BHMH2123 Lecture 3 Property Tax PDF

BHMH2123 Introduction to Auditing & Taxation Lecture 3 BHMH2123 S1 2024/25  Property Tax INTRODUCTION INCOME FROM LAND & BUILDINGS IN HONG KONG MAY BE TAXED IN 2 WAYS: 1. PROPERTY TAX (PART II OF THE IRO) – THE LETTING OF LAND, BUILDING...

BHMH2123 Introduction to Auditing & Taxation Lecture 3 BHMH2123 S1 2024/25  Property Tax INTRODUCTION INCOME FROM LAND & BUILDINGS IN HONG KONG MAY BE TAXED IN 2 WAYS: 1. PROPERTY TAX (PART II OF THE IRO) – THE LETTING OF LAND, BUILDINGS/ LAND & BUILDINGS BY THE OWNERS – NOT CONSTITUTE A BUSINESS BHMH2123 S1 2024/25 2. PROFITS TAX (PART IV OF THE IRO) – IF LETTING/SUB-LETTING OF LAND, BUILDINGS/ LAND & BUILDINGS BY THE TAXPAYER – CONSTITUTE A BUSINESS  Property Tax 3. A corporation may apply exemption from Property Tax and include rental income in its profit income – S5(2)(a) 4. Under S25, if a sole proprietor, partnership & corporation paid property tax in a year of assessment, they may apply the paid property tax to set off against its profits tax payment. BHMH2123 S1 2024/25  Property Tax Scope of Charge (S5(1)) the source of income is land/buildings/land & buildings the chargeable person is the ‘owner’ of the land and/or buildings the rental income must be from land and/or buildings situated in HK tax is charged on a current year basis i.e. each year of assessment tax is computed at the standard rate on the net BHMH2123 S1 2024/25 assessable value Net assessable value = assessable value less statutory deduction Basis period and tax rate  Year of assessment (S2(1)) The period of 12 months commencing on 1 April in any year to 31 March of the following year  Tax rate No tax rebate for property tax Standard rate Year of assessment Tax rate (%) BHMH2123 S1 2024/25 2008/09 onwards 15  Property Tax Meaning of ‘land or buildings’ (S7A) Ordinary meaning Include piers, wharves and other structures Other structures include walls, dams, fish ponds, sewers, roads, bridges etc. BHMH2123 S1 2024/25 ‘buildings’ include a part of a building e.g. The letting of a room in a flat  Property Tax-Ownership S2 OF THE IRO PROVIDES ‘OWNERS’ FOR PROPERTY TAX PURPOSES: A PERSON HOLDING DIRECTLY FROM THE HKSAR GOVERNMENT A BENEFICIAL OWNER[受益人] A LIFE TENANT[終身租客] A MORTGAGOR[抵押人] A MORTGAGEE IN POSSESSION[抵押貸款人] AN EXECUTOR OF AN OWNER’S ESTATE[遺囑執行人] A PERSONWHO IS MAKING PAYMENTS TO A CO-OPERATIVE BHMH2123 S1 2024/25 SOCIETY[合作社] FOR THE PURPOSE OF PURCHASE OF THE LAND AND/OR BUILDINGS A PERSONWITH ADVERSE TITLE TO LAND RECEIVING RENT FROM BUILDING[擁有相逆土地業權] Property Tax-Ownership (cont’d) A PERSON WHO HOLDS LAND AND/OR BUILDINGS SUBJECT TO A GROUND RENT OR OTHER ANNUAL CHARGE INCORPORATED OWNERS FORMED BY THE OWNERS OF A BUILDING UNDER THE BUILDING MANAGEMENT ORDINANCE RECEIVE CONSIDERATION IN RESPECT OF THE RIGHT OF USE OF ANY PARTS OF LAND AND/OR BUILDINGS IN PRACTICE, ANY PERSON’S NAME REGISTERED UNDER A BHMH2123 S1 2024/25 GOVERNMENT LEASE IN THE LAND REGISTRY[土地註冊 署] IS REGARDED AS THE OWNER Property Tax – Class Exercise 1 Identify the owner of the following properties A property in HK is registered in the name of Mr. Chan who is a partner of Chan, Wong & Cheung partnership. A duly executed declaration of trust [委托合約]shows that Mr. Chan is holding the property in trust for the partnership BHMH2123 S1 2024/25 Answer_____________________________  Answer: Mr Chan is not the beneficial owner of the property although the property is registered in his name. By the evidence of the declaration of trust, the partnership is the beneficial owner and therefore liable to property tax if income is derived from the property BHMH2123 S1 2024/25  Property Tax – Class Exercise 2 Identify the owner of the following properties Mr. Yip purchased a property in Shatin on 1 May 2023. 90 % of the purchase money was financed by a bank mortgage loan. As Mr. Yip was unable to repay the bank loan, the bank with effect from 1 October 2023, the date of delivery of a judgment by the Court, entered into possession of the property. BHMH2123 S1 2024/25 Answer_____________________________  Answer: Before 1 October 2023, Mr Yip was obviously the owner of the property because he was the registered owner and the mortgagor. However the bank falls into the definition of owner as a mortgagee in possession from 1 October 2023. BHMH2123 S1 2024/25  Property Tax The assessable value[應評稅值] of an immovable property is the consideration, in money or money’s worth, payable in a Y/A for the right of use of it (S5B(2)) ‘Consideration’ [代價] include  Rent[租金] received and receivable  Lump sum premiums [整筆使用權費]  Service charges, management fee etc. paid to the owner [付款與業主交管理費]  payment for the right of use of premises under licence (e.g. car park fee) BHMH2123 S1 2024/25  Owner’s expenditures e.g. repairs and maintenance fees borne by the tenant Property Tax - Basis of Assessment  The consideration is taxable on an accrual basis, not on a cash basis  Bad debt is deducted from the calculation of assessable value when it is proved to be bad e.g. the satisfaction of assessor  Separate assessments are made for each property  The premium paid by a tenant may be spread over for a maximum of 3 years (i.e. 36 months) commencing at the start of the lease period. If the lease period is BHMH2123 S1 2024/25 shorter than 3 years, then the premium is spread over the lease period, not 3 years (S5B(4))  Property Tax Tax Computation  The amount of property tax is computed at the standard rate on the gross rental income after deducting 20% of the gross amount as annual relief for repair & maintenance of the property (No deduction for actual expenses will be allowed). Government rent, decoration fees, rent-collection fees, building management fees, insurance and mortgage interests are all non- deductible.  The net assessable value[應評稅淨值] is BHMH2123 S1 2024/25 computed by deducting rates (if paid by the owner) and bad debt for rent and an allowance of 20 % for maintenance of the property  Computation Template of Property Tax S5B(2) & (4) Rent and premium A S7C(2) Add: Rent recovered B C S7C(1)&(3) Less: Irrecoverable rent (bad debt) (D) Assessable value E S5(1A)(b)(i) Less: Rates paid by owner (F) G BHMH2123 S1 2024/25 S5(1A)(b)(ii) Less: Statutory deduction (G * 20%) (H) Net Assessable Value I S5(1) Property tax thereon (I x 15%) J Mr. Cheung owns a property in Hong Kong. On 1 May 2019, he let his property for a period of four years at a monthly rent of $ 2,000 payable on the first day of each month and at a premium of $ 18,000 payable on 1 May 2019. Required: Calculate the assessable value for the year of BHMH2123 S1 2024/25 assessment 2019/20, 2020/21, 2021/22 and 2022/23 Mr. Cheung Property Tax Computation Year of assessment 2019/20 $ Monthly rent 11m x $2,000 22,000 Premium 11m x $18,000/36 5,500 (S5B(4)) Assessable value 27,500 Year of assessment 2020/21 $ BHMH2123 S1 2024/25 Monthly rent 12m x $2,000 24,000 Premium 12m x $18,000/36 6,000 Assessable value 30,000 Mr. Cheung Property Tax Computation Year of assessment 2021/22 $ Monthly rent (12m x $2,000) 24,000 Premium (12m x $18,000/36) 6,000 Assessable value 30,000 Year of assessment 2022/23 $ BHMH2123 S1 2024/25 Monthly rent (12m x $2,000) 24,000 Premium (1m x $18,000/36) 500 Assessable value 24,500 On 1 October 2020, Mr. Chan let his property in Hong Kong for a period of 2 years at a monthly rent of $ 10,000 payable on the first day of each month and at a premium of $ 30,000 payable on 1 October 2020. Required: Calculate the assessable value for the year of assessment 2020/21, 2021/22 and 2022/23 BHMH2123 S1 2024/25 Mr. Chan Property Tax Computation Year of assessment 2020/21 $ Monthly rent (6m x $ 10,000) 60,000 Premium (6m x $ 30,000/24) 7,500 Assessable value 67,500 Year of assessment 2021/22 $ BHMH2123 S1 2024/25 Monthly rent (12m x $ 10,000) 120,000 Premium (12m x $ 30,000/24) 15,000 Assessable value 135,000 Mr. Chan Property Tax Computation Year of assessment 2022/23 $ Monthly rent 6m x $10,000 60,000 Premium 6m x $30,000/24 7,500 Assessable value 67,500 BHMH2123 S1 2024/25 Mr. Wong owns a property in Hong Kong. He let his property on 1 October 2022 for a period of two years under the following terms : a. monthly rent of $8,000 payable on the first day of the month b. one-month rental deposit of $8,000, payable on 1 October 2022 c. initial premium of $20,000, payable on 1 October 2022 d. the tenant is liable to pay the management fee of $500 a month and pays the management fee directly to the management co. e. the landlord is responsible to pay repairs expenses $4,000 but the tenant has paid the repairs expenses for the landlord. BHMH2123 S1 2024/25 Required: Calculate the assessable value for the year of assessment 2022/23 Mr. Wong Property Tax Computation Year of assessment 2022/23 $ Monthly rent (6m x $8,000) 48,000 Premium (6m x $20,000/24) 5,000 Repairs paid for the benefit of the landlord 4,000 Assessable value 57,000 BHMH2123 S1 2024/25  Net Assessable Value The net assessable value is the assessable value less certain deductions (s5(1A)) These deductions include:  The rates paid by an owner, and Statutory deduction [法定減免] of 20% An allowance for repairs and outgoings of 20% of the assessable value after the deduction of rates paid by the owner in respect of a property BHMH2123 S1 2024/25 Mr. Leung let his flat for a period of two years from 1 April 2022 at a monthly rent of $ 8,000 and at a premium of $ 24,000. During the year ended 31 March 2023, Mr. Leung incurred the following expenses. a. rates of $ 1,000 per quarter b. actual repairs of $ 3,000 c. mortgage loan interest of $ 54,300 The tenant is liable to pay the management expenses directly to the management co. BHMH2123 S1 2024/25 Required: Calculate the net assessable value for the year of assessment 2022/23 Mr. Leung Property Tax Computation Year of assessment 2022/23 $ Monthly rent (12m x $8,000) 96,000 Premium (12m x $ 24,000/24) 12,000 Assessable value 108,000 Less: Rates paid (4 x $ 1,000) (4,000) 104,000 BHMH2123 S1 2024/25 Less: 20% deduction (20% x $ 104,000) (20,800) Net assessable value 83,200 The property tax is chargeable at standard tax rate on the net assessable value S5(1) BHMH2123 S1 2024/25 In the previous example, the standard tax rate for the year of assessment 2022/23 is 15% Required: Calculate the property tax liability of Mr. Leung for the year of assessment 2022/23. BHMH2123 S1 2024/25 Mr. Leung Property Tax Computation Year of assessment 2022/23 $ Net assessable value 83,200 Property tax thereon @15% 12,480 BHMH2123 S1 2024/25 End of Lecture 3 Studentsare reminded to read the following chapters of HKTTP: Relevant areas in Chapter 6 & 7 BHMH2123 S1 2024/25