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Examples which illustrate the calculation of Profits Tax under the two-tiered profits tax rates regime and the comparison of tax payable under Personal Assessment. Tax rates for the years of assessment 2018/19 and 2019/20 are assumed to be the same.

 

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1.

Q:

Corporation with assessable profits below $2,000,000

 
 

A:

Corporation A declares assessable profits of $1,500,000 for the year of assessment 2018/19. Since Corporation A has no connected entity, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 1,500,000 1,500,000
 
Tax on $1,500,000 @16.5% 247,500
$1,500,000 @16.5% _______ 247,500
247,500 247,500 495,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 1,500,000 1,500,000
 
Tax on $1,500,000 @8.25% 123,750
$1,500,000 @8.25% _______ 123,750
123,750 123,750 247,500
     
Assessable profits should be charged at 8.25%.

The tax savings of Corporation A resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $247,500.

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2.

Q:

Corporation with assessable profits above $2,000,000

 
 

A:

Corporation B declares assessable profits of $2,500,000 for the year of assessment 2018/19. Since Corporation B has no connected entity, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 2,500,000 2,500,000
 
Tax on $2,500,000 @16.5% 412,500
$2,500,000 @16.5% _______ 412,500
412,500 412,500 825,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 2,500,000 2,500,000
 
Tax on First $2,000,000 @8.25% 165,000
Remainder $500,000 @16.5% 82,500
First $2,000,000 @8.25% 165,000
Remainder $500,000 @16.5% _______ 82,500
247,500 247,500 495,000
     
Assessable profits of first $2,000,000 should be charged at 8.25% and the remainder of $500,000 should be charged at 16.5%.

The tax savings of Corporation B resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $330,000.

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3.

Q:

Corporation with connected entity charged at two-tiered rates

 
 

A:

Corporation C declares assessable profits of $1,500,000 for the year of assessment 2018/19. Since assessable profits of a connected entity are charged at the two-tiered rates, the Profits Tax of Corporation C should be charged at 16.5% as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 1,500,000 1,500,000
 
Tax on $1,500,000 @16.5% 247,500
$1,500,000 @16.5% _______ 247,500
247,500 247,500 495,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 1,500,000 1,500,000
 
Tax on $1,500,000 @16.5% 247,500
$1,500,000 @16.5% _______ 247,500
247,500 247,500 495,000

As Corporation C was not eligible for two-tiered profits tax rates, there is no tax savings under the two-tiered profits tax rates regime.

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4.

Q:

Partnership with assessable profits below $2,000,000

 
 

A:

Partnership D declares assessable profits of $1,500,000 for the year of assessment 2018/19. Since Partnership D has no connected entity and all its partners are individuals, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 1,500,000 1,500,000
 
Tax on $1,500,000 @15% 225,000
$1,500,000 @15% _______ 225,000
225,000 225,000 450,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 1,500,000 1,500,000
 
Tax on $1,500,000 @7.5% 112,500
$1,500,000 @7.5% _______ 112,500
112,500 112,500 225,000
     
Assessable profits should be charged at 7.5%.

The tax savings of Partnership D resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $225,000.

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5.

Q:

Partnership with assessable profits above $2,000,000

 
 

A:

Partnership E declares assessable profits of $2,500,000 for the year of assessment 2018/19. Since Partnership E has no connected entity and all its partners are individuals, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 2,500,000 2,500,000
 
Tax on $2,500,000 @15% 375,000
$2,500,000 @15% _______ 375,000
375,000 375,000 750,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 2,500,000 2,500,000
 
Tax on First $2,000,000 @7.5% 150,000
Remainder $500,000 @15% 75,000
First $2,000,000 @7.5% 150,000
Remainder $500,000 @15% _______ 75,000
225,000 225,000 450,000
     
Assessable profits of first $2,000,000 should be charged at 7.5% and the remainder of $500,000 should be charged at 15%.

The tax savings of Partnership E resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $300,000.

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6.

Q:

Partnership with connected entity charged at two-tiered rates

 
 

A:

Partnership F declares assessable profits of $1,500,000 for the year of assessment 2018/19. Since assessable profits of a connected entity are charged at two-tiered rates and all its partners are individuals, the Profits Tax of Partnership F should be charged at 15% as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 1,500,000 1,500,000
 
Tax on $1,500,000 @15% 225,000
$1,500,000 @15% _______ 225,000
225,000 225,000 450,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 1,500,000 1,500,000
 
Tax on $1,500,000 @15% 225,000
$1,500,000 @15% _______ 225,000
225,000 225,000 450,000

As Partnership F was not eligible for two-tiered profits tax rates, there is no tax savings under the two-tiered profits tax rates regime.

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7.

Q:

Partnership with corporate partner

 
 

A:

Partnership G declares assessable profits of $5,000,000 for the year of assessment 2018/19. Partnership G has one corporate partner and two individual partners sharing 20% and 80% of the profits or loss respectively. Since Partnership G has no connected entity, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 5,000,000 5,000,000
 
Tax on $1,000,000 @16.5% 165,000
$4,000,000 @15% 600,000
$1,000,000 @16.5% 165,000
$4,000,000 @15% _______ 600,000
765,000 765,000 1,530,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 5,000,000 5,000,000
 
Corporate partner Non-corporate partners
Tax on First $2,000,000 $400,0001@8.25% $1,600,0002@7.5% 153,000
Remainder $3,000,000 $600,000@16.5% $2,400,000@15% 459,000
First $2,000,000 $400,0001@8.25% $1,600,0002@7.5% 153,000
Remainder $3,000,000 $600,000@16.5% $2,400,000@15% _______ 459,000
612,000 612,000 1,224,000

Notes:

1. Threshold of corporate partner
    = $2,000,000 x 20%
    = $400,000

2. $2,000,000 less threshold of corporate partner
    = $2,000,000 - $400,000 (Note 1)
    = $1,600,000

The tax savings of Partnership G resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $306,000.

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8.

Q:

Partnership with partner electing for Personal Assessment

 
 

A:

Partnership H declares assessable profits of $3,500,000 for the year of assessment 2018/19 with losses of $700,000 brought forward. It has five individual partners sharing profits or losses equally and one individual partner elects for Personal Assessment. Since Partnership H has no connected entity, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 3,500,000 3,500,000
Less: Loss set off 700,000
Assessable Profits after loss set off 2,800,000
Assessable Profits transferred to PA 560,000
 
Tax on $2,800,000 @15% 420,000
$3,500,000 @15% _______ 525,000
420,000 525,000 945,000
Less: Tax related to Assessable Profits transferred to PA ($420,000÷5) 84,000
Less: Tax held over ($525,000÷5) _______ 105,000
336,000 420,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 3,500,000 3,500,000
Less: Loss set off 700,000
Assessable Profits after loss set off 2,800,000
Assessable Profits transferred to PA 560,000
 
Tax on First $2,000,000 @7.5% 150,000
Remainder $800,000 @15% 120,000
First $2,000,000 @7.5% 150,000
Remainder $1,500,000 @15% _______ 225,000
270,000 375,000 645,000
Less: Tax related to Assessable Profits transferred to PA ($270,000÷5) 54,000
Less: Tax held over ($375,000÷5) _______ 75,000
216,000 300,000

The tax savings of Partnership H resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $300,000.

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9.

Q:

Qualifying corporate treasury centre charged at half rate

 
 

A:

Corporation J, a qualifying corporate treasury centre, declares assessable profits of $4,000,000 for the year of assessment 2018/19 and makes an election to have its qualifying profits of $1,000,000 charged at half rate. Since Corporation J has elected to have its qualifying profits assessed at half rate, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 4,000,000 4,000,000
 
Tax on $1,000,000 @8.25% 82,500
$3,000,000 @16.5% 495,000
$1,000,000 @8.25% 82,500
$3,000,000 @16.5% _______ 495,000
577,500 577,500 1,155,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 4,000,000 4,000,000
 
Tax on $1,000,000 @8.25% 82,500
$3,000,000 @16.5% 495,000
$1,000,000 @8.25% 82,500
$3,000,000 @16.5% _______ 495,000
577,500 577,500 1,155,000

As Corporation J's qualifying profits has been charged at half rate, two-tiered profits tax rates is not applicable to Corporation J and there is no further tax savings under the two-tiered profits tax rates regime.

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10.

Q:

Corporation with profits derived from qualifying debt instruments

 
 

A:

Corporation K declares assessable profits of $4,000,000 for the year of assessment 2018/19, including assessable profits of $1,000,000 derived from qualifying debt instruments. Since Corporation K has no connected entity, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 4,000,000 4,000,000
 
Tax on $1,000,000 @8.25% 82,500
$3,000,000 @16.5% 495,000
$1,000,000 @8.25% 82,500
$3,000,000 @16.5% _______ 495,000
577,500 577,500 1,155,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 4,000,000 4,000,000
 
Tax on $1,000,000 @8.25% 82,500
$2,000,000 @8.25% 165,000
$1,000,000 @16.5% 165,000
$1,000,000 @8.25% 82,500
$2,000,000 @8.25% 165,000
$1,000,000 @16.5% _______ 165,000
412,500 412,500 825,000
     
Assessable profits of $1,000,000 derived from qualifying debt instruments should be charged at half rate and remaining assessable profits of $3,000,000 should be charged at 8.25% up to $2,000,000 and with the excess charged at 16.5%.

The tax savings of Corporation K resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $330,000.

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11.

Q:

Sole proprietorship business with assessable profits above $2,000,000

 
 

A:

Sole proprietorship business A ("A Co.") declares assessable profits of $2,500,000 for the year of assessment 2018/19. Since A Co. has no connected entity, its Profits Tax should be calculated as follows:

Before implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 2,500,000 2,500,000
 
Tax charged on $2,500,000 @15% 375,000 375,000
Less: 2018/19 Provisional Tax Paid 300,000 _______
Balance Payable 75,000 375,000 450,000

 

After implementation of the two-tiered profits tax rates regime

2018/19 2019/20 Total
(Final) (Provisional) Tax Payable
$ $ $
Assessable Profits 2,500,000 2,500,000
 
Tax charged on First $2,000,000 @7.5% 150,000 150,000
Remainder $500,000 @15% 75,000 75,000
Less: 2018/19 Provisional Tax Paid 300,000 _______
Balance Payable / (Repayable) (75,000) 225,000 150,000
     
Assessable profits of first $2,000,000 should be charged at 7.5% and the remainder of $500,000 should be charged at 15%.

The tax savings of A Co. resulting from charging two-tiered profits tax rates for final tax 2018/19 and provisional tax 2019/20 will be $300,000.

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12.

Q:

Sole proprietorship with assessable profits below $2,000,000 and it is disadvantageous for election of Personal Assessment after the implementation of the two-tiered profits tax rates regime

 
 

A:

Mr. Chan is married. He receives salaries income of $332,000 from his employment and the assessable profits of his wife, Mrs. Chan's sole-proprietorship business (B Co.) are assessed as $200,000 for the year of assessment 2018/19. The couple elects for Personal Assessment and has not paid any provisional tax for the year of assessment 2018/19.

Mrs. Chan declares in her 2018/19 Tax Return – Individuals that B Co. is chargeable at two-tiered profits tax rates as no other connected entity has elected two-tiered profits tax rates for the year of assessment 2018/19.

Comparison of tax payable for the year of assessment 2018/19 before and after implementation of the two-tiered profits tax rates regime (with election for Personal Assessment)

Salaries tax payable of Mr. Chan $ $
   Salaries income 332,000
   Less: Married person's allowance 264,000
   Net chargeable income 68,000
   Tax payable at progressive rates
   First $50,000 @2% 1,000
   Remainder $18,000 @6% 1,080
   Total tax payable 2,080

 

Before implementation
of the two-tiered profits
tax rates regime
After implementation
of the two-tiered profits
tax rates regime
$ $ $
Profits tax payable of Mrs. Chan
   Assessable profits of B Co. 200,000
   Tax payable at standard rate 15% 30,000
   Tax payable at two-tiered rates,
      $200,000 @7.5%
15,000
 
Total tax payable of Mr. Chan and Mrs. Chan under Schedular Basis
   Salaries tax payable 2,080 2,080
   Profits tax payable 30,000 15,000
   Total tax payable 32,080 17,080

 

Tax payable of Mr. Chan and Mrs. Chan under Personal Assessment (Note 1)
$ $
Salaries income 332,000
Assessable profits of B Co. 200,000
Total income 532,000
Less: Married person's allowance 264,000  
Net chargeable income 268,000  
Tax payable at progressive rates
First $50,000 @2% 1,000
Next $50,000 @6%   3,000
Next $50,000 @10%   5,000
Next $50,000 @14%   7,000
Remainder $68,000 @17%   11,560
Total tax payable   27,560

Note1: Implementation of the two-tiered profits tax rates regime will not affect the calculation of tax payable under Personal Assessment.

Before implementation of the two-tiered profits tax rates regime, it is advantageous for the couple to elect for Personal Assessment (total tax payable under Personal Assessment: $27,560 is less than total tax payable under Schedular Basis: $32,080). However, it is NOT advantageous for them to elect for Personal Assessment after implementation of the two-tiered profits tax rates regime and charging assessable profits of B Co. at two-tiered rates (total tax payable under Personal Assessment: $27,560 is more than total tax payable under Schedular Basis: $17,080). The tax savings for the couple will be $10,480 (Before: $27,560 under Personal Assessment – After: $17,080 under Schedular Basis = Tax savings $10,480).

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13.

Q:

More than one sole proprietorship businesses and it is disadvantageous for election of Personal Assessment after the implementation of the two-tiered profits tax rates regime

 
 

A:

Mr. Leung, single, receives salaries income of $150,000 from an employment and the assessable profits of Mr. Leung's two sole-proprietorship businesses (C Co. and D Co.) are assessed at $380,000 and $30,000 respectively for the year of assessment 2018/19. Mr. Leung elects for Personal Assessment and has not paid any provisional tax for the year of assessment 2018/19.

Mr. Leung declares in his 2018/19 Tax Return – Individuals that C Co.is chargeable at two-tiered profits tax rates as no other connected entity has elected two-tiered profits tax rates for the year of assessment 2018/19.

Comparison of tax payable for the year of assessment 2018/19 before and after implementation of the two-tiered profits tax rates regime (with election for Personal Assessment)

Salaries tax payable $ $
   Salaries income 150,000
   Less: Basic allowance 132,000
   Net chargeable income 18,000
   Tax payable at progressive rates
   $18,000 @2% 360

 

Before implementation
of the two-tiered profits
tax rates regime
After implementation
of the two-tiered profits
tax rates regime
$ $ $
Profits tax payable
   Assessable profits of C Co. 380,000
   Tax payable at standard rate 15% 57,000
   Tax payable at two-tiered rates, 
      $380,000 @7.5%
28,500
   Assessable profits of D Co. 30,000  
   Tax payable at standard rate 15% 4,500 4,500
   Total tax payable 61,500 33,000
 
Note: It is advantageous for Mr. Leung to elect two-tiered profits tax rates for C Co. because the assessable profits of C Co. are higher than that of D Co.
 
Total tax payable under Schedular Basis
   Salaries tax payable 360 360
   Profits tax payable 61,500 33,000
   Total tax payable 61,860 33,360

 

Tax payable under Personal Assessment (Note 1)
$ $
Salaries income 150,000
Assessable profits of C Co. and D Co. 410,000
Total income 560,000
Less: Basic allowance 132,000  
Net chargeable income 428,000  
Tax payable at progressive rates
First $50,000 @2% 1,000
Next $50,000 @6%   3,000
Next $50,000 @10%   5,000
Next $50,000 @14%   7,000
Remainder $228,000 @17%   38,760
Total tax payable   54,760

Note1: Implementation of the two-tiered profits tax rates regime will not affect the calculation of tax payable under Personal Assessment.

Before implementation of the two-tiered profits tax rates regime, it is advantageous for Mr. Leung to elect for Personal Assessment (total tax payable under Personal Assessment: $54,760 is less than total tax payable under Schedular Basis: $61,860). However, it is NOT advantageous for him to elect for Personal Assessment after implementation of the two-tiered profits tax rates regime and charging assessable profits of C Co. at two-tiered rates (total tax payable under Personal Assessment: $54,760 is more than total tax payable under Schedular Basis: $33,360). The tax savings for Mr. Leung will be $21,400 (Before: $54,760 under Personal Assessment – After: $33,360 under Schedular Basis = Tax savings $21,400).

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14.

Q:

Sole proprietorship with assessable profits below $2,000,000 and it is advantageous for election of Personal Assessment after the implementation of the two-tiered profits tax rates regime

 
 

A:

Mr. Ho is a married person with 2 children. Mr. Ho and Mrs. Ho report their incomes and expenses in their 2018/19 tax returns as follows:

Mr. Ho Mrs. Ho
$ $
Salaries income 380,000 288,000
Assessable profits from Sole Proprietorship Business G Co. 120,000 -
Rental income 480,000 -
Mortgage interest paid for the letting property 120,000 -

 

The couple elects for personal assessment and has not paid any provisional tax for the year of assessment 2018/19.

Mr. Ho declares in his Tax Return – Individuals that G Co. is chargeable at two-tiered profits tax rates as no other connected entity has elected two-tiered profits tax rates for the year of assessment 2018/19.

Comparison of tax payable for the year of assessment 2018/19 before and after implementation of the two-tiered profits tax rates regime (with election for Personal Assessment)

Salaries tax payable of Mr. Ho and Mrs. Ho
  Mr. Ho Mrs. Ho
$ $
Salaries 380,000 288,000
Less: Allowances
        Basic allowances 132,000 132,000
        Child allowances 240,000            -
Net chargeable income 8,000 156,000
 
First $50,000 @2% 160 1,000
Next $50,000 @6% - 3,000
Next $50,000 @10% - 5,000
Remainder $6,000 @14%            - 840
Tax thereon 160 9,840
   
Property Tax payable of Mr. Ho
Net Assessable Value (Rental Income x 80%)  384,000 -
Tax payable at standard rate @15% 57,600 -

 

Profits tax payable of Mr. Ho
Before implementation
of the two-tiered profits
tax rates regime
After implementation
of the two-tiered profits
tax rates regime
$ $ $ $
Assessable Profits of G Co. 120,000 120,000
Tax payable at standard rate @15% 18,000
Tax payable at two-tiered rates: $120,000 @7.5% 9,000

 

Total tax payable of Mr. Ho and Mrs. Ho under Schedular Basis
Before implementation
of the two-tiered profits
tax rates regime
After implementation
of the two-tiered profits
tax rates regime
$ $
Salaries tax payable:
- Mr. Ho 160 160
- Mrs. Ho 9,840 9,840
Profits tax payable 18,000 9,000
Property tax payable 57,600 57,600
Total 85,600 76,600

 

Tax payable of Mr. Ho and Mrs. Ho under Personal Assessment (Note 1)
$ $
Salaries income
- Mr. Ho 380,000
- Mrs. Ho 288,000
Total Salaries income 668,000
Net assessable value 384,000
Assessable profits of G Co. 120,000
Total income 1,172,000  
Less: Deduction  
         Mortgage interest paid 120,000
Reduced total income 1,052,000
Less: Allowances  
         Married person's allowance 264,000
         Child allowance 240,000
Net chargeable income 548,000  
   
Tax at progressive rates
First $50,000 @2% 1,000
Next $50,000 @6% 3,000
Next $50,000 @10% 5,000
Next $50,000 @14% 7,000
Remainder $348,000 @17% 59,160
Total tax payable 75,160

Note1: Implementation of the two-tiered profits tax rates regime will not affect the calculation of tax payable under Personal Assessment.

It is advantageous for the couple to elect for Personal Assessment before implementation of the two-tiered profits tax rates regime (total tax payable under Personal Assessment: $75,160 is less than total tax payable under Schedular Basis: $85,600). After implementation of the two-tiered profits tax rates regime and charging assessable profits of G Co. at two-tiered rates, it is still advantageous for the couple to elect for Personal Assessment (total tax payable under Personal Assessment: $75,160 is still less than total tax payable under Schedular Basis: $76,600).