff loans are financed by excess operating cash from the business. (2) Two years ago, Mr Nam borrowed money from the business in order to assist his cousin who is resident in Australia. The loan amount of $2,000,000 was directly transferred from Nam Kee's bank account to his cousin's bank account in Australia. Mr Nam is paid interest of 1% per annum by his cousin, which is then paid to the business as loan interest. (3) The compensation was received from a travel agency which terminated its contract with Nam Kee last year. Under the contract, Nam Kee was the exclusive restaurant providing meals to groups of tourists from Mainland China. The amount of compensation represents the estimated loss of revenue suffered by Nam Kee during the remaining period of the contract. (4) Staff costs comprise: Salary costs Medical subsidy to staff Sponsor to staff on courses MPF contribution Total per accounts Remarks 400,000 100,000 Reimbursement to staff for medical expenses 40,000 Reimbursement to staff for education courses 60,000 600,000 2 ACCT3063 TAX PLANNING AND MANAGEMENT ASSIGNMENT 1 SEM 1, 2021-22 Mr Nam has the intention of joining an employees' group medical insurance scheme so that employees' medical expenses would be covered by the insurance company. However, he is concerned whether the tax deductibility treatment of insurance premium would be different from the current arrangement, and whether this would be affected by the employees' salaries tax positions. (5) Staff quarters expenses refer to rates, management fee, and utilities for a residential property which has been occupied as quarters by some employees. (6) Legal and professional expenses comprise: $ Audit and tax services fee Company secretarial fee Penalty charged by the IRD for under-reporting income 30,000 70,000 80,000 180,000 (7) Interest expenses comprise: $ 190,000 Interest on a bank mortgage loan obtained in 2017 to acquire a residential property used as staff quarters* Interest on bank overdraft credit line used for daily business operation Total per accounts The bank mortgage loan is secured by the property 10,000 200,000 (8) Other office consumables of $50,000 for replacing kitchen utensils, crockery and cutlery (forks and knives, etc) used in the restaurant. (9) The depreciation expenses relates to the following categories of fixed asset: $ Property X used as a restaurant 160,000 Property Y used as staff quarters 130,000 Truck used for restaurant business 4,000 Furniture and fixtures 6,000 Total per accounts 300,000 There were no additional to fixed assets in the year 2020. (10) The 2020/21 depreciation allowances for the assets in note (9) is $450,000 in total. 3 ACCT3063 TAX PLANNING AND MANAGEMENT ASSIGNMENT 1 SEM 1, 2021-22 Required: As Mr Nam's tax consultant, prepare a report addressing each of the following issues from a Hong Kong tax perspective. (a) Low interest rate loans to staffs (i) For Kam Kee - from profits tax perspective, the tax principles and rules which are relevant to ascertaining the taxability of the interest income derived from the low interest rate loans extended to staffs (Note 1). (5 marks) (ii) For the individual borrowing staffs - from salaries tax perspective, the tax principles and rules which are relevant to ascertaining whether the loan interest payment will be deductible to them, and whether the benefit of enjoying a lower interest rate is taxable on them. (4 marks) (b) The relevant tax principles and rules leading to the tax treatment of the following specific profit or loss items: (i) Medical subsidy to staff (Note 4) - The profits tax deductibility position for Nam Kee, and the salaries tax assessability position for the staffs. (4 marks) - Whether, and if so, how the profits tax deductibility position for Nam Kee and the salaries tax assessability position for the employees would be different if Nam Kee joins employees' group insurance scheme. (4 marks) (ii) Interest paid on the bank mortgage loan to acquire the staff quarters property (Note 7) - The profits tax deductibility position for Nam Kee. (5 marks) (c) Based on the facts given, prepare a tax computation of Nam Kee's profits tax liability for the year of assessment 2020/21 (6 marks) Professional marks will be awarded for the appropriateness of the format and presentation of the report and the effectiveness with which the advice is communicated. (4 marks) 60,000 Mr Nam runs a restaurant in Hong Kong under the tradename Nam Kee' as a sole proprietorship business. During a recent meeting with a tax consultant, Mr Nam presented the following financial results of Nam Kee for the year ended 31 December 2020: Notes $ $ Turnover from restaurant 5,000,000 Cost of good sold (3,700,000) Gross profit 1,300,000 Loan interest income from staff 1 Loan interest income from sole proprietor 2 20,000 Compensation on cancellation of contract 3 500,000 1,880,000 Staff costs 4 (600,000) Office utilities (160,000) Staff quarter expenses 5 (90,000) Legal and professional expenses 6 (180,000) Interest expenses 7 (200,000) Other office consumables 8 (50,000) Depreciation expenses 9 (300,000) (1,580,000) Operating profit 300,000 The following explanatory notes are provided by Mr Nam in support of his business' results: (1) Mr Nam treats all staffs as valuable assets of the business. When any staff gets married, Mr Nam offers a low interest rate loan to help him/her buy a property to live in. All the staff loans are financed by excess operating cash from the business. (2) Two years ago, Mr Nam borrowed money from the business in order to assist his cousin who is resident in Australia. The loan amount of $2,000,000 was directly transferred from Nam Kee's bank account to his cousin's bank account in Australia. Mr Nam is paid interest of 1% per annum by his cousin, which is then paid to the business as loan interest. (3) The compensation was received from a travel agency which terminated its contract with Nam Kee last year. Under the contract, Nam Kee was the exclusive restaurant providing meals to groups of tourists from Mainland China. The amount of compensation represents the estimated loss of revenue suffered by Nam Kee during the remaining period of the contract. (4) Staff costs comprise: Salary costs Medical subsidy to staff Sponsor to staff on courses MPF contribution Total per accounts Remarks 400,000 100,000 Reimbursement to staff for medical expenses 40,000 Reimbursement to staff for education courses 60,000 600,000 2 ACCT3063 TAX PLANNING AND MANAGEMENT ASSIGNMENT 1 SEM 1, 2021-22 Mr Nam has the intention of joining an employees' group medical insurance scheme so that employees' medical expenses would be covered by the insurance company. However, he is concerned whether the tax deductibility treatment of insurance premium would be different from the current arrangement, and whether this would be affected by the employees' salaries tax positions. (5) Staff quarters expenses refer to rates, management fee, and utilities for a residential property which has been occupied as quarters by some employees. (6) Legal and professional expenses comprise: $ Audit and tax services fee Company secretarial fee Penalty charged by the IRD for under-reporting income 30,000 70,000 80,000 180,000 (7) Interest expenses comprise: $ 190,000 Interest on a bank mortgage loan obtained in 2017 to acquire a residential property used as staff quarters* Interest on bank overdraft credit line used for daily business operation Total per accounts The bank mortgage loan is secured by the property 10,000 200,000 (8) Other office consumables of $50,000 for replacing kitchen utensils, crockery and cutlery (forks and knives, etc) used in the restaurant. (9) The depreciation expenses relates to the following categories of fixed asset: $ Property X used as a restaurant 160,000 Property Y used as staff quarters 130,000 Truck used for restaurant business 4,000 Furniture and fixtures 6,000 Total per accounts 300,000 There were no additional to fixed assets in the year 2020. (10) The 2020/21 depreciation allowances for the assets in note (9) is $450,000 in total. 3 ACCT3063 TAX PLANNING AND MANAGEMENT ASSIGNMENT 1 SEM 1, 2021-22 Required: As Mr Nam's tax consultant, prepare a report addressing each of the following issues from a Hong Kong tax perspective. (a) Low interest rate loans to staffs (i) For Kam Kee - from profits tax perspective, the tax principles and rules which are relevant to ascertaining the taxability of the interest income derived from the low interest rate loans extended to staffs (Note 1). (5 marks) (ii) For the individual borrowing staffs - from salaries tax perspective, the tax principles and rules which are relevant to ascertaining whether the loan interest payment will be deductible to them, and whether the benefit of enjoying a lower interest rate is taxable on them. (4 marks) (b) The relevant tax principles and rules leading to the tax treatment of the following specific profit or loss items: (i) Medical subsidy to staff (Note 4) - The profits tax deductibility position for Nam Kee, and the salaries tax assessability position for the staffs. (4 marks) - Whether, and if so, how the profits tax deductibility position for Nam Kee and the salaries tax assessability position for the employees would be different if Nam Kee joins employees' group insurance scheme. (4 marks) (ii) Interest paid on the bank mortgage loan to acquire the staff quarters property (Note 7) - The profits tax deductibility position for Nam Kee. (5 marks) (c) Based on the facts given, prepare a tax computation of Nam Kee's profits tax liability for the year of assessment 2020/21 (6 marks) Professional marks will be awarded for the appropriateness of the format and presentation of the report and the effectiveness with which the advice is communicated. (4 marks)