2016 A HKTF T2 Property ans PDF

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THE HONG KONG POLYTECHNIC UNIVERSITY AF3210 HONG KONG TAX FRAMEWORK Tutorial 2 – Property Tax Answer 4 Year of Assessment 2013/14: Property tax liability = Nil; because the rental income started in June 2014, i.e. Y/A 2014/15.

Miss Chan Property Tax Computation Year of Assessment 2014/15 $ 150,000 93,750 19,000 262,750 (52,550) 210,200

Rent ($15,000 x 10) Premium ($225,000 x 10/24) Management fee ($1,900 x 10) Less: 20% statutory deduction Net assessable value Tax at 15%

31,530

Property Tax Computation Year of Assessment 2015/16 $ 195,000 112,500 22,800 330,300 (66,060) 264,240

Rent ($15,000 x 2 + $16,500 x 10) Premium ($225,000 x 12/24) Management fee ($1,900 x 12) Less: 20% statutory deduction Net assessable value Tax at 15%

39,636

Notes: (a) Rates paid by tenant is neither an assessable value nor an eligible deduction for Miss Chan. (b) Bank mortgage interest is not an eligible deduction for property tax purposes.

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Answer 5 Part (a) and (b) Mr. Lo Property Tax Computation Year of Assessment 2014/15 $ 280,000 18,900 261,100 52,220 208,880

Rent: 1.11.2014 - 31.3.2015 ($56,000 x 5) Less: Rates ($8,100/3 x 7) Less: 20% statutory deduction Net assessable value Property tax payable at 15%

31,332

Notes:  Rent free period is not assessable for property tax purposes as no consideration is paid or payable.  Rent in arrear is not deductible until it is proved to be irrecoverable in the following year.  Rates paid by landlord is deductible but apportioned on lease term basis.  Government rent paid by landlord is not deductible.  Management fee paid by tenant directly to the management office is not deductible or assessable. Only rates agreed and paid by landlord, 20% statutory allowance, and bad rent are deductible for property tax purpose.

Year of Assessment 2015/16 Rent: 1.4.2015 - 31.5.2015 – old lease 1.7.2015 - 31.3.2016 – new lease Management fee ($4,800 x 9) Premium ($240,000 x 9/24) – new lease Less: Irrecoverable rent ($56,000 x 4 - $112,000) Less: Rates (1.4.2015 - 30.6.2015) Less: 20% statutory deduction Net assessable value Tax at 15%

$ 112,000 270,000 43,200 90,000 515,200 112,000 403,200 8,100 395,100 79,020 316,080 47,412

Notes:  The old lease is regarded as terminated on 1.6.2014 when the tenant declared bankrupt and was beyond contact.  The overdue management fee paid by landlord for period under the old lease is not an eligible deduction for property tax purpose.  Since the overdue rent from 1.2.2015 to 31.5.2015 is proved to be bad when the tenant moved out on 1.6.2015, the bad debt can be claimed as deduction in the Y/A 2015/16 2016A HKTF_T2_Property_ans

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

 

rather than 2014/15. However, since the rental deposit is used to compensate part of the loss, only the balance of bad debt not recovered or compensated can be deducted. Rates under the new lease is payable by tenant, hence not deductible for Mr. Lo. However, rates for the intermittent period between the old and new lease may by concession be deducted as the property remained to be available for letting purposes during the intermittent period. Management fee paid by the tenant to Mr. Lo is taxable consideration Commission paid to property agent is not a deductible item under property tax.

Part(c) Mr. Lo’s obligations under the Inland Revenue Ordinance include:     

To notify chargeability to tax within 4 months after the end of the basis period for the year of assessment concerned To furnish the return within the time so specified in the return To notify cessation to own any land and building in Hong Kong within one month from the date of such cessation To notify change in address within one month of such change To keep sufficient records of rent received to enable the tax liability to be readily ascertained, and to retain such records for a period of not less than 7 years

Part (d) Possible tax planning ideas include:  

Loan interest is not deductible under property tax. Mr. Lo may elect to be assessed under personal assessment to claim the deduction of interest. Management fee payable to the landlord is assessable. If the management fee is payable by the tenant to the building management office direct (as was the case in the first tenancy agreement), it will not be included in the assessable value.

(You would be able to explore more possible tax planning ideas as you progress in this course.)

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Answer 6 Mr. Newton’s property tax liability in the year of assessment 2016/17: Spreading premium over 36 months starting from 1 Jul y 2016 and ending on 30 June 2019: 2016/17 (1.7.2016 - 31.3.2017) 2017/18 (1.4.2017 - 31.3.2018) 2018/19 (1.4.2018 - 31.3.2019) 2019/20 (1.4.2019 - 30.6.2019)

90,000 x 9/36 90,000 x 12/36 90,000 x 12/36 90,000 x 3/36

= = = =

$22,500 30,000 30,000 7,500 $90,000

Y/A 2016/17 – Provisional Tax $ 270,000 22,500 292,500 (5,400) 287,100 (57,420) 229,680

Rent (9 x $30,000) Premium Assessable value Less: Rates paid ($1,800 x 3) Less: 20% statutory allowance Net assessable value Property tax at 15%

34,452

Notes: (a) Property tax is levied on person who derives assessable value from land and buildings situated in Hong Kong. The residence and citizenship of the person are irrelevant. In this case, since the property is located in Hong Kong, the landlord, Mr. Newton, is subject to HK property tax in respect of consideration received. (b)

Management fee directly paid by tenant to the management company is neither assessable nor deductible. Only rates agreed and paid by landlord, 20% statutory deduction and irrecoverable rent are deductible for property tax purposes.

(c)

The fact that the rent is paid by tenant to the landlord’s agent in Hong Kong does not affect the assessability of Mr. Newton. Section 5B(2) of IRO states that assessable value includes consideration payable to, to the order of, or for the benefit of, the owner.

(d)

The agency service fee of 2% is not deductible for property tax purposes.

Mr. Chau can on behalf of Mr. Newton lodge a hold-over claim in respect of the 2016/17 provisional property tax. Under section 63O, such claim must be: (i)

in writing;

(ii)

lodged with the Commissioner not later than 28 days before the payment due date, i.e. 28 days before 2 March 2017, or not later than 14 days after the date of notice, i.e. 14

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days after 12 January 2017; whichever is the later. In this case, the deadline for lodging the holdover claim should be 2 February 2017; and (iii)

stating the ground for holding over the provisional property tax. In this case, the ground would be: “The assessable value for 2016/17 is $292,500, which is less than 90% of the estimated assessable value of $350,000.” [NAV $280,000/(1-20%) = $350,000]

By doing so, provisional property tax of [($280,000 - $229,680) x 15%] = $7,548 will be held over.

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