8. If not every receipt/income from my business is taxable, which is taxable and which is not?
Receipts arising from day to day business operations are normally your operating income and are taxable.
Proceeds from the sales of fixed /capital assets are capital receipts and are usually non-taxable.
Income closely connected with your business operations is also taxable, including:
- rental income received from sub-letting part of your business premises;
- rebates received from trade associates; and
- the forfeiture of trade deposits or compensation money from customers arising from the cancellation of ordinary business contracts.
Sale proceeds arising from the sale of your business entity as a going concern or of your fixed assets are normally of capital nature and are non-taxable. You should however keep in mind the specific provisions in the Inland Revenue Ordinance which relate to the treatment of stock and machinery and plant under such circumstances (seek advice from a practicing lawyer or accountant if required).
The following income/receipts are also taxable:
- trade debts that were claimed irrecoverable, and deducted from the previous years' assessable profits, but which have subsequently been recovered from customers;
- grants and subsidies (unrelated to capital expenditures) you received from the Government or other parties;
- rental/charges for the hiring of your computers, equipment and machines;
- sums for the use or right to use in Hong Kong of a patent, design, trademark, copyright material or a secret process/formula etc. received by you; and
- sums received for the transfer of a right to receive income.
The following income/receipts are non-taxable:
- proceeds from the sale of fixed/capital assets;
- proceeds from the sale of business interests/goodwill;
- compensation for early termination of business tenancies;
- dividends from corporations subject to Profit Tax separately;
- amounts already included in the assessable profits of other persons chargeable to Profits Tax;
- interest on Tax Reserve Certificates;
- interest on, and any profit made in respect of a bond issued under the Loans Ordinance (Cap. 61 of the Laws of Hong Kong) or the Loans (Government Bonds) Ordinance (Cap. 64), or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument;
- interest income and trading profits derived from long term debt instruments; and
- sums received or accrued in respect of a specified investment scheme by or to a person :
- in relation to a mutual fund, unit trust or similar investment scheme that is authorized as a collective investment scheme under section 104 of the Securities and Futures Ordinance (Cap. 571); or
- in relation to a mutual fund, unit trust or similar investment scheme where the Commissioner is satisfied that the mutual fund, unit trust or investment scheme is a bona fide (truly and honestly) widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime.