The profits tax implications to HK Co2 as the seller in respect of the assets sold and the profits made
from the sale.
(i) Based on the information provided, the assets to be transferred are accounts receivable, trading stock and plant and
machinery. The total net book value of these assets is $12 million. With the proposed sale proceeds of $20 million,
HK Co2 is expected to make an accounting profit of $8 million. Under section (s.) 14 of the Inland Revenue Ordinance
(IRO), profits arising from the disposal of capital assets such as plant and machinery and business goodwill would not
be taxable. However, profits arising from the sale of revenue assets such as trading stock would be taxable. In the
circumstances, the basis on which the sale proceeds are allocated to the individual assets is relevant in determining
whether any portion of the profit would be taxable. In the case of HK Co2, it is the intention of the management to
transfer the assets at their net book values, and thus the excess of $8 million represents the business goodwill. Based
on this allocation, there would be no accounting profit or loss arising from the sale of the accounts receivable, trading
stock and plant and machinery. The $8 million relating to the business goodwill would not be taxable provided that the
business has been operated by HK Co2 and the valuation is commercially justified. To ensure that the entire excess of
$8 million is attributable to the non-taxable goodwill, it is advisable that the detailed breakdown of the sale proceeds
allocation be included in the sale and purchase agreement.
In respect of the plant and machinery, although no accounting profit or loss arises, there may be tax implications
depending on the tax written down value of the plant and machinery transferred. The relevant sale proceeds as allocated
to the respective tax depreciation allowance pools will be deducted from the total tax written down values of those pools.
This would automatically reduce the claimable amount of tax depreciation allowance for HK Co2 going forward. If the
sale proceeds exceed the tax written down values in those pools, a balancing charge will arise and be taxable.
(i) Capital profit vs revenue profit 1
Sales proceeds allocation 1
Business goodwill not taxable 1
Desirability of a detailed breakdown in purchase/sale agreement 0·5
Plant and machinery – deduction from pools 1
Plant and machinery – less depreciation allowance or balancing charge 0·5
