THE KONG INSTITUTE OF CHARTERED SECRETARIES THE INSTITUTE OF CHARTERED SECRETARIES AND ADMINISTRATORS

International Qualifying Scheme Examination

HONG KONG TAXATION PILOT PAPER

Marking Scheme

1 1 (a) Main points to be covered are:

1. is well known as a source jurisdiction. To be chargeable under Hong Kong income , the concept of residence is not relevant. Rather, the source of income is important. Subject to exemptions, in general a person, irrespective of whether he/she is a Hong Kong resident person or overseas resident person, is chargeable to:

(a) Hong Kong property tax if he/she owns Hong Kong property which generates rental income

(b) Hong Kong if he/she is under Hong Kong employment or holds a Hong Kong office or is under foreign employment but renders services in Hong Kong

(c) Hong Kong if he/she carries on a trade, profession or in Hong Kong and derives Hong Kong sourced profits from such a trade, profession or business

2. In general, the concept of residence has no significant effect on tax exemption and deduction rules under Hong Kong income tax. Resident persons or non-resident persons are equally treated in terms of tax exemptions and deductions for outgoings and expenses.

3. The concept of residence is also irrelevant under the scope of Hong Kong . Irrespective of whether a person is a Hong Kong resident or an overseas resident, he/she may have to pay stamp duty if he/she executes the specific instruments in respect of transactions in Hong Kong property, Hong Kong stock or Hong Kong bearer instruments.

4. However, the concept of residence is important when it comes to certain tax reliefs and allowances:

(a) Personal assessment, an alternative provided for individual taxpayer to minimise his/her income tax liability, is only available to a Hong Kong permanent resident or a temporary resident.

(b) One of the conditions for the parent/grandparent of a taxpayer to be eligible for dependent parent/grandparent allowance is that the parent/grandparent should be a Hong Kong permanent resident.

(c) Some tax provisions or incentives are only available to non-Hong Kong resident persons. For example, section 21 of the (IRO) only applies to compute the amount of assessable profits derived from Hong Kong by a non-resident person in respect of a trade, profession or business carried on in Hong Kong. Also, sections 20AB-AE apply to exempt non-resident funds in respect of Hong Kong sourced investment profits.

5. Mr. Davidson should be advised that:

(a) He is obliged under section 51(1) of the IRO to file the appropriate tax return issued by the Inland Revenue Department. The penalty for non-compliance with filing a tax return is a maximum fine of $10,000 plus three times the tax undercharged (section 80(2))or an additional tax of a maximum of treble the amount of tax undercharged (section 82A).

2 (b) He is obliged to keep rent records for property tax purposes under section 51D. The penalty for non-compliance with keeping rent records is a maximum fine of $10,000 (section 80(1)) (9 marks)

(b) Main points to be covered are:

1. In accordance with the principles from the Goepfert case (CIR v Goepfert George Andrew 2HKTC 210), Mr. Davidson’s employment has its source outside Hong Kong: (i) the employment contract in question was entered into and is enforceable outside Hong Kong; (ii) his ultimate employer was PanHealth (US) Limited, which was a US company at all material times; and (iii) his remuneration is paid to him through his bank account outside Hong Kong.

It is also supported by the fact that, although Mr. Davidson performed most of his work in Hong Kong, his attachment to the Hong Kong subsidiary, GoodHealth (HK) Limited, was merely a matter of convenience. Moreover, his work was for the benefit of various subsidiary companies in the Asia Pacific region, not only for the Hong Kong subsidiary.

However, as Mr. Davidson performed some duties in Hong Kong, he is subject to Hong Kong salaries tax in respect of his income derived from services rendered in Hong Kong. His total employment income will be apportioned based on his time spent in Hong Kong and outside Hong Kong to ascertain the assessable income (section 8(1A)(a)).

2. In respect of the directors’ fee received from GoodHealth (HK) Limited, Mr. Davidson will be subject to Hong Kong salaries tax on the basis that the fee is sourced in Hong Kong. This is because the board meetings of GoodHealth (HK) Limited were held in Hong Kong and thus the company was managed and controlled in Hong Kong. (4 marks)

3. Mr. Davidson Salaries tax assessment for 2006/07 $ $ Employment income [$1,500,000 x (180 + 15 x 180/350)/365] 771,428 Housing benefit: Rental value: (771,428 x 10%) 77,142 Less: rent suffered 12,000 65,142 Director fee 60,000 Assessable income 896,570 Less: Married person’s allowance 200,000 Child allowances 80,000 280,000 Net chargeable income 616,570

Salaries tax liability: 16% of $896,570 143,451 Progressive tax rates ($6,600 + 19% x 526,570) 106,648

(4 marks)

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4. Mr. Davidson Property tax assessment for 2006/07 $ 1.6 2006 – 31.3.2007 Rent ($30,000 x 10) 300,000 Premium ($80,000 x 10/24) 33,333 Assessable value 333,333 Less: Rates ($2,800/3 x 10) 9,333 324,000 Less: Statutory allowance (20%) 64,800 Net assessable value 259,200 Property tax @16% 41,472

1. The premium is spread over the lease period, which is shorter than the statutory three- year period.

2. The rent deposit is not assessed as it serves only as a security and is not consideration for the right of use of the flat.

3. Rates paid by the landlord during the period of letting are deductible but mortgage loan interest expenses are not deductible under property tax. (6 marks)

(c) Main points to be covered are:

1. A valid objection must: a. be in writing; b. state precisely the grounds for objection; c. be received by the Commissioner within one month after the date of the notice of assessment. A late objection can be allowed by the Commissioner if the taxpayer has reasonable excuse such as sickness, absence from Hong Kong, etc.; and d. for an objection to an estimated assessment raised in absence of a tax return; the objection is valid only if the tax return is filed within the specified period as approved by the Commissioner.

2. In Mr. Davidson’s situation, the 2006/07 estimated salaries assessment was issued on 15 April 2008. The one-month period for lodging a valid objection has lapsed. However, as Mr. Davidson was on a business trip and absent from Hong Kong during the one month period, i.e. from 14 April to 16 May 2008, he may lodge a late objection to the Inland Revenue Department using that reason.

3. However, the 2006/07 salaries tax assessment issued to Mr. Davidson was an estimated assessment because of his failure to file his salaries tax return. To validate his objection, Mr. Davidson must also file the salaries tax return in question as soon as allowed by the Commissioner. (3 marks)

4. Mr. Davidson is chargeable to property tax on his rental income from letting of the flat. Under property tax, apart from the deduction of rates agreed and paid by the landlord, only a statutory allowance of 20% is allowable. The actual interest expenses of $51,000 and $142,000 from the two loans used to finance the acquisition of the flat are not allowable under property tax.

4 5. Mr. Davidson is eligible to elect personal assessment for 2006/07: he was a Hong Kong temporary resident in 2006/07 as he spent 195 days in Hong Kong in the year.

6. Mr. Davidson may be able to obtain relief for these interest expenses by electing personal assessment under which the interest expenses of $259,200 (not exceeding the net assessable value ($259,200) of the flat) will be allowable.

7. Whether or not Mr. Davidson’s friend, who was the recipient of the interest, is taxable in respect of his/her interest income, is irrelevant for interest deduction relief. However, the Inland Revenue Department may have to ascertain there is a genuine and arm’s length lending and borrowing transaction between Mr. Davidson and his friend for deduction purposes. (6 marks)

(d) Main points to be covered are:

1. The sale and purchase of Hong Kong stock requires a bought note and a sold note for completion of the transaction. The contract notes are subject to stamp duty under Head 2(1) and the amount of stamp duty payable is:

$100,000 x 0.2% + $5 = $205.

2. The gifting of Hong Kong stock is operating as a voluntary disposition inter vivos. Therefore the deed of gift attracts stamp duty under Head 2(3). The amount of stamp duty payable is:

$25 x 5,000 x 0.2% + $5 = $255.

3. The formal purchase and sale agreement of the residential flat in Hong Kong is subject to stamp duty under Head 1(1A). The amount of stamp duty payable is:

$7,000,000 x 3.75% = $262,500.

The deed of assignment (conveyance on sale) is also subject to stamp duty at a nominal amount of $100 if the formal purchase and sale agreement was duly stamped.

4. The mortgage deed and/or mortgage loan agreement, if any, in respect of the advance and mortgage loan are not dutiable instruments under any of the four Heads of Schedule 1 of the .

5. An agreement for lease of immovable property in Hong Kong is subject to stamp duty under Head 1(2). The amount of stamp duty payable is:

$80,000 x 3.75% + ($30,000 x 12) x 0.5% = $4,800.

(8 marks)

(Total: 40 marks)

5 2 (i) Mr. Tong Salaries tax assessment for 2007/08 $ $ Salary and bonus 770,000 Holiday warrant benefit (1) 14,000 Reimbursement of wages to a maid (2) 40,000 824,000 Less: Motor car running expenses [$42,000 x 55%] 23,100 800,900 Add: Rental value (10% x $800,900) 80,090 Less: Rent paid ($700,000 x 5%) 35,000 45,090 845,990 Add: Share option gain [($24 - $20) x 10,000] 40,000 885,990 Less: Self education expenses (4) 50,000 Net assessable income 835,990 Less: Approved charitable donation 50,000 Contribution to MPF 12,000 62,000 773,990 Less: Married person’s allowance 200,000 Child allowance 100,000 Dependent brother/sister allowance 30,000 Disabled dependent allowance 60,000 390,000 Net chargeable income 383,990

Tax payable at progressive rates ($7,350 + 17% x $278,990) 54,778 Tax payable at standard rate (16% x $773,990) 123,838

(10 marks)

6 Explanatory notes:

1. The two non-transferable air tickets came from employment under the terms of the sales award and were spent for holiday purposes. They are assessable under salaries tax as a holiday benefit at the cost borne by the employer, i.e. $14,000.

2. As Mr. Tong was personally liable for paying the maid (the employment contract was signed by him), the payment of wages to the maid was his private expenditure. Reimbursement of the wages is therefore taxable.

3. The company car provided by the employer is a benefit that is not in money’s worth. The car was purchased by the company and there is no evidence that Mr. Tong can assign the right to use the car for consideration. Thus it is not taxable.

4. The management course was offered by a university and, judging from Mr. Tong’s job position, it is likely that the course is a prescribed course of education. The tuition fees are allowable under section 12(1)(e). However, the amount of deduction should be limited to $60,000 for 2007/08.

5. There is no evidence that the membership of a social club is necessary for Mr. Tong’s employment. Hence, the club membership fee is not deductible under section 12(1)(a). (5 marks)

(ii) Main points to be covered are:

1. The home finance allowance is a pure allowance that comes from employment. The allowance is taxable income.

2. Mr. Tong may claim the home loan interest (section 26E) in respect of the mortgage loan interest of his dwelling subject to the satisfaction of the following conditions: (a) Mr. Tong is the owner of the dwelling (sole owner or joint owner or co-owner). (b) The dwelling is situated in Hong Kong and is used exclusively or partly for residential purposes. (c) The bank mortgage loan is used wholly or partly for acquisition of the dwelling. (d) The bank mortgage loan is secured by a mortgage over the dwelling. (e) The lender is a financial institution.

Home loan interest is granted to a person for any seven years of assessment, whether continuous or not. The maximum deduction is $100,000 per year. (5 marks)

(Total: 20 marks)

7 3(i) Main points to be covered are:

1. The agency agreement was signed in Taiwan and Tai Wong Limited did not actively participate in the sales made to the Chinese customers. The sales with the Chinese customers were concluded by the sub-agents in China. According to the decision in the case CIR v International Wood Product Ltd (HKTC 551), the commission income received by Tai Wong Limited should not have a source in Hong Kong. Hence, the commission is not taxable. (1½ marks)

2. Interest from debentures issued and listed in Luxemburg is not sourced in Hong Kong.

Interest on deposits with Wing Lung bank is taxable under section 15(1)(f). As the provision of credit was made in Hong Kong, the interest income is sourced in Hong Kong. The 1998 Exemption Order does not apply here as the deposits were employed back to back securing a bank overdraft for section 16(2)(d) purposes.

Interest from the European customer on its overdue trade accounts balance is taxable on the basis that the interest is part of the company’s trading profits, which are sourced in Hong Kong and hence taxable. Accordingly, the interest income should also be regarded as sourced in Hong Kong and therefore taxable as well. The provision of credit test does not apply in this case. The citizenship of the customer is also irrelevant in determining the taxability of the interest income. (2½ marks)

3. Interest on a bank overdraft is allowable. The overdraft was for business purposes and the overdraft was secured by bank deposits from which the deposit interest income is taxable under section 15(1)(f). Hence, section 16(2)(d) and section 16(2A) are satisfied.

Hire purchase interest is the financial cost for the acquisition of computers for business use. This interest is therefore allowable under section 16(1). (1½ marks)

4. Legal fees to get rid of an unsatisfactory staff member are considered to be normal business expenses incurred in carrying on a business. They are thus allowable.

Expenses for the registration of a trademark are allowable under section 16(1)(g).

The cost of appeal against rates is considered revenue in nature as it is incurred for the purpose of reducing the company’s business expenditure, i.e. rates. It is allowable. (2 marks) 5. Acquisition cost of loose tools is capital expenditure but replacement of loose tools, i.e. $4,780 x 65% = $3,107, is allowable under section 16(1)(f).

Renovation expenses of business premises are deductible under section 16F by five equal instalments over five years starting from 2007/08. (1½ marks) 6. According to the decision in CIR v Li & Fung Ltd (HKTC 1193), the nature of the sale proceeds has been changed to a capital asset when they were converted into a seven- day call deposit. Therefore, the exchange losses are capital in nature and are not allowable.

8 Provision for slow moving and obsolete stock is merely an accounting provision rather than a definite committed liability. It is not allowable as it fails to satisfy the test of whether it was incurred under section 16(1). (2 marks) 7. The computers under hire-purchase qualify for depreciation allowances. $ $ Cost 240,000 Less: I.A [60% x ($40,000 + $20,000 x 5)] 84,000 84,000 156,000 Less: A.A @ 30% 46,800 46,800 Reducing value/ depreciation allowance 109,200 130,800 (2½ marks)

8. Where the objects and activities of a trade association are to further the trade interest of the company, the subscriptions are incurred in the production of business profits and are allowable.

Annual contributions to a mandatory provident fund, provided that the contribution is not more than 15% of the employee’s emolument, are allowable as staff costs. They are expenditure incurred in the carrying on a business. (1½ marks) (ii) Main points to be covered are: Scientific research Additional information is required to ascertain the nature of the research, the nature of the research expenditure and how the research expenditure was spent for section 16B.

Under section 16B, scientific research is defined to mean: (a) any activities in the fields of natural or applied science for the extension of knowledge; and (b) any systematic, investigative or experimental activities carried for the purposes of any feasibility study or in relation to any market, business or management research. Also under section 16B, the scientific expenditure excludes expenditure on land or buildings or any alteration/addition to any building. Note that from 2004/05, the term “scientific research” under section 16B was amended to be “research and development” with an expanded definition under section 16B(4).

If the expenditure is to be deductible, the scientific research must relate to the trade or business/class of trade or business to which it belongs. If the expenditure is a payment to a research institute, to be deductible it must be paid to an approved research institute which carries out the scientific research related to the trade or business/class of trade or business to which the company belongs. (3 marks) Compensation receipt Additional information is required to ascertain the nature of the contract and the cause for the cancellation of the contract. If the contract is an ordinary sales/trading contract or agency contract, the compensation for its cancellation is revenue in nature and is taxable. If the contract forms the whole business of the company, then the compensation so received is capital in nature and is not taxable. (2 marks) (Total: 20 marks)

9 4 (a) Both Sunny Limited and Windy Limited are associated companies under section 45(2). Referring to Schedule 3, Glory Limited owns 91% of Sunny Limited (85% x 60% + 40%) and 100% of Windy Limited. (2 marks) However, the relief under section 45(1) will not apply to exempt stamp duty because, under section 45(4)(a), part of the purchase consideration was provided by a body corporate, Rainy Limited, which is not associated with either Sunny Limited and Windy Limited. In practice, the Stamp Office may stamp the conveyance on sales based on the market value at the date of transfer. (3 marks) Stamp duty payable: $16,000,000 x 3.75% = $600,000. (2 marks)

(b) Proposal 1 The crux of the question is whether the profits derived from the sale of the finished goods by Qtech Limited are trading profits or manufacturing profits. The answer depends on the involvement of Qtech Limited in the manufacturing activities in China.

As Qtech Limited is involved in the manufacturing activities in China, e.g. by providing technical know-how, management, production skills and skilled labour, as well as training and supervision of local labour and manufacturing plant and machinery (additional information to be sought from Qtech Limited), the Inland Revenue Department may be prepared to concede that the profits in question derived by Qtech are manufacturing profits and can be apportioned on a 50-50 basis. (6 marks) Proposal 2 First of all, as the patent cost was allowed for profits tax purposes when Qtech Limited incurred this cost to acquire the patent for use in Hong Kong business, the proceeds from subsequent disposal of the patent are deemed trading receipts under section 16E. Thus, the amount of $4 million is taxable. In respect of the royalty expense paid by Qtech Limited for the right to use the patent in Hong Kong, the expense is a revenue expense incurred in the production of assessable profits. The royalty of $400,000 is therefore deductible under section 16(1). The royalty income of $400,000 received by the overseas associated company is taxable under profits tax by virtue of section 15(1)(b) as the income is in respect of a right to use the patent in Hong Kong. The amount of assessable profits is computed under section 21A. However, as the royalty income was paid by the associated company and the patent has been owned by a Hong Kong company, i.e. Qtech Limited, before, the percentage to be used to compute the assessable profits is 100%. Therefore, the full amount of $400,000 is deemed assessable profits and taxable under profits tax. Also, to facilitate the collection of profits tax from the overseas associated company, by virtue of section 20B, Qtech Limited has to deduct the relevant profits tax at source and paid the net amount of royalty to the overseas associated company. (7 marks)

(Total: 20 marks)

10 5 Your advice should cover the following main points:

1. Acquisition cost of the know-how right

If Eversuper Limited purchases the know-how right from the German company and uses the know-how right in its Hong Kong manufacturing business, according to section 16E, a deduction is allowed under Hong Kong profits tax for the cost of acquisition of the right. It should be noted that both the vendor (German company) and the purchaser (Eversuper Limited) are unconnected companies. (2 marks)

2. Alternative (i)

This is typically called a sale and leaseback arrangement. A sale and leaseback arrangement refers to leased machinery or plant, which at any time prior to its acquisition by the lessor was owned and used by the end-user who is either the lessee (as in this case) or an associate of the lessee.

As regards Evergain Limited: a. The monthly rent of $300,000 is subject to Hong Kong profits tax under section 15(1)(d) as it is rental for the right of use of movable property in Hong Kong. b. No initial or annual allowances will be granted to the lessor, Evergain Limited, as the special machines are acquired under a sale and leaseback arrangement.

For Eversuper Limited: a. The sales proceeds of $6 million are capital receipts and thus not taxable under Hong Kong profits tax. However, the sales proceeds, restricted to the original cost of the special machines, should be deducted from the pool and if the sales proceeds exceed the residue value of the pool, a balancing charge has to be computed. The balancing charge is added to the assessable profits of Eversuper Limited. The management of Eversuper Limited should be reminded about the effect of section 38B, whereby if special machines which qualify for capital allowances are sold to a connected person, as in this case, the Commissioner of Inland Revenue shall, if of the opinion that the sale price does not represent the special machines’ true market value, determine the true market value to replace the sale price. b. The monthly rent of $300,000 paid by the company can be claimed under Hong Kong profits tax as deductible expenses under section 16(1) as it is for the purpose of hiring the special machines, which are used for its business in Hong Kong. (5 marks)

3. Alternative (ii) a. Loan from US associated company: The interest in respect of the $4 million loan received by the US associated company is not taxable under Hong Kong profits tax by virtue of section 15(1)(f) as the company did not carry on business in Hong Kong. Hence, the section 16(2)(c) condition is not satisfied. Although the loan was entered into to finance the acquisition of the know-how right for use in its business, Eversuper Limited cannot claim the deduction of the interest under Hong Kong profits tax. b. Loan from Evergain Limited The interest in respect of the $2 million loan is deductible under Hong Kong profits tax by Eversuper Limited. The loan was borrowed to finance the acquisition of the know-how right for use in Eversuper Limited’s business. The interest income received by Evergain Limited is taxable under section 15(1)(f) as the company carries on business in Hong

11 Kong and the provision of credit is likely to be in Hong Kong. Hence the section 16(2)(c) condition is satisfied and the section 16(2A) restriction does not apply.

(5 marks) 4. Alternative (iii)

The bank loan of $6 million was entered into to finance the acquisition of the know-how right for use in Eversuper Limited’s business. However, with the arrangement by which Eversuper Limited’s US associated company advanced $4 million to the bank, the interest paid by the bank to the associated company in respect of the $4 million loan is treated as if it were the interest on the loan borrowed by Eversuper Limited from the bank when the section 16(2B) restriction is considered. Hence, according to section 16(2B), two-thirds of the interest paid by Eversuper Limited to the bank attributable to the sub-participated portion (i.e. $4 million) is subject to adjustment and disallowed. The remaining one-third of the interest paid in respect of the $6 million loan would be allowable under Hong Kong profits tax (4 marks)

5. Alternative (iv)

The management of Eversuper Limited should note that section 15(1)(m) and section 15A apply to the situation in which a stream of taxable income is assigned for a lump sum payment without the disposal of the underlying asset(s). In this alternative, the rental income before assignment is taxable under Hong Kong profits tax in respect of Eversuper Limited. Hence, the Inland Revenue Department would employ section15 (1)(m) to deem the consideration of $6 million received by assigning the right to receive a stream of rental income as trading profits to be taxable under Hong Kong profits tax. (4 marks)

(Total: 20 marks)

12 6 (a) Main points to be covered are:

1. Section 61B is used to restrict the trafficking of loss companies for tax avoidance purposes. It disallows losses set-off if the CIR is satisfied that the sole or dominant purpose of any change in shareholding in a company was for the purpose of utilising such losses to obtain a tax benefit. Section 61B applies if: (a) a change in shareholding has been “effected” after 13 March 1986; and (b) the CIR is satisfied that, as a direct or indirect result of the changes, profits have been received by or accrued to the company during any year of assessment; and (c) utilisation of the loss is the sole or dominant purpose for the change in shareholding.

“Effected” means shares are transferred from one person to another. The transferee may or may not be an existing shareholder, and the transferor may or may not continue to be a shareholder.

In deciding whether profits have been received, the flow of profits before or after the change will be examined in particular with reference to: (a) the nature and conduct of the company’s business, (b) income and expenditure patterns, (c) management and control, and (d) the background of the party to whom shares were transferred.

“Dominant purpose” means the purpose, which outweighs all other purposes combined. (3 marks)

2. Based on the facts of the case, KKB Limited appears to be acquiring the shareholdings of Panmex Limited not for the dominant purpose of utilising its accumulated tax losses. Instead, the acquisition of the shareholdings of Panmex Limited is intended to improve the company’s solvency level and make use of its good trading network to help KKB Limited to achieve expansion of its trading business into the North American market. There is no change of the nature of business carried on by Panmex Limited after the share transfer. Hence, it is likely that section 61B may not be applicable to this case and tax losses sustained by Panmex Limited could be set off against future profits accrued to Panmex Limited in subsequent years after the share transfer. It should be noted that the lack of group loss relief under Hong Kong profits tax means the tax losses sustained by Panmex Limited could not be transferred to KKB Limited directly to set off the latter company’s assessable profits. (3 marks)

3. However, KKB Limited has to be aware that it is possible that the Inland Revenue Department may still invoke section 61B or section 61A to challenge the arrangement. It is therefore advisable for KKB Limited to obtain an advance ruling on the acquisition proposal, particularly in respect of the tax treatment of the tax losses sustained by Panmex Limited, before the company implements the proposal. (2 marks)

4. Any dividend thereafter earned by KKB Limited from the shareholdings of Panmex Limited is not taxable in Hong Kong. (1 mark)

As regards to the interest free loan to Panmex Limited, any interest expenses incurred by KKB Limited are not deductible under profits tax (1 mark)

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(b) Topsky Limited Computation of Industrial Building Allowance $ Cost of construction 10,000,000 Mark Less: Initial allowance ($6m x 20%) 1,200,000 2004/05 1 8,800,000 Less: Initial allowance ($4m x 20%) 800,000 2005/06 1 8,000,000 Less: Annual allowance ($10m x 4%) 400,000 2006/07 1 Residue before sale 7,600,000 Sale proceeds 14,000,000 (6,400,000) 0.5

Balancing charge restricted to 2,400,000 2007/08 0.5

Bigg Limited Computation of Industrial Building Allowance $ Residue before sale 7,600,000 0.5 Add: Balancing charge 2,400,000 0.5 Residue after sale 10,000,000 0.5

Year of first use 2005/06 1 25th year after year of first use 2030/31 0.5 Year of sale taken place 2006/07 1 No. of year from the year of sale taken place 25 1 up to 25th year after year of first use

Annual allowance: $10,000,000 x 1/25 400,000 0.5

Annual allowance for 2004/05 and 2005/06 400,000 0.5

(10 marks)

(Total: 20 marks)

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