TA_U5_Salaries_31.pdf

8/10/2019 TA_U5_Salaries_31.pdf

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TA_U5_SalariesTax(3) 1

BUSI 0018 Hong Kong Taxation

Tutorial Questions

Unit 5 Salaries Tax (3)

Answer 12(a)

The rules governing the deduction of outgoings and expenses are contained in IRO S12(1)(a)which allows all outgoings and expenses, other than expenses of a domestic or privatenature and capital expenditure, wholly, exclusively and necessarily incurred in the productionof the assessable income. This means that to be deductible, the expenditure must satisfyeach of the following tests in addition to not being expenditure of a domestic or private natureor expenditure of a capital nature.

1.

it must have been incurred,2. wholly, exclusively and3.

necessarily

4.

in the production of the income.

The incurred test means that the expenditure must either be paid or have given rise to anestablished liability or a definite commitment arising in the year in which the deduction isclaimed. If payment has not been made, it is allowed only when an actual and knownliability or obligation of ascertainable amount existed on the last day of that year.

The wholly and exclusively test means that the entire amount must have been expended forthe sole purpose of producing the income. But, in practice, expenditure incurred for morethan one purpose would be apportioned and the part attributable to the employment will beallowed, provided the other tests are satisfied, e.g. depreciation allowance and petrol.

The "necessarily" test means that the expenditure must be essential to the conduct of theemployment, i.e. vital to the employment to the extent that it would not be possible for thetaxpayer to perform the duties and to produce the income from the employment withoutincurring that expenditure.

"In the production of income" is considered to be the same as the meaning of the phrase "inthe performance of duties". Expenditure is not incurred in the production of income if it isonly incurred to enable the duties to be performed e.g. travelling to and from the place ofemployment (CIR v Humphrey).


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Answer 12(b)

Mr. Chan's claim must be considered under Section 12(1)(a) which allows deductions forexpenses incurred wholly, exclusively and necessarily in the production of assessableincome. However, expenses of a private, domestic or capital nature are not deductible.

1. Membership subscriptionStrictly speaking, the expense is not incurred in the production of assessable incomeand thus not deductible. However, the IRD's practice is to allow deduction of one

professional membership subscription if the holding of a professional qualification isa pre-requisite of employment and the retention of membership and the keepingabreast of current developments in the particular profession are of regular use and

benefit in the performance of the duties. This concession is applicable in Mr. Chan'scase, but only limited to one professional association. In practice, its up to Mr. Chanto choose which one he makes the claim. In the absence of other specific informationin the question, the one which incurred the higher cost will be claimed.

2.

Removal costThe cost of removing ones properties from one place to the other is not regarded asincurred wholly, exclusively and necessarily in the production of assessable income.This is true even in the case where the move is initiated or requested by employer (seeD11/88). Therefore, Mr. Chan cannot claim the deduction for the removal cost. Inthe question, it was not stated whether or not the removal cost was reimbursed by theemployer. However, if this is the case, the reimbursement will remain as taxablewhile the removal cost is not deductible.

3. Cost of petrolThe cost of travelling between a person's residence and his place of work is a privateand personal expense because every employee has the duty to travel to his place ofwork. Such travel is not the performance of his duties, but rather enables the personto be available in an environment to perform his duties. (see CIR v HumphreyHKTC451). The cost of petrol is therefore not a deductible expense.

4. Salary in lieu of notice of resignationThis sum was paid in order to terminate his employment relationship with hisemployer. It was not incurred in the production of his assessable income and istherefore not a deductible expense. The fact that such payment would enable him tostart his private practice at an earlier time (and thereby producing income) does not

change the nature of the payment.

5. Rent for the office and salaries for part-time secretaryThe income from the District Council is assessable as it is an income from office.Therefore, the expenses incurred necessarily in the production of that income aredeductible.


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Answer 13

Salaries tax liability of Mr. Man

Year of assessment 2008/09$ $

Salary ($20,000 x 12) 240,000

Holiday journey 10,000Rental value [10% x (250,000 - 18,000 - 21,600)] 21,040Less: Rent suffered ($1,000 x 12) 12,000

9,040Assessable Income 259,040Less: Car expenses ($24,000 x 75%) 18,000

Depreciation allowances($28,800 x 75%) 21,600

39,600Net assessable income 219,440

Year of assessment 2009/10

From 1.4.09 to 30.6.09:Salary ($20,000 x 3) 60,000Rental value [10% x (60,000 - 5,250)] 5,475Less: Rent paid ($1,000 x 3) 3,000

2,475Provident fund ($100,000 x ) 50,000Payment in lieu of leave 9,333Assessable Income 121,808Less: Car expenses ($7,000 x 75%) 5,250Add: Balancing charge ($13,400 x 75%) 10,050

Net Assessable Income 126,608 126,608

From 1.9.09 to 31.3.10:Salary ($24,000 x 7) 168,000Rental value ($168,000 x 10%) 16,800

184,800 184,800Net assessable income for the year 311,408


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1. The marriage gift (red packet) is not taxable because it is paid as a personal gift andnot for services rendered.

2. A journey taken for holiday purpose is specifically taxable since the year of

assessment 2003/04 and it may be difficult for Mr. Man to argue the otherwise eventhough it was given on the occasion of his marriage. The honeymoon expense of$8,000 is not tax deductible because it is of private nature.

3. Car running expenses and depreciation allowances are deductible to the extent thatthey are necessarily incurred in the production of assessable income [S.12(1)(a)&(b)].


1. Half of the provident fund which represents the employer's contribution is taxable asthe fund does not come from a recognized occupational retirement scheme.

2. The salary of $60,000 in lieu of notice is not taxable (see BR 116/77) on the basis thatit is a payment to deprive Mr. Man of his right to receive the adequate notice.

3. The housing allowance of $15,000 is not chargeable because it is not arising fromemployment or a reward for services (see BR 116/77).

4. The income from provident fund, payment in lieu of leave and balancing charge arenot included in the calculation of rental value because the income from provident fundand payment in lieu of leave are payment on termination of employment, and the

balancing charge is assessed under S12(5).

5. The income from AB Ltd is fully taxable because it is a Hong Kong employment andit is unlikely to argue that Mr. Mans stay in HK is a visit. 60-days rule thereforedoes not apply.

6. The rental value is calculated at 10% on chargeable income from AB Ltd because Mr.Man is provided with a flat by the company in Hong Kong and this flat is a primaryand principal place of residence occupied by Mr. and Mrs. Man. The hotelaccommodation provided in Singapore was strictly not a place of residence underS.9 since it is only a place provided for during the business trip. While Mr. Man wasin Singapore, the flat in HK was still provided to Mrs. Man.


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Answer 14

Salaries Tax Liability of Mr. Ching


1.4.09 -

30.6.09

1.7.09 -

31.12.09

1.1.10 -

31.3.10

Salary 60,000 120,000 60,000

Housing subsidy - - 60,000Meal allowance (1,000 x 3) 3,000 - -Reimbursement of utilities - 3,000 -Outstanding award 1,250 2,500 1,250Club fee 375 750 375 64,625 126,250 121,625RV (64,625 - 4,740) x 8% 4,790 - - (126,250 - 9,480) x 10% - 9,000 - 2,677 -Share option (5-2) x 600 - 60 435 870 435Assessable Income 69,850 129,797 122,060Less: Insurance & licence (10,000 x 60%) 1,500

3,000 1,500

Depreciation (21,600 x 60%) 3,240 6,480 3,240 4,740 9,480 4,740Net Assessable Income (NAI) 65,110 120,317 117,320Total NAI for the year 302,747Concessionary deductions:

Approved charitable donation (limit to 35%) (105,961)Elderly residential care expenses

- Mrs. Chings mother and father (120,000)Contribution to retirement scheme (12,000) (237,961)NAI after concessionary deductions 64,786

Allowances:

Married persons allowance (216,000)Dependent parent allowance Mr. Chings mother (60,000)Disabled dependent allowance Mrs. Chings mother (60,000) (336,000)

Net Chargeable Income (NCI) (271,214)Salaries tax payable Nil


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Notes:1.

Loss to be c/f for 2009/10 is nil. Calculation of loss to be c/f is made on the basis ofAI minus outgoings/expenses and DA. Since this formula produces a positive figure(see above), there is no loss to be c/f. All other concessionary deductions and

personal allowances not fully absorbed by the income will be lapsed.

2. Rental value is calculated on AI minus outgoings/expenses and DA but excludinglump sum payment and share option benefit.

3.

Subscription to Country Club is not allowable even though it is required by theemployer as it is not necessarily incurred in the production of assessable income.Reimbursement of private expense is therefore taxable.

4. Meal allowance is additional cash allowance arising from the employment and thustaxable.

5.

Housing subsidy received in the last 3 months is totally taxable as cash allowancederived from employment.

6.

Reimbursement of utilities is taxable as this represents a discharge of personalliabilities of Mr. Ching.

7. Payment of wages to domestic helper by employer is not taxable because the contractwas between the employer and the domestic helper directly. The payment representsa discharge of employers own liability.

8. 60% of the insurance and licence fee as agreed by IRD is deductible (as incurredwholly, exclusively and necessarily in the production of Mr. Chings income). Same

logic applies to depreciation allowance.

9.

Share option benefit is taxable upon exercising the option right, i.e. on 4 April 2009.The gain realised on 30 April 2009 is irrelevant. The sale of option right for 400shares on 12 January 2009 occurred in the Y/A 2008/09 and is irrelevant for 2009/10.

10.

No child allowance is given in respect of Alex since he was not maintained by Mr. orMrs. Ching.

11.

Mr. Chings father is not eligible for dependent parent allowance since he is notordinarily residing in HK.

12.

In respect of Mrs. Chings mother, both elderly residential care expenses and disableddependent allowance are eligible. Although approval was not yet received until May2010, it has been held in one Board of Review case (D92/97) that disabled dependentallowance can be granted as long as the dependent is proved to be eligible for thegovernment disability allowance. It does not have to be actually receiving thedisability allowance.

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