Case 2 Mr.Fu has carried on his trading business in Hong Kong for many years. It is accepted that all his trading profits are sourced in Hong Kong. Mrs.Fu assists him to manage the business. He prepares his accounts to 31 March each year. His statement of comprehensive income for the year ended 31 March 2021 is as follows: $ Gross profit Compensation received (Note 1) Bank interest received (Note 2) 16,930,000 40.000 246,000 17,216.000 Less: Advertising Bad debts (Note 3) Salaries and allowances (Note 4) Annual contributions to MPF scheme (Note 5) Commission (Note 6) Legal fees (Note 7) Rent and rates (Note 8) Telephone Water and electricity Insurance premiums (Note 9) Interest paid (Note 10) Bank charges Motorcar expenses (Note 11) Entertainment (Note 12) Renovation expenditure(Note 13) Exchange loss (Note 14) Donations (Note 15) Depreciation Sundry expenses (all allowable) Net profit 500,000 476,000 5,644,000 206,000 1,700,000 80,000 1,108,000 50,000 180,000 140,000 550.000 136,000 434,600 620.000 1,200,000 34.000 360,000 456,000 828,000 14,702,600 2,513,400 Notes: (1) Compensation received from overseas suppliers for breach of trading contracts. 50,000 (2) Interest on Mr.Fu's private fixed deposit with a local bank Interest on the business fixed deposit placed with another local bank to secure the loan granted to the business (Note 10) 196,000 246,000 (3) Loan to supplier written off Trade debts written off General allowance for impairment loss on trade receivables 100,000 296,000 80,000 476,000 (4) Mr.Fu's salary Mrs.Fu's salary Filipino domestic servants salary Other staff salary 1,200,000 1,200,000 84,000 3,160,000 5,644,000 (5) Annual contributions to MPF scheme. Mr.Fu Mrs. Fu Other staff 24,000 24,000 158,000 206,000 (6) Overseas sales agents Local sales agents Undisclosed recipients 840,000 560,000 300,000 1,700,000 (7) Collection of loans lent to suppliers Collection of trade debts Preparation of accounts Preparation of new tenancy agreement for Mr Fu's residence 10,000 20,000 36,000 14,000 80,000 (8) Rent for office premises Rent for Mr.Fu's residence Rates for office premises 480,000 600,000 28,000 1,108,000 (9) Premium on labour policy for the staff Premium on trading stock Premium on Mr.Fu's life insurance policy 52,000 60,000 28,000 140,000 (10) Mr.Fu borrowed $3 million from a local bank. The loan was secured by the business fixed deposit mentioned in Note 2 above. Interest paid to Mr.Fu's son. Mr.Fu's son does not carry on any business in Hong Kong 500,000 50,000 550,000 (11) Fines Other expenses 8,000 426,600 434,600 It was agreed that 30% of the motor car expenses was attributable to Mr.Fu's private use. (12)25% of the expenses was attributable to Mr.Fu's private use. (13) Renovation expenditure on office premises 800,000 Renovation expenditure on Mr.Fu's residence 400,000 1,200,000 (14)This arose from the conversion of US dollar bank deposits into HK dollar bank deposit. 100,000 (15) Donations of beds to hospitals organised by approved charitable organisations Cash donations to various approved charitable organisations 260.000 360,000 Other information: (16) Depreciation allowance for plant & machinery $368,586. (17)Mr.Fu purchased the office premises (Note 13) in 2010.It was agreed that the commercial building allowance for the office premises was $140,000 for a year. (18)Mr.Fu has not elected for personal assessment for the year of assessment 2020/21. Required: (a) Compute Mr.Fu's profits tax liability for the year of assessment 2020/21. Ignore provisional profits tax. Show all your workings. (b)Briefly explain the tax treatment of the following items: (i)Interest income (Note 2) (ii)Interest expenses (Note 10) Case 2 Mr.Fu has carried on his trading business in Hong Kong for many years. It is accepted that all his trading profits are sourced in Hong Kong. Mrs.Fu assists him to manage the business. He prepares his accounts to 31 March each year. His statement of comprehensive income for the year ended 31 March 2021 is as follows: $ Gross profit Compensation received (Note 1) Bank interest received (Note 2) 16,930,000 40.000 246,000 17,216.000 Less: Advertising Bad debts (Note 3) Salaries and allowances (Note 4) Annual contributions to MPF scheme (Note 5) Commission (Note 6) Legal fees (Note 7) Rent and rates (Note 8) Telephone Water and electricity Insurance premiums (Note 9) Interest paid (Note 10) Bank charges Motorcar expenses (Note 11) Entertainment (Note 12) Renovation expenditure(Note 13) Exchange loss (Note 14) Donations (Note 15) Depreciation Sundry expenses (all allowable) Net profit 500,000 476,000 5,644,000 206,000 1,700,000 80,000 1,108,000 50,000 180,000 140,000 550.000 136,000 434,600 620.000 1,200,000 34.000 360,000 456,000 828,000 14,702,600 2,513,400 Notes: (1) Compensation received from overseas suppliers for breach of trading contracts. 50,000 (2) Interest on Mr.Fu's private fixed deposit with a local bank Interest on the business fixed deposit placed with another local bank to secure the loan granted to the business (Note 10) 196,000 246,000 (3) Loan to supplier written off Trade debts written off General allowance for impairment loss on trade receivables 100,000 296,000 80,000 476,000 (4) Mr.Fu's salary Mrs.Fu's salary Filipino domestic servants salary Other staff salary 1,200,000 1,200,000 84,000 3,160,000 5,644,000 (5) Annual contributions to MPF scheme. Mr.Fu Mrs. Fu Other staff 24,000 24,000 158,000 206,000 (6) Overseas sales agents Local sales agents Undisclosed recipients 840,000 560,000 300,000 1,700,000 (7) Collection of loans lent to suppliers Collection of trade debts Preparation of accounts Preparation of new tenancy agreement for Mr Fu's residence 10,000 20,000 36,000 14,000 80,000 (8) Rent for office premises Rent for Mr.Fu's residence Rates for office premises 480,000 600,000 28,000 1,108,000 (9) Premium on labour policy for the staff Premium on trading stock Premium on Mr.Fu's life insurance policy 52,000 60,000 28,000 140,000 (10) Mr.Fu borrowed $3 million from a local bank. The loan was secured by the business fixed deposit mentioned in Note 2 above. Interest paid to Mr.Fu's son. Mr.Fu's son does not carry on any business in Hong Kong 500,000 50,000 550,000 (11) Fines Other expenses 8,000 426,600 434,600 It was agreed that 30% of the motor car expenses was attributable to Mr.Fu's private use. (12)25% of the expenses was attributable to Mr.Fu's private use. (13) Renovation expenditure on office premises 800,000 Renovation expenditure on Mr.Fu's residence 400,000 1,200,000 (14)This arose from the conversion of US dollar bank deposits into HK dollar bank deposit. 100,000 (15) Donations of beds to hospitals organised by approved charitable organisations Cash donations to various approved charitable organisations 260.000 360,000 Other information: (16) Depreciation allowance for plant & machinery $368,586. (17)Mr.Fu purchased the office premises (Note 13) in 2010.It was agreed that the commercial building allowance for the office premises was $140,000 for a year. (18)Mr.Fu has not elected for personal assessment for the year of assessment 2020/21. Required: (a) Compute Mr.Fu's profits tax liability for the year of assessment 2020/21. Ignore provisional profits tax. Show all your workings. (b)Briefly explain the tax treatment of the following items: (i)Interest income (Note 2) (ii)Interest expenses (Note 10)