Question

Berry Ltd (“BEL”) carried on trading business in Hong Kong. Its provisional income statement for the year ended 31 March 2019 shows a net profit before taxation of $3,000,000, inter alia, after crediting the following income and charging the following expenses:

					Note
Income							$
		Sales through Hong Kong shops					30,000,000
		Sales through overseas agents			1		5,000,000
		Investment income			2		1,200,000
		Profit on sale of product design			3		300,000
Expenditure
	Product research expense				4		500,000
	Depreciation						300,000
	Bank charges and interest				5		160,000
	Repairs expense				6		100,000
	Bad debts				7		75,000

Explanatory Notes

1. BEL purchased goods from Hong Kong suppliers and sold to overseas customers. Over 100 overseas agents solicited customers for BEL. The agents would receive orders for BEL in overseas and forward the same to BEL for final confirmation.

2

	$
Interest on AUD fixed deposits placed with the Head Office of Hang Seng Bank, Hong Kong. The deposit has been used to secure a bank loan (see note (5) below)	300,000
Interest from 7-year qualifying debt instrument	900,000
Total per accounts	1,200,000

3 During the year 2009, BEL bought the proprietary interest of a registered product design for use by its suppliers to produce BEL’s products at a price of $1 million. During the year 2018/19, BEL sold the proprietary interest of the product design at a price of $1.3 million and hence made a profit of $300,000. Also BEL bought a registered trademark during the year 2019/20 at a price of $2 million, which was not reflected in the above income statement. The trademark has a protection period of 4 years starting from 2018/19.

4 The product research expense included $150,000 for new research equipment.

5

	$
Bank charges on ordinary trading transactions	20,000
Interest on bank loan* secured by a deposit with Hang Seng Bank (see note 2 above)	140,000
Total per accounts	160,000

*The bank loan was used to buy trading stock.

6 The repairs expense of $100,000 was for initial repairs to a second-hand packing machine which was acquired during the year. The expense was for the purpose to put the machine back to operable condition for obtaining the relevant license from the government.    

7

Write-off of a staff loan* (5% interest and 95% principal) 20,000

Bad debts recovered (trade debts written off in the year 2018/19) (8,000)

Provision - 5 % on total trade debtors’ balance 10,000

                - on specified trade debtors 53,000

Total per accounts 75,000

The loan was provided to the staff’s bank account in Hong Kong.

8 Depreciation allowance agreed by the Inland Revenue Department for the year was $200,000

Required

1. Calculate the profits tax payable by BEL for the year of assessment 2018/19, ignore provisional tax.

1. 2. Explain your profits tax treatments for the following items:
1. Sales through overseas agents $5,000,000
2. Interest from fixed term bank deposit interest $300,000
3. Sales proceeds of the registered product design $1,300,000
4. Registered trademark acquisition cost $2,000,000
5. Interest on bank loan $140,000
6. Write-off of staff loan $20,000
7. Initial repairs expense of the second-hand packing machine $100,000

Answer 1

1. Sales through overseas agents $5,000,000 (3 marks) – The profit from the sales through overseas agents are taxable.

2. Interest from fixed term bank deposit interest $300,000 (3 marks) – Interest from fixed tern bank deposit interest of $300,000 is exempted from tax.

3. Sales proceeds of the registered product design $1,300,000 (2 marks) – Bought at $10,00,000 and sold to $13,00,000. The income of $3,00,000 is taxable.

4. Registered trademark acquisition cost $2,000,000 (2 marks) – Trademark is registered for 4 years period, hence per year cost is $ 5,00,000.

5. Interest on bank loan $140,000 (3 marks) – Interest on bank loan can be shown as expenses, the income from the deposit should show as income while computing the income tax.

6. Write-off of staff loan $20,000 (3 marks) – Staff loan can be treated as eligible expenses.

7. Initial repairs expense of the second-hand packing machine $100,000 (3 marks) – Initial repair expenses can’t be shown as an expenses. This should be capitalised.

Description	Amount
Net Profit before taxation   ------ (A)	30,00,000.00
Addition
New Reasearch equipment	1,50,000.00
Initial expenses of buy a second hand machine	1,00,000.00
Depreciation allowance	2,00,000.00
Bad Debts provision (5% - 3%)	4,000.00
Addition Total ----- (B)	4,54,000.00
Less :
Interest on Aud Fixed deposits	3,00,000.00
Interest from 7-year qualifying debt instrument	9,00,000.00
Registered Trade Mark bouth for 2 Million and having the protection period of 4 years	5,00,000.00
Less Total    ----- ( C )	17,00,000.00
Profits Tax payable by BEL (A + B - C)	17,54,000.00