Taxation

(a)

Mr. Wong’s factory was damaged and production has suspended for nine month while extensive repairs were carried out because of the construction work of MTR. MTR paid a compensation of $5 million to him. To determine whether the compensation receipt is taxable, the followings should be considered.

This case relates to Section 14(1) excludes profits arising from sale of capital assets. Under the general test between fixed capital and circulating capital, there is capital receipt if the business connected with fixed capital. There is revenue receipt if the business connected with circulating capital. The capital receipt is non-taxable while revenue receipt is taxable.

When we consider the damaged factory, there is a permanent loss. Thus, the compensation is a capital receipt. Therefore, the compensation receipt is not taxable. [Glenboig Union Fireclay Co Ltd v CIR (1922)]

When we consider the production which has suspended for 9 months, there is a temporary loss of use of a capital asset. Thus, the compensation is a revenue receipt which is taxable. [Burmah Stram Ship Co Ltd v CIR (1930)]

When we consider the extensive repairs, there is an expense in capital. Therefore, the compensation for this expense is not taxable.

Therefore, the compensation receipt is taxable or non-taxable which depends on the purpose of the compensation.

(b)

A customer was injured by a broken glass while he was dining at the Delicious Restaurant. He took legal actions against the company for negligence. The case was settled out of court, and theRestaurant agreed to pay $300,000 as compensation. To determine whether the compensation payment is deductible, the followings should be considered.

Under the general deduction rule Section16 (1), there shall be deducted all outgoings and expenses to the extent to which they are incurred during the basis period for that year of assessment in the production of profits chargeable to profits tax for any period.“In the production...