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HKICPA QP Module 9 Principles of Taxation study materials
HKICPA QP Module 9 Principles of Taxation study resources

HKICPA QP Module 9 Principles of Taxation practice questions

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Question 1Role knowledge and relevant financial foundations

What is the legal status of the Departmental Interpretation and Practice Notes (DIPNs) issued by the Inland Revenue Department (IRD)?

  1. They constitute subsidiary legislation and are binding on both the taxpayer and the courts.
  2. They represent the IRD's interpretation of tax provisions and are binding on the taxpayer but not on the courts.
  3. They have no legal binding force on either the taxpayers or the IRD, although they reflect the department's administrative practice.
  4. They are binding on the IRD as administrative statements of practice, but they do not have the force of law and are not binding on taxpayers or the courts. Correct answer.

Explanation

DIPNs are issued by the IRD for the information and guidance of taxpayers. They do not have the force of law and are not binding on taxpayers or the courts. However, they are binding on the IRD's own officers as administrative practice until they are withdrawn or overridden by case law.

Question 2Role knowledge and relevant financial foundations

Under Section 51C of the Inland Revenue Ordinance (IRO), for how long must a person carrying on a trade, profession, or business in Hong Kong retain sufficient records of their transactions?

  1. For a period of not less than 5 years after the end of the basis period for the year of assessment.
  2. For a period of not less than 7 years after the completion of the transactions to which they relate. Correct answer.
  3. For a period of not less than 6 years from the date the tax return is submitted to the IRD.
  4. For a period of not less than 10 years after the end of the year of assessment in which the transactions occurred.

Explanation

Section 51C of the IRO mandates that every person carrying on a trade, profession, or business in Hong Kong must keep sufficient records in the English or Chinese language to enable their assessable profits to be readily ascertained. Such records must be retained for at least 7 years after the completion of the transactions to which they relate.

Question 3Role knowledge and relevant financial foundations

Under Section 64 of the Inland Revenue Ordinance (IRO), what is the statutory time limit for a taxpayer to submit a valid written notice of objection against an assessment?

  1. Within 14 days from the date of the notice of assessment.
  2. Within 30 days from the date of the notice of assessment.
  3. Within 1 month after the date of the notice of assessment. Correct answer.
  4. Within 60 days after the end of the year of assessment to which the objection relates.

Explanation

Section 64(1) of the IRO states that a taxpayer objecting to an assessment must give notice of objection in writing to the Commissioner within 1 month after the date of the notice of assessment. The notice must state precisely the grounds of objection.

Question 4Role knowledge and relevant financial foundations

Which of the following taxes is NOT levied under the Inland Revenue Ordinance in Hong Kong?

  1. Property Tax on rental income derived from immovable property.
  2. Salaries Tax on income derived from an office or employment.
  3. Profits Tax on profits derived from carrying on a trade or business.
  4. Capital Gains Tax on the disposal of shares held as long-term investments. Correct answer.

Explanation

Hong Kong's tax system is schedular and only taxes income that falls under Salaries Tax, Profits Tax, or Property Tax. There is no general Capital Gains Tax in Hong Kong. Disposal gains of shares held as capital assets are not subject to tax.

Question 5Role knowledge and relevant financial foundations

In interpreting Hong Kong tax law, what is the role and status of decisions made by courts in other Commonwealth jurisdictions, such as the UK or Australia?

  1. They are binding precedents that Hong Kong courts and the IRD must follow.
  2. They have no relevance whatsoever, because Hong Kong is no longer a Commonwealth territory.
  3. They are persuasive authorities that may be referred to by Hong Kong courts, especially where the statutory provisions are similar. Correct answer.
  4. They override the provisions of the Inland Revenue Ordinance if they represent more recent common law developments.

Explanation

Decisions of jurisdictions outside Hong Kong, particularly Commonwealth jurisdictions sharing common law origins and similar statutory phrasing (like the UK or Australia), are persuasive authorities rather than binding precedents. Hong Kong courts often refer to them for guidance in interpreting tax law principles.

Question 6Role knowledge and relevant financial foundations

Under Section 59(3) of the Inland Revenue Ordinance, under what circumstances can the assessor make an estimated assessment on a taxpayer?

  1. Only when the taxpayer requests the assessor to estimate their tax liability due to lost records.
  2. When a taxpayer fails to submit a tax return within the prescribed time limit, or submits a return that the assessor does not accept. Correct answer.
  3. Only when the taxpayer is planning to leave Hong Kong permanently in the near future.
  4. When the taxpayer's business undergoes a change of accounting date that causes a tax dispute.

Explanation

Section 59(3) of the IRO empowers the assessor to make an estimated assessment if a person fails to furnish a return within the stipulated time, or if the assessor does not accept the return as furnished. The assessor may estimate the sum on which such person is chargeable to tax.

Question 7Role knowledge and relevant financial foundations

During an appeal hearing before the Board of Review (Inland Revenue Ordinance), upon which party does the burden of proof lie under Section 68(4)?

  1. The burden of proof lies entirely on the assessor who made the assessment.
  2. The burden of proof lies on the appellant (the taxpayer) to prove that the assessment appealed against is excessive or incorrect. Correct answer.
  3. The burden of proof is shared equally between the taxpayer and the IRD.
  4. The burden of proof lies on the Commissioner of Inland Revenue to justify the tax rate applied.

Explanation

According to Section 68(4) of the IRO, the burden of proving that the assessment appealed against is excessive or incorrect lies on the appellant (the taxpayer). This is a vital administrative principle in Hong Kong tax appeals.

Question 8Role knowledge and relevant financial foundations

Under Section 82A of the Inland Revenue Ordinance (IRO), what is the maximum amount of penalty that the Commissioner or the Board of Review may impose by way of additional tax for making an incorrect return without a reasonable excuse?

  1. A fine of HK$10,000 and 10% of the tax undercharged.
  2. An amount equal to the tax undercharged.
  3. Double the amount of the tax undercharged.
  4. Treble the amount of the tax undercharged (300% of the tax undercharged or which would have been undercharged). Correct answer.

Explanation

Section 82A of the IRO provides that any person who, without reasonable excuse, makes an incorrect return, is liable to be assessed to additional tax of an amount not exceeding treble (three times or 300%) the amount of tax undercharged as a penalty.

Question 9Role knowledge and relevant financial foundations

Which of the following characteristics does NOT represent a feature of the Hong Kong tax system?

  1. Low tax rates compared to other developed economies.
  2. Levy of a broad-based Value Added Tax (VAT) or Goods and Services Tax (GST). Correct answer.
  3. Territorial basis of taxation.
  4. Absence of general dividend withholding tax and capital gains tax.

Explanation

Hong Kong does not levy any Goods and Services Tax (GST) or Value Added Tax (VAT). It relies primarily on direct taxes (Profits Tax, Salaries Tax, Property Tax) and specific indirect taxes like stamp duty and duties on specific goods.

Question 10Role knowledge and relevant financial foundations

According to Section 51(2) of the Inland Revenue Ordinance (IRO), if a person is chargeable to tax for a year of assessment but has not received a tax return from the IRD, within what timeframe must they notify the Commissioner in writing of their chargeability?

  1. Within 30 days after the end of the basis period for that year of assessment.
  2. Within 4 months after the end of the basis period for that year of assessment. Correct answer.
  3. Within 4 months after the end of the year of assessment (i.e., by 31 July).
  4. Within 6 months after the end of the year of assessment (i.e., by 30 September).

Explanation

Section 51(2) of the IRO states that every person chargeable to tax for any year of assessment who has not been required to furnish a return under Section 51(1) must inform the Commissioner in writing that he is so chargeable within 4 months after the end of the basis period for that year of assessment.

Question 11Role knowledge and relevant financial foundations

Which of the following statement regarding the Board of Review (Inland Revenue Ordinance) is correct?

  1. It is a division of the High Court of Hong Kong staffed by High Court judges.
  2. It is an independent administrative tribunal empowered to hear appeals against the Commissioner's determinations. Correct answer.
  3. It is a department under the Financial Services and the Treasury Bureau that reports directly to the Commissioner of Inland Revenue.
  4. Its decisions on issues of fact can be appealed directly to the Court of Final Appeal.

Explanation

The Board of Review is an independent administrative tribunal established under Section 65 of the IRO. It consists of members appointed by the Chief Executive and is independent of the IRD. It hears appeals against the Commissioner's determinations on tax assessments.

Question 12Role knowledge and relevant financial foundations

In the interpretation of tax legislation in Hong Kong, how has the Ramsay principle (fiscal nullity doctrine) been applied by the Hong Kong courts?

  1. The Ramsay principle has been rejected in Hong Kong because it is a UK common law doctrine not recognized in the IRO.
  2. It allows the IRD to ignore any transaction that reduces tax liability, even if the transaction has a genuine commercial purpose.
  3. It is a rule of statutory construction where courts look at the overall effect of a composite pre-planned transaction rather than analyzing individual steps in isolation. Correct answer.
  4. It is used exclusively to interpret the standard rate provisions of Salaries Tax.

Explanation

The Ramsay principle (from the UK case WT Ramsay Ltd v IRC) is a rule of statutory interpretation. It applies to artificial, pre-ordained series of transactions. Hong Kong courts (e.g., in Collector of Stamp Revenue v Arrowtown Assets Ltd) have affirmed that statutory provisions should be applied to the substance of a composite transaction as a whole, rather than its fragmented legal steps in isolation.

Question 13Role knowledge and relevant financial foundations

Under the Inland Revenue Ordinance (IRO), what is the procedure for appealing a decision of the Board of Review?

  1. Either the taxpayer or the Commissioner may appeal directly to the Court of First Instance on any issue of fact or law.
  2. Either the taxpayer or the Commissioner may appeal to the Court of First Instance on a question of law only. Correct answer.
  3. Only the taxpayer can appeal, and the appeal must be lodged with the Commissioner of Inland Revenue within 14 days.
  4. No appeal is permitted because the decisions of the Board of Review are final and binding on all issues of law and fact.

Explanation

Section 69 of the IRO provides that either the appellant (taxpayer) or the Commissioner may apply to the Board of Review to state a case on a question of law for the opinion of the Court of First Instance. Appeals are strictly limited to questions of law; the Board of Review is the sole arbiter of facts.

Question 14Role knowledge and relevant financial foundations

If a taxpayer defaults on paying their assessed tax, which of the following recovery measures is NOT available to the Commissioner under the Inland Revenue Ordinance (IRO)?

  1. Instituting civil proceedings in the District Court as a debt due to the Crown (government) under Section 75.
  2. Issuing a recovery notice to a third party who owes money to, or holds money for, the defaulting taxpayer (a garnishee order) under Section 76.
  3. Applying to a District Judge for a Departure Prevention Direction (DPD) to prevent the taxpayer from leaving Hong Kong under Section 77.
  4. Instructing the police to immediately arrest the taxpayer and seize their assets without a court warrant. Correct answer.

Explanation

The Commissioner has strong statutory recovery powers under Part XII of the IRO, including civil suits in District Court (S.75), garnishee notices (S.76), and applying for Departure Prevention Directions (S.77). However, the Commissioner has no power to order immediate arrest or seizure of assets by the police without following the proper judicial processes.

Question 15Role knowledge and relevant financial foundations

Under the Inland Revenue Ordinance, what is the statutory deduction rate allowed for repairs and outgoings when calculating Property Tax?

  1. The actual expenses incurred during the year, supported by receipts.
  2. A flat statutory deduction of 20% of the assessable value after deducting any rates paid by the owner. Correct answer.
  3. A flat statutory deduction of 15% of the gross rent receivable.
  4. A maximum of HK$20,000 per property per year of assessment.

Explanation

Section 5(1A) of the IRO provides for a flat statutory deduction of 20% of the assessable value (after deducting rates paid by the owner) to cover repairs and outgoings. Taxpayers do not need to prove the actual amount spent on repairs, and actual repair expenses cannot be claimed.

Question 16Role knowledge and relevant financial foundations

Under Section 8(1) of the Inland Revenue Ordinance, which of the following is NOT listed as a category of income subject to Salaries Tax?

  1. Income arising in or derived from Hong Kong from any office.
  2. Income arising in or derived from Hong Kong from any employment.
  3. Income arising in or derived from Hong Kong from any pension.
  4. Income arising in or derived from Hong Kong from any trade or business. Correct answer.

Explanation

Section 8(1) of the IRO defines the charge to Salaries Tax as income arising in or derived from Hong Kong from any office, employment, and pension. Income from a trade or business is subject to Profits Tax under Section 14, not Salaries Tax.

Question 17Role knowledge and relevant financial foundations

If an employer provides an employee with a rent-free residence in Hong Kong, how is this housing benefit treated for Salaries Tax purposes?

  1. It is completely exempt from Salaries Tax as a non-cash benefit.
  2. The employee is taxed on the actual market rent of the residence.
  3. The employee is deemed to have received additional taxable income equal to the 'Rental Value', which is calculated as 10% of their net income after allowable deductions. Correct answer.
  4. The rental value is calculated as a flat HK$10,000 per month for all types of properties.

Explanation

Under Section 9(1)(b) and 9(2) of the IRO, the rental value of a place of residence provided by the employer is included in the employee's assessable income. The Rental Value (RV) is calculated as a statutory percentage of the employee's income (after deducting allowable outgoings and expenses). For a residential flat, the rate is 10%.

Question 18Role knowledge and relevant financial foundations

For the purpose of Property Tax under the Inland Revenue Ordinance, who is defined as an 'owner' of land and/or buildings?

  1. Only the person holding the legal title registered at the Land Registry.
  2. Only the tenant who sublets the property to another user.
  3. Any person entitled to hold, lease, or occupy land or buildings, including a beneficial owner, mortgagor, life tenant, and holder of a lease from the Government. Correct answer.
  4. Only the mortgagee (bank) holding the property as security for a loan.

Explanation

Section 2 of the IRO defines 'owner' broadly to include a beneficial owner, a tenant for life, a mortgagor, a mortgagee in possession, a person who holds land or buildings directly from the Government, and any person who is entitled to receive rent under a lease or sublease.

Question 19Role knowledge and relevant financial foundations

Which of the following conditions must be met for a taxpayer to claim a deduction for self-education expenses under Salaries Tax?

  1. The course must be taken at a foreign university only.
  2. The expenses must be paid for a course of education run by a recognized education provider or professional association. Correct answer.
  3. The taxpayer must pass all examinations in the course to be eligible for the deduction.
  4. The self-education expenses are deductible without any statutory limit.

Explanation

Under Section 12(1)(e) and 12(6) of the IRO, a deduction is allowed for self-education expenses paid for a course of education undertaken at a university, college, school, or other training institution, or run by a professional association or trade union. There is a statutory maximum limit (HK$100,000). Passing is not a requirement.

Question 20Role knowledge and relevant financial foundations

Who is eligible to elect for Personal Assessment under Part VII of the Inland Revenue Ordinance (IRO)?

  1. Any individual, whether resident in Hong Kong or not, who has source income in Hong Kong.
  2. An individual who is of or above the age of 18, and who is either a permanent resident or temporary resident of Hong Kong. Correct answer.
  3. Only corporate entities carrying on business in Hong Kong.
  4. Only individuals who do not earn any income under Salaries Tax.

Explanation

Section 41 of the IRO states that an individual of or above the age of 18 (or under 18 if carrying on a business) who is a permanent or temporary resident of Hong Kong may elect for Personal Assessment. This allows their income from Salaries Tax, Profits Tax, and Property Tax to be aggregated and taxed under progressive rates with allowances.

Question 21Role knowledge and relevant financial foundations

What is the maximum statutory deduction allowed for an employee's mandatory contributions to a Mandatory Provident Fund (MPF) scheme for Salaries Tax purposes?

  1. HK$12,000 per year.
  2. HK$15,000 per year.
  3. HK$18,000 per year. Correct answer.
  4. 5% of the employee's total annual income without any maximum cap.

Explanation

Under Section 26G of the IRO, a taxpayer is allowed to deduct mandatory contributions made by them as an employee to a MPF scheme. The maximum deduction is capped at the statutory maximum mandatory contribution, which is HK$18,000 per year (HK$1,500 per month).

Question 22Role knowledge and relevant financial foundations

Under the Inland Revenue Ordinance (IRO), what is the basic unit of assessment for Property Tax?

  1. The net profit generated from the sale of properties.
  2. The gross rental income receivable by the owner for the year of assessment, after deducting rates paid by the owner. Correct answer.
  3. The annual rental value estimated by the Rating and Valuation Department.
  4. The cash rent actually received by the owner, ignoring any rent due but unpaid.

Explanation

Property Tax is charged on the owner of land or buildings in Hong Kong. The Assessable Value (AV) is the consideration (e.g., rent, premium) receivable in respect of the property for the year of assessment. From the AV, rates paid by the owner are deducted to arrive at the Net Assessable Value before the 20% statutory deduction.

Question 23Role knowledge and relevant financial foundations

What is the standard Basic Allowance for an individual taxpayer under Salaries Tax for the recent years of assessment?

  1. HK$100,000
  2. HK$120,000
  3. HK$132,000 Correct answer.
  4. HK$264,000

Explanation

Under the IRO (specifically Schedule 4), the Basic Allowance for a single individual is HK$132,000. For a married person, the Married Person's Allowance is HK$264,000.

Question 24Role knowledge and relevant financial foundations

Which of the following describes the main tax benefit of electing for Personal Assessment under Part VII of the Inland Revenue Ordinance?

  1. It allows corporate profits tax rates to be reduced to the salaries tax rate.
  2. It allows individual taxpayers to aggregate all sources of income, deduct personal allowances, claim interest on home loans/mortgages, and offset business losses against Salaries and Property Tax income. Correct answer.
  3. It exempts all property rental income from taxation for permanent residents.
  4. It allows individuals to pay tax at a flat rate of 10% on all their income.

Explanation

Personal Assessment is not a tax itself, but a mechanism that allows individuals to aggregate their income from Salaries Tax, Profits Tax, and Property Tax. By doing so, they can offset business losses against other income, deduct interest paid on money borrowed to purchase rental properties, and claim personal allowances that are otherwise not available under Profits Tax or Property Tax.

Question 25Role knowledge and relevant financial foundations

Under what condition can a corporation carrying on a trade or business in Hong Kong be exempt from Property Tax on a property it owns, as provided under Section 5(2)(a) of the Inland Revenue Ordinance?

  1. If the property is leased to a charitable organization.
  2. If the corporation includes the rental income in its Profits Tax return and the profits are subject to Profits Tax, or if the property is occupied by the corporation for the purpose of producing profits. Correct answer.
  3. If the corporation is registered as a non-profit company.
  4. If the property's annual rent is less than HK$120,000.

Explanation

Section 5(2)(a) of the IRO allows corporations carrying on business in Hong Kong to apply for exemption from Property Tax on properties they own, provided that the rental income is incorporated in their Profits Tax assessment, or the property is occupied by the corporation for business purposes. Alternatively, under Section 25, any Property Tax paid by the corporation can be set off against its Profits Tax liability.

Question 26Role knowledge and relevant financial foundations

Mr. Chan owns a property in Hong Kong and let it out to a tenant for a monthly rent of HK$20,000. For the year of assessment, the tenant paid the rent regularly. The owner paid rates of HK$4,000 for the year, while the tenant paid management fees of HK$2,000 directly to the management office. What is Mr. Chan's Property Tax liability for the year of assessment (using a Property Tax rate of 15%)?

  1. HK$27,000
  2. HK$28,320 Correct answer.
  3. HK$28,560
  4. HK$36,000

Explanation

Calculations: 1. Gross rent receivable = HK$20,000 * 12 = HK$240,000. 2. Rates paid by the owner are deductible under Section 5(1A) = HK$4,000. (Note: Management fees paid by the tenant are not deductible from Mr. Chan's assessable value as they are not rates paid by the owner). 3. Assessable Value = HK$240,000 - HK$4,000 = HK$236,000. 4. Less: Statutory deduction for repairs and outgoings (20%) = HK$236,000 * 20% = HK$47,200. 5. Net Assessable Value = HK$236,000 - HK$47,200 = HK$188,800. 6. Property Tax = HK$188,800 * 15% = HK$28,320.

Question 27Role knowledge and relevant financial foundations

In the landmark case of CIR v Goepfert, the court established the guidelines for determining the source (locality) of an employment for Salaries Tax. Which of the following is NOT one of the three primary factors used to determine whether an employment is a non-Hong Kong employment?

  1. The place where the contract of employment was negotiated, entered into, and is enforceable.
  2. The place of residence of the employer (i.e. where the employer's central management and control is located).
  3. The place where the employee actually performs their daily duties and services. Correct answer.
  4. The place where the employee's remuneration (salary) is paid to them.

Explanation

Under the Goepfert decision, the locality of employment is determined by looking at where the employment is located, which is established by: (1) the place where the contract of employment was negotiated and entered into, and is enforceable; (2) the residence of the employer; and (3) the place where the salary is paid. The place where the duties are actually performed is irrelevant for determining the *source of employment* itself (though it is relevant for apportionment of income if the employment is determined to be non-HK).

Question 28Role knowledge and relevant financial foundations

An employee has a non-Hong Kong employment. Under Section 8(1B) of the Inland Revenue Ordinance (the '60 days rule'), the employee's income from services rendered in Hong Kong is exempt from Salaries Tax if they visit Hong Kong for not more than how many days in a year of assessment?

  1. 60 days Correct answer.
  2. 90 days
  3. 180 days
  4. 183 days

Explanation

Section 8(1B) of the IRO provides that in determining whether services are rendered in Hong Kong, no account shall be taken of services rendered in Hong Kong by an individual who visits Hong Kong for a period or periods not exceeding 60 days in the year of assessment. If visits do not exceed 60 days, all HK-rendered services are ignored, resulting in full exemption from Salaries Tax for that year.

Question 29Role knowledge and relevant financial foundations

Under Section 9(1)(d) of the Inland Revenue Ordinance, when is a share option granted to an employee by reason of their employment subject to Salaries Tax?

  1. On the date the option is granted to the employee.
  2. On the date the option vests (i.e. when the vesting conditions are satisfied).
  3. On the date the employee exercises, assigns, or releases the option. Correct answer.
  4. Only when the underlying shares acquired through the option are subsequently sold.

Explanation

Section 9(1)(d) of the IRO charges Salaries Tax on any gain realized by the exercise, assignment, or release of a share option obtained by a person as an employee or director. The grant of the option and the vesting of the option are generally not taxable events, unless the option is assignable and has a market value at grant (which is rare). Subsequent sale of shares is a capital transaction and is not taxable.

Question 30Role knowledge and relevant financial foundations

Which of the following statements regarding the deduction of Home Loan Interest under Section 26E of the Inland Revenue Ordinance is correct?

  1. A taxpayer can claim the deduction for an unlimited number of years, provided the property is their residence.
  2. The deduction is allowed for a maximum of 20 years of assessment (whether consecutive or not), up to a maximum cap of HK$100,000 per year. Correct answer.
  3. The deduction is only available if the property is let out to generate rental income.
  4. The deduction can only be claimed if the taxpayer elects for standard rate taxation.

Explanation

Under Section 26E of the IRO, a taxpayer who owns a dwelling and uses it as their place of residence can deduct home loan interest paid on a loan secured on that dwelling. The deduction is available for up to 20 years of assessment (consecutive or otherwise) and the maximum annual deduction is HK$100,000.

Question 31Role knowledge and relevant financial foundations

Mrs. Wong pays HK$90,000 for her dependent mother's residential care expenses at a registered elderly home during the year of assessment. Mrs. Wong wishes to claim this under the IRO. Which of the following is correct?

  1. Mrs. Wong can claim both the Elderly Residential Care Expenses deduction and the Dependent Parent Allowance for her mother.
  2. Mrs. Wong can only claim the Elderly Residential Care Expenses deduction (capped at the actual expenditure or HK$100,000, whichever is lower), and she cannot claim the Dependent Parent Allowance for the same parent in the same year. Correct answer.
  3. Elderly Residential Care Expenses are not deductible if the parent is over 60 years old.
  4. The maximum deduction allowed for Elderly Residential Care Expenses is HK$50,000.

Explanation

Section 26D of the IRO provides that a taxpayer can deduct elderly residential care expenses paid to a residential care home for their (or their spouse's) parent/grandparent. The maximum deduction is HK$100,000. However, under Section 26D(5), if the Elderly Residential Care Expenses deduction is claimed and allowed for a parent, no taxpayer can claim a Dependent Parent Allowance (or Dependent Grandparent Allowance) for the same parent in that year.

Question 32Role knowledge and relevant financial foundations

Mr. Lee receives an annual salary of HK$600,000 from his employer. He is also provided with a rent-free flat by his employer in Hong Kong. During the year of assessment, Mr. Lee pays HK$10,000 for self-education expenses and makes a mandatory MPF contribution of HK$18,000. What is the Rental Value (RV) of the flat that should be added to Mr. Lee's assessable income for Salaries Tax purposes?

  1. HK$60,000
  2. HK$59,000
  3. HK$57,200 Correct answer.
  4. HK$60,000 less the MPF contributions

Explanation

Calculations: 1. Base income for Rental Value = Salary (HK$600,000) less allowable deductions. 2. Allowable deductions: Self-education expenses (HK$10,000) + MPF contributions (HK$18,000) = HK$28,000. 3. Net income before Rental Value = HK$600,000 - HK$28,000 = HK$572,000. 4. Rental Value (RV) = 10% of net income before RV = HK$572,000 * 10% = HK$57,200.

Question 33Role knowledge and relevant financial foundations

Under Section 26C of the Inland Revenue Ordinance, what is the limitation on the deduction for approved charitable donations for Salaries Tax?

  1. It must not exceed 10% of the taxpayer's assessable income.
  2. It must not exceed 35% of the taxpayer's assessable income after deducting allowable expenses and depreciation allowances. Correct answer.
  3. The deduction is only allowed for donations of HK$5,000 or more.
  4. There is no percentage limit, but the donation must be made to the Government only.

Explanation

Section 26C of the IRO allows a deduction for approved charitable donations to tax-exempt charities under Section 88. The minimum total donation in a year must be HK$100. The maximum deduction is capped at 35% of the taxpayer's assessable income (after deducting allowable outgoings, expenses, and depreciation allowances).

Question 34Role knowledge and relevant financial foundations

Under Personal Assessment, how is the deduction of mortgage interest on a property let out to generate rental income restricted?

  1. The interest can be deducted up to a maximum of HK$100,000 per year, with the excess carried forward.
  2. The interest deduction is limited to the Net Assessable Value (NAV) of that specific property after rates and the 20% statutory deduction. Any excess interest cannot be offset against other income. Correct answer.
  3. Mortgage interest on let-out properties is fully deductible against the taxpayer's aggregated income without any restriction.
  4. The interest is only deductible if the property was acquired before 1998.

Explanation

Under Section 42(1) of the IRO, when a taxpayer elects for Personal Assessment, they can deduct interest paid on money borrowed for the acquisition of a property let out. However, the interest deduction is capped at the Net Assessable Value (NAV) of that specific property. Any excess interest cannot be used to offset other income (such as Salaries Tax or Profits Tax income) and cannot be carried forward.

Question 35Role knowledge and relevant financial foundations

Which of the following statement regarding the taxability of termination payments received by an employee from their employer is correct?

  1. All termination payments, including statutory severance payments, are fully taxable.
  2. Statutory severance payments or long service payments calculated in accordance with the Employment Ordinance are exempt from Salaries Tax, but any contractual payments or ex-gratia payments exceeding the statutory amount are taxable. Correct answer.
  3. Contractual payments in lieu of notice are completely exempt from Salaries Tax.
  4. Any payment received by an employee after their employment ends is exempt from tax.

Explanation

Under the practice of the IRD and case law, statutory severance payments and long service payments calculated in accordance with the Employment Ordinance (Cap. 57) are not taxable because they are not payments for services rendered. However, any amount paid in excess of the statutory requirement (such as contractual gratuities, ex-gratia payments, and payment in lieu of notice) is taxable under Salaries Tax.

Question 36Role knowledge and relevant financial foundations

During the year of assessment, Mr. Ho's tenant defaulted on rent. The monthly rent was HK$30,000. Rent for 3 months (HK$90,000) became unrecoverable. Mr. Ho had paid rates of HK$6,000 for the year. The total gross rent receivable (before considering the default) was HK$360,000. How should the unrecoverable rent be treated, and what is Mr. Ho's Net Assessable Value (NAV) for the year of assessment?

  1. The unrecoverable rent is not deductible, so the NAV is HK$283,200.
  2. The unrecoverable rent is deductible in the year it becomes unrecoverable. The NAV is HK$211,200. Correct answer.
  3. The unrecoverable rent can only be offset against Profits Tax. The NAV is HK$288,000.
  4. The NAV is calculated as HK$360,000 less rates (HK$6,000) and unrecoverable rent (HK$90,000), which equals HK$264,000.

Explanation

Calculations: 1. Under Section 7C of the IRO, unrecoverable rent is deductible in the year of assessment in which it is proved to the satisfaction of the assessor to have become unrecoverable. 2. Assessable Value = Gross Rent Receivable (HK$360,000) - Unrecoverable Rent (HK$90,000) = HK$270,000. 3. Less: Rates paid by owner = HK$6,000. 4. Net amount before statutory deduction = HK$270,000 - HK$6,000 = HK$264,000. 5. Less: Statutory deduction for repairs and outgoings (20%) = HK$264,000 * 20% = HK$52,800. 6. Net Assessable Value (NAV) = HK$264,000 - HK$52,800 = HK$211,200.

Question 37Role knowledge and relevant financial foundations

For Salaries Tax purposes, how is the source (locality) of a director's fee determined?

  1. By looking at where the director resides.
  2. By looking at where the director actually performs their duties (e.g. where they write board reports).
  3. By looking at where the company is managed and controlled (i.e. the location of the registered office or where the board meetings are held). Correct answer.
  4. By looking at the location where the director's bank account is kept.

Explanation

Under established tax principles and IRD practice, a director holds an office rather than an employment. The source of income from an office is the place where the company is managed and controlled (typically where the board of directors meets to conduct the company's business or where the head office is located).

Question 38Role knowledge and relevant financial foundations

Which of the following best describes the tax implication of the distinction between an employee (contract of service) and an independent contractor (contract for services)?

  1. Both are subject to Salaries Tax, but independent contractors can claim personal allowances.
  2. Employees are subject to Salaries Tax under Section 8, whereas independent contractors are subject to Profits Tax under Section 14. Correct answer.
  3. Employees can deduct all business expenses, whereas independent contractors cannot deduct any expenses.
  4. Independent contractors are subject to Property Tax on their service fees.

Explanation

An employee works under a contract of service and is subject to Salaries Tax under Part III of the IRO. An independent contractor operates under a contract for services (carrying on a trade or business) and is subject to Profits Tax under Part IV of the IRO. Different deduction rules apply.

Question 39Role knowledge and relevant financial foundations

What is the statutory test for the deductibility of expenses under Salaries Tax according to Section 12(1)(a) of the Inland Revenue Ordinance?

  1. Expenses must be incurred in the production of profits.
  2. Expenses must be wholly, exclusively, and necessarily incurred in the production of the assessable income. Correct answer.
  3. Expenses are deductible if they are reasonable and related to the employment.
  4. Any expense that is reimbursed by the employer is deductible by the employee.

Explanation

Section 12(1)(a) of the IRO sets a very strict test for Salaries Tax deductions: the taxpayer must prove that the outgoings and expenses were 'wholly, exclusively and necessarily incurred in the production of the assessable income'. All three conditions must be satisfied, making it much harder to deduct expenses under Salaries Tax than Profits Tax.

Question 40Role knowledge and relevant financial foundations

Which of the following statement is correct regarding the Salaries Tax treatment of lump sum retirement benefits received from a MPF scheme or a recognized ORSO scheme?

  1. All retirement benefits, whether monthly pensions or lump sums, are fully taxable.
  2. Pensions (monthly payments) are generally taxable, but lump sum payments received upon retirement, death, incapacity, or termination of service (subject to rules) are generally exempt from Salaries Tax. Correct answer.
  3. Lump sum benefits are only exempt if the taxpayer has worked for the employer for less than 5 years.
  4. Only benefits received from foreign pension schemes are exempt.

Explanation

Under Section 8(2) of the IRO, monthly pensions are taxable under Salaries Tax. However, lump sums received from MPF schemes (upon retirement, death, incapacity, or permanent departure) or recognized ORSO schemes (subject to specific calculation formulas for terminations of service before 10 years) are generally exempt from Salaries Tax.

Question 41Role knowledge and relevant financial foundations

Mr. and Mrs. Tang jointly own a residential property in Hong Kong (held as joint tenants) which is let out. They elect for Personal Assessment. How is the property's rental income and related mortgage interest allocated between them under Personal Assessment?

  1. The income and interest must be allocated entirely to the husband.
  2. The income and interest must be allocated between them in proportion to their respective shares in the property (i.e. 50:50 for joint tenancy). Correct answer.
  3. They can allocate the income and interest in any ratio they choose to minimize tax.
  4. The income is allocated 50:50, but the interest can only be claimed by the spouse with the higher Salaries Tax income.

Explanation

For property held in joint tenancy, the owners are deemed to have equal shares in the property. Therefore, under Personal Assessment, the Net Assessable Value and the qualifying mortgage interest must be allocated 50:50 between the spouses. If the property were held as tenants in common, the allocation would be based on their actual legal ownership percentages.

Question 42Role knowledge and relevant financial foundations

How are 'holiday journey benefits' provided by an employer to an employee treated for Salaries Tax purposes under the Inland Revenue Ordinance?

  1. They are completely exempt from tax as they are for leisure.
  2. They are taxable, and the taxable value is the cost of the holiday journey paid or reimbursed by the employer. Correct answer.
  3. They are only taxable if the holiday is taken in Hong Kong.
  4. They are taxed at a flat rate of 30% regardless of the employee's tax bracket.

Explanation

Under Section 9(1)(a) and Section 9(2A) of the IRO, the value of any holiday journey benefit provided by an employer is taxable. The taxable amount is the cost of the holiday journey (including transport and accommodation expenses) borne or paid by the employer, whether directly or by reimbursement.

Question 43Role knowledge and relevant financial foundations

Which of the following statement correctly describes the difference between joint tenancy and tenancy in common for Property Tax purposes?

  1. Joint tenants are separately assessed on their shares, while tenants in common are always assessed on a single composite return.
  2. For joint tenancy, owners are deemed to have equal shares and are jointly and severally liable for Property Tax. For tenancy in common, owners have defined shares (which may be unequal) and are liable in proportion to their shares. Correct answer.
  3. Property Tax is only levied on tenancy in common; joint tenancy is exempt.
  4. Tenants in common are allowed a 30% repair deduction, while joint tenants are allowed only 20%.

Explanation

Under joint tenancy, all owners jointly own the whole property and are deemed to have equal shares. They are jointly and severally liable for the tax. Under tenancy in common, each owner holds a distinct, defined share of the property (e.g. 70% and 30%) and is liable for the tax in proportion to their share.

Question 44Role knowledge and relevant financial foundations

Under Section 8(2)(c) of the Inland Revenue Ordinance, a taxpayer with a Hong Kong employment may exclude income earned from services rendered outside Hong Kong from Salaries Tax if which of the following condition is met?

  1. The services are rendered in a country that has no tax treaty with Hong Kong.
  2. The income is subject to tax of a similar nature to Hong Kong Salaries Tax in the territory where the services were rendered, and the taxpayer has paid that tax to the foreign authority. Correct answer.
  3. The taxpayer spends more than 183 days in the foreign territory during the year of assessment.
  4. The employer is a foreign corporation that does not operate in Hong Kong.

Explanation

Section 8(2)(c) of the IRO provides that any income derived by a person from services rendered outside Hong Kong is excluded from the charge to Salaries Tax if: (1) the income is subject to tax in the territory where the services are rendered, and (2) the taxpayer has actually paid tax of a similar nature on that income in that foreign territory.

Question 45Role knowledge and relevant financial foundations

Under what circumstance will an election for Personal Assessment NOT be beneficial to a taxpayer?

  1. When the taxpayer has incurred a loss in their sole proprietorship business.
  2. When the taxpayer has paid mortgage interest on a let-out property that exceeds the property's rental income.
  3. When the taxpayer's only source of income is Salaries Tax and they are already subject to tax at progressive rates.
  4. When the taxpayer has Salaries Tax income and also owns a let-out property with no mortgage, and their total income is high enough to be taxed at the standard rate of 15%. Correct answer.

Explanation

If a taxpayer's income is high and they would be taxed at the standard rate of 15% under separate assessments, electing Personal Assessment (which aggregates all income and applies progressive rates up to 17%) may lead to a higher tax liability. In such cases, the IRD will automatically cancel the Personal Assessment election as it is not beneficial to the taxpayer.

Question 46Role knowledge and relevant financial foundations

Mr. Green has a non-Hong Kong employment. During the year of assessment, his annual salary was HK$1,095,000. He spent 120 days in Hong Kong performing services for his employer, 30 days in Hong Kong on holiday, and the remaining 215 days outside Hong Kong. Under the day-apportionment method for non-Hong Kong employment, what is Mr. Green's assessable income for Salaries Tax purposes?

  1. HK$360,000
  2. HK$450,000 Correct answer.
  3. HK$1,095,000
  4. HK$410,958

Explanation

For a non-Hong Kong employment, Salaries Tax applies only to income from services rendered in Hong Kong, apportioned by days of presence. Under IRD practice (DIPN 10), the numerator includes all days of presence in Hong Kong during the employment period (including weekends and holidays that fall within the period of HK presence), and the denominator is 365. Mr. Green was present in Hong Kong for 120 work days plus 30 holiday days = 150 days. Assessable Income = HK$1,095,000 * (150 / 365) = HK$450,000.

Question 47Role knowledge and relevant financial foundations

Miss Lau's employer pays her a monthly cash salary of HK$80,000 and separately reimburses HK$18,000 of her HK$20,000 monthly rent paid to a landlord in Hong Kong, under a qualifying residence-related benefit arrangement. She has no other deductions or allowances. What is her monthly net assessable income for Salaries Tax purposes?

  1. HK$80,000
  2. HK$86,000 Correct answer.
  3. HK$98,000
  4. HK$78,000

Explanation

Under Section 9(1A) of the IRO, where an employer reimburses rent paid by an employee to a landlord under a qualifying residence-related benefit arrangement, the taxable housing benefit is the Rental Value (RV) rather than the cash reimbursed. RV is 10% of the employee's income from the employer (HK$80,000 * 10% = HK$8,000), reduced by the rent borne by the employee. The employee's unreimbursed rent is HK$20,000 - HK$18,000 = HK$2,000. Net RV = HK$8,000 - HK$2,000 = HK$6,000. Net Assessable Income = Cash salary (HK$80,000) + Net RV (HK$6,000) = HK$86,000. The HK$18,000 reimbursement is not taxed separately as cash income because the RV method applies instead.

Question 48Role knowledge and relevant financial foundations

Mr. Chan let out a property in Hong Kong from 1 July 2025 onwards. The agreed monthly rent was HK$30,000. However, to secure the tenant, Mr. Chan granted a rent-free period for the first 2 months (July and August 2025). The tenant paid rates of HK$4,000 for the period from 1 July 2025 to 31 March 2026, which was Mr. Chan's obligation under the tenancy agreement. What is the Net Assessable Value (NAV) of the property for the year of assessment 2025/26 (ending 31 March 2026)?

  1. HK$168,000 Correct answer.
  2. HK$164,800
  3. HK$172,800
  4. HK$216,000

Explanation

Calculations: 1. Period of letting in 2025/26: 1 July 2025 to 31 March 2026 = 9 months. 2. Rent-free period: 2 months (July and August 2025). Thus, rent is only receivable for 7 months (September 2025 to March 2026). 3. Rent receivable = 7 months * HK$30,000 = HK$210,000. 4. Under IRO, if a tenant pays rates which are the owner's agreement obligation, this represents a benefit to the owner and is added to the assessable value. However, here, the rates paid by the tenant were Mr. Chan's obligation, meaning Mr. Chan's gross consideration is HK$210,000 + HK$4,000 (rates paid by tenant) = HK$214,000. Then, under Section 5(1A), the rates paid by the owner (or here paid on behalf of the owner) are deducted. Net rates deduction = HK$4,000. So the Assessable Value remains HK$210,000. 5. Less: Statutory deduction for repairs and outgoings (20%) = HK$210,000 * 20% = HK$42,000. 6. Net Assessable Value (NAV) = HK$210,000 - HK$42,000 = HK$168,000.

Question 49Role knowledge and relevant financial foundations

For the year of assessment, Mr. Tsang's Net Income (assessable income less allowable deductions, before personal allowances) is HK$3,000,000. His Net Chargeable Income (after deducting personal allowances of HK$264,000) is HK$2,736,000. How should Mr. Tsang's Salaries Tax liability be calculated to determine the final tax payable under the IRO?

  1. By applying the progressive tax rates to the Net Chargeable Income of HK$2,736,000, which is the only method allowed.
  2. By applying the standard tax rate of 15% to the Net Income of HK$3,000,000, which is the only method allowed.
  3. By comparing the tax calculated at progressive rates on the Net Chargeable Income of HK$2,736,000 (which is HK$447,120) and the tax calculated at the standard rate of 15% on the Net Income of HK$3,000,000 (which is HK$450,000), and charging the lower amount (HK$447,120). Correct answer.
  4. By charging the sum of both the progressive rate tax and the standard rate tax.

Explanation

Under Section 13 of the IRO, Salaries Tax is calculated at progressive rates on the Net Chargeable Income (income less deductions less allowances) but is capped at the standard rate (15%) on the Net Income (income less deductions, before allowances). The taxpayer pays the lower of the two. Here, progressive tax on HK$2,736,000 is HK$447,120, while standard tax on HK$3,000,000 is HK$450,000. Since the progressive tax is lower, the tax payable is HK$447,120.

Question 50Role knowledge and relevant financial foundations

An employee with a non-Hong Kong employment is granted share options by his employer. The option was granted on 1 July 2023 when he worked in Singapore. On 1 July 2024, the employee was transferred to Hong Kong to perform services. The options vested on 1 July 2025, and he exercised them on 1 July 2026. The employee spent 180 days in Hong Kong during the period between the grant date and the vest date. How is the share option gain taxed for Salaries Tax purposes?

  1. The entire share option gain is fully subject to Salaries Tax in Hong Kong because the option was exercised when the employee was in Hong Kong.
  2. The share option gain is apportioned based on the ratio of the number of days the employee rendered services in Hong Kong to the total number of days between the grant date and the vest date. Correct answer.
  3. The share option gain is completely exempt from Salaries Tax because the option was granted when he had Singapore employment.
  4. The gain is taxed at a flat rate of 10% on the exercise date with no apportionment.

Explanation

For a non-Hong Kong employment, if share options are granted and some services are performed in Hong Kong during the vesting period (between grant and vest), the option gain is considered partially sourced in Hong Kong. Under IRD practice (DIPN 38), the gain is apportioned based on the number of days the employee rendered services in Hong Kong relative to the total days in the vesting period (from grant date to vesting date).