ENG-2006 — Page 90

62 The Economy

A trading fund is an accounting entity enabling a department to provide services on a commercial or quasi-commercial basis. Unlike a vote-funded department, a department operating on a trading fund is allowed to retain revenue generated to meet its expenditure and finance future expansion.

Financial Results

The Government's consolidated account recorded a surplus of $14 billion in 2005-06. The accumulated balance at end-March 2006 stood at $310.7 billion. This forms the Government's fiscal reserves and is available to meet any calls on its contingent liabilities. It also enables the Government to cope with any short-term fluctuations in expenditure relative to revenue.

Total government revenue in 2005-06 amounted to $247.1 billion and spending to $233.1 billion. For details of revenue by source and of expenditure by component for 2005-06 and 2006-07 (Revised Estimate), see Appendix 6, Table 6.

Public expenditure in 2005-06 totalled $245 billion. There was a drop of 4.7 per cent in nominal terms or 4.1 per cent in real terms over the previous year. Some $44.3 billion, or 18.1 per cent of the public expenditure in 2005-06, was of a non- recurrent nature. Table 7 gives an analysis of expenditure by policy area group and Table 8, the growth rate of public expenditure as compared with the rate of economic growth.

Revenue Sources

Hong Kong's tax system is simple and relatively inexpensive to administer. Tax rates are low and the Government accords a high priority to curbing tax evasion and minimising opportunities for tax avoidance. The major sources of revenue are profits tax (28 per cent) and salaries tax (15 per cent). Other significant sources include revenue from land premiums (12 per cent), stamp duties (7 per cent), properties and investments (6 per cent), utilities, fees and charges for services provided by the Government (6 per cent), rates (6 per cent), bets and sweeps tax (5 per cent), and duties on dutiable commodities (3 per cent). These major sources of revenue are presented at Appendix 6, Chart 1.

The Inland Revenue Department collects about 58 per cent of total revenue, including profits tax, salaries tax, property tax, stamp duties, bets and sweeps tax, estate duty, and hotel accommodation tax. Profits, salaries and property taxes including tax under personal assessment, which together accounted for about 45 per cent of total revenue in 2005-06, are levied under the Inland Revenue Ordinance. Persons liable to these taxes may be assessed on three separate and distinct sources of income: business profits, salaries and income from property.

Profits tax is charged only on net profits arising in or derived from Hong Kong, from a trade, profession or business carried on in Hong Kong. In 2005-06, profits of unincorporated businesses were taxed at 16 per cent and profits of corporations at 17.5 per cent.

Profits tax is paid initially on the basis of profits made in the year preceding the year of assessment and is subsequently adjusted according to profits actually made in

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