Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Section 16(1) : In the production of chargeable profits

In the case re Stanley So & Company, it was held that certain entertainment expenses, equipment rental and office facilities charges are disallowed because they are regarded as excessive and not in the production of chargeable profits. In such cases, the IRD can make appropriate adjustments when computing the assessable profits. Click here for details.

The UK income tax law allow expenditure incurred “for the purpose of the trade”, vide Section 130 of ICTA 1970. Australia and South Africa tax law adopt “in the production of (or producing) the income”, similar to Hong Kong. 

From the Hong Kong court cases, it appears that there is no clear distinction between the UK's “for the purpose of the trade” and the Hong Kong's “in the production of profits”. This can been seen in the case CIR versus Swire Pacific Ltd. HKTC 1145 in which similar criteria to UK have been adopted to decide the issue.

Swire Pacific carried on a shipyard business. In early seventies, its workers went on strike when the company decided to merge with another company. In order to end the strike, the company paid to the workers “retirement grants” of $22,000,000. The Revenue disallowed $18,000,000 as deduction on the grounds that such payment had not made in the production of profits of the business that had just three more months to last; but rather, it was to preserve of the company's assets and to safeguard the merger. The court rejected the Revenue's contention and ruled that there was ample evidence to support that the payment was to get the workers back to work, so that the company could continue to earn profits for the remaining months and to avoid damages had the strike continued; and hence, it was for the production of profits. It follows from this case that if a payment is incurred in the ordinary course of business with “a purpose of earning profits”, it is deductible even though the payment turns out to be unprofitable. 

In the Board of Review case D46/02, 80% of the sauna, gymnasium and physical-fitness expenses incurred by a jockey was held to be deductible. Press here for details.

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