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Hong Kong Profits Tax - Scenarios on Partnership Business

  1. I started a partnership business with my brother and our first accounts closed on 31 March 2005. How should I report my share of the profits of the partnership to the Inland Revenue Department?

  2. Under a partnership agreement (with 2 partners in total), I draw a monthly salary of $10,000 from the business and the balance of the profits is divided between my partner and myself in equal shares. How will the assessable profits of the business be allocated between us?

  3. Our partnership business had an assessed loss in the previous year of assessment and one of the partners, who is an individual, retired at the end of that year. In this regard, can the share of the loss allocated to the partner who retired be used to set off the profits of the partnership of this year and subsequent years?

  4. One of the partners has a separate employment, and mandatory contributions (for a MPF scheme) have been made by him both in the capacity of a self-employed person and an employee. How should tax deductions be claimed under profits tax?
1. I started a partnership business with my brother and our first accounts closed on 31 March 2005. How should I report my share of the profits of the partnership to the Inland Revenue Department?

For Profits Tax purposes, a partnership is treated as a separate legal "person". As such, the assessable profits of a partnership are calculated as a single amount and the tax in respect of the profits is charged in the name of the partnership (but not charged to your or your brother's individual name).


The precedent partner of the partnership should complete for the partnership a "Profits Tax Return íV Persons Other Than Corporations" (B.I.R.52) for the year of assessment 2004/05.


The "net profits" shown in the accounts of the business have to be converted into its "assessable profits" and declared in B.I.R.52.


Normally, a Profits Tax Assessment would be raised on the partnership at the Standard Rate of Tax (i.e. 16% for the year of assessment 2004/05 onwards). However, if Personal Assessment is elected, the partners' tax liabilities may be reduced.


Where it is apparent that a partner will obtain a tax advantage by electing Personal Assessment, Profits Tax is not, in practice, charged on his/her share of assessable profits from the partnership (tax is separately charged under Personal Assessment). Nor is Provisional Profits Tax charged on that portion of assessable profits from the partnership.


2. Under a partnership agreement (with 2 partners in total), I draw a monthly salary of $10,000 from the business and the balance of the profits is divided between my partner and myself in equal shares. How will the assessable profits of the business be allocated between us?

The allocation of the assessable profits (or adjusted loss) between partners takes into account any salary or interest on loans or capital invested which has been paid to a partner or his/her spouse. Such a payment is treated as though it were a distribution of profits to the partner concerned and the balance of the assessable profits is then apportioned on the basis of the agreed profit sharing ratio. The following examples illustrate how this is done:


Example 1



HK$


Assessable profits


300,000


Less: Salary paid to Partner A


(120,000)


Remaining balance


180,000



Allocation of Assessable Profits


Partner A


Partner B



$


$


Salary


120,000


---


Sharing ratio (profit)


50%


50%


Share of balance


90,000


90,000


Share of assessable profits


210,000


90,000


Example 2



HK$


Assessable profits


100,000


Less: Salary paid to Partner A


(120,000)


Remaining balance


(20,000)



Allocation of Assessable Profits


Partner A


Partner B



$


$


Salary


120,000


---


Sharing ratio (profit/loss)


50%


50%


Share of balance


(10,000)


(10,000)


Sub-total


110,000


(10,000)


Reallocation


(10,000)


10,000


Share of assessable profits


100,000


---


As the partnership in Example 2 was in a profitable position overall (i.e. it had assessable profits of $100,000), no partner could be allocated any loss. Hence, the notional loss ($10,000) of Partner B was re-allocated to Partner A who was in a "profit position" after the initial allocation.


You do not have to separately report the salary you draw from the partnership business in a Tax Return - Individual (B.I.R.60) as the amount will be included in the assessable profits of the business.


3. Our partnership business had an assessed loss in the previous year of assessment and one of the partners, who is an individual, retired at the end of that year. In this regard, can the share of the loss allocated to the partner who retired be used to set off the profits of the partnership of this year and subsequent years?

Where an individual incurs a share of a loss in a business carried on by a partnership and does not choose personal assessment for for that year of assessment, the amount may be carried forward and set off against his/her share of the assessable profits from the partnership business in subsequent years of assessment until it is fully set off.


However, any remaining balance of the loss lapses if the partner retires before the loss is fully set off, i.e. the balance cannot be utilized to reduce the subsequent profits of the partnership.


Please note that you are required to inform the Business Registration Office of any admission or retirement of partners within 1 month of such change. You may use the Form I.R.B.R.64 as provided by the Inland Revenue Department.


4. One of the partners has a separate employment, and mandatory contributions (for a MPF scheme) have been made by him both in the capacity of a self-employed person and an employee. How should tax deductions be claimed under profits tax?

In arriving at the deductible amount, sums already deducted in the partner's salaries tax assessment, and profits tax assessments of his other businesses have to be taken into account. In other words, the aggregate amount to be deducted for that partner in respect of MPF contributions should not exceed $12,000 in any year.



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