Repost:

Mr. Au and Mr Yeung have been in partnership with Fantastic Ltd since 2005. The partnership business, AYF Consulting (AYF), is engaged in computer systems development and sales of peripheral products. Profits and losses after deducting salary, interest and capital contributions payable to partners are shared as follows:

Mr Au 30%

Mr Yeung 30%

Fantastic Ltd 40%

The partnership agreement stated that Mr Au and Mr Yeung would each receive an annual salary of $80,000 and that Fantastic Ltd would be paid interest at the rate of 8% p.a. on its capital contribution of $400,000. On 31 March 2013 Mr Au retired from the partnership and withdrew his share of accumulated profits amounting to $500,000. Thereafter, the profit sharing ratio, calculated on the same basis as mentioned above, was changed to:

Mr Yeung 40%

Fantastic Ltd 60%

The accounting profits and losses of AYF for the years ended 31 March were as follows:

2012 $400,000

2013 ($900,000)

2014 $500,000

Other relevant information:

During all relevant times, Mr Au has another full-time employment, the incomes from which are reported and the respective salaries taxes paid separately.

Mr Yeung derived income liable to property tax. His net assessable value for each of the above years was $160,000. He has elected personal assessment for each year.

Fantastic Ltd derived profits from a computer network service business and its assessable profits from that business for the year ended 31 March 2013 were agreed to be $300,000.

For the year ended 31 March 2014, Fantastic Ltds Income Statement (excluding its share of the partnership profits) showed:

Service income received $3,200,000

Compensation payment for loss of service contract $500,000

Exchange gain foreign currency bank account $30,000#

Interest income from AYF $32,000

3,762,000

Expenses:

Rent (paid to Mr Yeung) $200,000

Refurbishment of office premises $300,000

Salaries and commission to staff $1,900,000

Payment made to former chief technician

(severance payment $130,000; payment for

covenant not to compete for 12 months $250,000) $380,000

Miscellaneous (all allowable) $60,000 $2,840,000

Net profit $922,000

# The bank account is used to hold the foreign currency payments from customers. The company periodically converts the foreign currency to Hong Kong dollars for operation needs when the exchange rate is favourable.

Required:

a) Determine the allocation of assessable profits (or losses) of AYF for the years of assessment 2012/13 and 2013/14 and the profits tax payable thereon (ignore provisional tax, tax waiver and tax reduction in your calculations).

B) Determine the assessable profits for Fantastic Ltd for the year of assessment 2013/14 and tax payable thereon (ignore provisional tax, tax waiver and tax reductions).

C) Based on your calculation in part (a) above, advise and explain to Mr Au if there is anything he should do from a tax planning perspective. Your answer should include practical advice on whether he is eligible to do so and the latest time to do it.