2.5

KEY POINT

Under section 9, income from office or employment chargeable to salaries tax include the following:
(a)       all payments made by an employer or others to an employee derived from an office or employment which falls within the definition of Section 9(1) which states that income from office or employment includes any wages, salaries, leave pay, fee, commission, bonus, gratuity (恩恤金), perquisite (津貼), or allowance, whether derived from the employer or others;
(b)       discharging the employee’s monetary or pecuniary (金錢上的) liability;
(c)       any benefit which is convertible into money;
(d)       payment for the education of a child of an employee;
(e)       payment under a retirement scheme which is not a recognized occupational retirement scheme;
(f)        payment under a recognized occupational retirement scheme not as a result of termination of service, death, incapacity or retirement of the employee;
(g)       payment in excess of the proportionate benefit under a recognized occupational retirement scheme as a result of termination of service (but not death, incapacity or retirement of the employee);
(h)       the rental value of residence provided by an employer;
(i)        the rental value of residence where the employer refunds partly or wholly the rent paid by the employee;
(j)        the gain realized on the grant of share option.

3.2

KEY POINT

(a)        Payment in accordance with employment contract (根據僱傭合約付款)
If the payments are paid in accordance with the contract of employment or they are payments which the employee can reasonably expect, they are taxable, e.g. lump sum gratuity on retirement or termination of contract. They cannot escape liability simply because they may be capital in nature.
(b)       Voluntary payments (自願性付款)
Whether made by the employer or a third party, such payments may be assessable if they are paid solely or mainly y reason of the employment (e.g. bonus or gratuity not provided for in the contract of employment, tips to a taxi-driver, tips to waiters in a restaurant, etc.) and for services rendered in the past, present or future, except:
(i)         gift of an exceptional kind, e.g. gift to an employee who has done well in an examination; and
(ii)        testimonial (紀念品) given for personal reasons, e.g. wedding gift.
(c)        Compensation payments (賠償金)
(i)         If the source is not in the terms of service, e.g. damages for cancellation of a service agreement or compensation for deprivation of rights (e.g. loss of amateur status of a football player), such payments would not normally be assessable.
(ii)        If such payments are provided for in the contract of payment, or terms of service, they arise from employment and are therefore assessable.
(d)        Payments made in lieu of notice (代通知金)
Any sum paid in lieu of notice to terminate the employment is not assessable and it makes no difference whether such period of notice is provided or not provided in the employment contract. Under common law, an employee is entitled to a reasonable notice of dismissal or payment in lieu, and the sum is not paid for services in the past, present or future.
(e)        Payments made in lieu of leave (代假期金)
This receipt is specifically listed as a taxable income in Section 9 of the IRO.
(f)        Redundancy or severance payments (遣散費)
If the sums are paid according to the provisions of the Employment Ordinance, they are not taxable because they are not payment for services, but payments made to terminate the employment. The IRD’s practice is to tax the excess over the employee’s entitlement under the Employment Ordinance. Thus, the amount of redundancy or severance payment over two-thirds of a monthly salary for each full year of services is subject to salaries tax. However, this practice has been changed after the publication of advance ruling case No. 25. The IRD looks at the true nature of the payment, and may allow the whole amount exempt from salaries tax.
(g)        Long service award (長期服務金)
If the sums are paid according to the provisions of the Employment Ordinance, they are strictly paid in recognition of the employee’s past services, and should be taxable. However, as a concession, the IRD will tax the part of the payment in excess of the amount provided by the Employment Ordinance. In other words, similar treatment as redundancy payment.

4.1

KEY POINT

The following benefits-in-kind are specifically included as income from employment or office by section 9:
(a)       accommodation;
(b)       share options;
(c)       any benefit capable of being converted into money by the recipient;
(d)       any amount paid by an employer in connection with the education of a child of an employee;
(e)       any amount paid by an employer in connection with a holiday journey of employees as from 1 April 2003

4.6

KEY POINTS

(a)       In D91/04 20 IRBRD, a serviced apartment was held not a hotel, hostel or boarding house. Thus, the 4% or 8% adopted in computing rental value does not apply. To qualify as a boarding house, meal must be provided. A hostel is a modest and temporary accommodation for working men and women. Among other features, a hotel offers short-term and overnight accommodation to anyone who presents himself with or without prior booking and who is in a fit state and able to pay for that accommodation.
(b)       In D38/05 20 IRBRD, the taxpayer argued that a residence provided by the employer which comprised a bedroom, a sitting room and a kitchenette (小廚房) and for which many facilities were not normally available in a residential unit, was a hotel room such that the rental value should be 4%. The Board rejected this argument and ruled that the residence fell within any other case in s 9(2) such that the rental value should be 10%. The board commented that where there is a sitting room in addition to a bedroom in a hotel, the rental value should be 8%.

4.7

EXAMPLE 1

Mr Chan has been employed as an accountant by A Ltd for a number of years. During the year ended 31 March 2009, A Ltd provided Mr Chan a place of residence in a hotel suite consisting of two bedrooms and paid him a monthly salary of $30,000. Mr Chan had to pay a nominal rent of $1,000 to A Ltd monthly. Mr Chan also paid an annual membership fee of $2,100 to the HKICPA.

The net assessable income of Mr Chan for the year of assessment 2008/09 is as follows:
Mr Chan
Salaries tax computation
Year of assessment 2008/09
Basis period: year ended 31 March 2009

In cases where the rental value is 10% of the net assessable income, the taxpayer may elect to use the rateable value instead of the 10% rental value.

4.8

EXERCISE 1

Mr Wong has been employed by B Ltd as a general manager for a number of years. As from 1 April 2008, B Ltd provided Mr Wong with a rent-free flat for residence and paid Mr Wong a monthly salary of $150,000. The rateable value (應課差餉租值) of the flat under the Rating Ordinance for the year ended 31 March 2009 was $144,000.

Required:

Compute the Mr Wong’s assessable income for the year of assessment 2008/09.

4.12

KEY POINT

Refund of rent is different from rental allowance in that rental allowance is a cash allowance which is 100% liable to salaries tax while refund of rent is chargeable on rental value which is 10% on the total income (as calculated in aforesaid manner) of an employee.

In considering whether a payment is a refund of rent or a rental allowance, all the circumstances have to be looked into including the control over the employee’s use of the money by the employer, the size of the refund in relation to rental payment by the employee, and the genuineness of the rental expenditure, etc.

4.18

KEY POINT

Important notes on the computation of rental value:
(a)       4%, 8% or 10% depending on the case given;
(b)       if an employee is provided with a place of residence for only part of the basis period, only that part of income derived from the period in which accommodation is provided is subject to the 10% rental value calculation;
(c)       do not forget the deduction of allowable expenses before arriving at the amount subject to rental value calculation;
(d)       do not forget the deduction of rent suffered;
(e)       although the income is subject to time basis, the excess of rent paid for the whole basis period may be deducted in full;
(f)        definition of “place of residence”;
(g)       definition of “associated corporation”.

4.19

DEFINITION

(a)       Place of residence is defined in Section 9(6) as a residence provided by an employer or an associated corporation notwithstanding that the employee is required to occupy that place of residence by or under his or her terms of employment and whether or not by doing so he or she can better perform his or her duties.
(b)       Associated corporation is defined in Section 9(6) as:
(i)        a corporation over which the employer has control;
(ii)       a corporation which is under the control of the same person as is the employer.
(c)       Control, in relation to a corporation, is defined in Section 9(6) as the power of a person to secure:
(i)        by means of the holding of shares or the possession of voting power in or in relation to that or any other corporation; or
(ii)       by virtue of any powers conferred by the articles of association or other document regulating that or any other corporation,
that the affairs of the first-mentioned corporation are conducted in accordance with the wishes of that person.

4.20

EXAMPLE 2

Mr Sze is a civil servant, and his monthly salary is $80,000. He is provided with rent free quarter by the government, but the government deducts 7.5% of his salary as rent contribution for the flat so provided. Compute his assessable income for the year.

Solution:

4.21

EXERCISE 2

Mr Lam is the chief accountant of a HK company, and he received an annual remuneration of $1,500,000 and a refund of rent $30,000 per month from his employer. Each month, he paid rent of $36,000 and building management fee of $4,000. Each quarter, he pays rates of $6,000.

Required:

Compute his assessable income for the year.

4.22

EXERCISE 3

Mr Pak is the regional sales manager of an American company. His employment is sourced outside HK. He received an annual remuneration of $2,000,000 and a monthly refund of rent of $50,000 from his employer. Each month, he paid rent of $60,000. During the year of assessment, he stayed in HK for 292 days.

Required:

Compute his assessable income for the year.

Assessable Amount

Exercise of option

Market value at the time of taking up the shares over the cost of the option and shares

Option assigned/released

Consideration for assignment/release of option less cost of option

4.25

EXAMPLE 3 – When the option is exercised

On 1 May 2006, Mr Lee’s employer granted Mr Lee a right to acquire 10,000 shares in HK Stone Ltd at $30 per share, and the option had to be exercised on or before 31 March 2008. In order to signify his acceptance of the grant of option, Mr Lee paid $100 to his employer on 5 May 2006. Mr Lee exercised the share option in February 2008 and gave the requisite share price of $30 to his employer, and obtained 10,000 shares from HK Stone Ltd when the share of HK Stone Ltd rose to $100 per share. Mr Lee was going to migrate to Canada, and he sold the 10,000 shares for $108 in January 2009.

You are required to advise Mr Lee on the assessable income arising from the above events.

Solution:

Market value of the shares at the time of exercise of option (2007/08):

4.26

EXERCISE 4

Mr Chan is a director of C Ltd. As part of an incentive scheme, C Ltd gave Mr Chan an opportunity to buy 1,000 shares in C Ltd at $2 each. Mr Chan paid $100 for the share option on 1 June 2006. Mr Chan exercised the option on 1 July 2007 and sold the shares on 1 January 2009. The market values of the shares on the various dates were:

Required:

Calculate the assessable income arising from the above events.

4.27

EXAMPLE 4 – When the option is assigned or released

On 1 June 2008, Mr Wood’s employer granted him a right to acquire 20,000 shares in the employer-company at $40 per share. Mr Wood paid $1,000 to his employer as a consideration to accept this option when the share price was $12. Three months later, Mr Wood did not wish to take up the shares, and his employer permitted him to sell the right to his colleagues. Mr Wood sold the right to his colleague at a price of $2,500 when the market value of the share rises to $15.

You are required to advise Mr Wood on the assessable income arising from the above events.

Solution:

4.30

KEY POINT

There are three types of benefits in kind provided in Sections 9(1)(a)(iv) and 9(2A) chargeable with salaries tax, namely:
(a)       benefit capable of being converted into money by the recipient;
(b)       payment of the school fee of an employee’s children by the employer even though the liability for payment of the school fee lies on the employer; and
(c)       payment of holiday journey for an employee even though the liability for payment is on the employer.

4.31

EXAMPLE 5

(a)       In Wilkins v Rogerson (196)) 39 TC 344, the employer provided a suit to an employee at a cost of ￡15. It was held that the taxable benefit was what the employee could get by selling the suit (i.e. ￡5).
(b)       Where the employer discharges the employee’s personal liability, the benefit is also considered to be convertible into cash, e.g. discharging the employee’s tax liability, paying the rates and telephone bill of a director (Nicoll v Austin (1935) 19 TC 531).
(c)       Tax paid by employer – if, as additional remuneration, an employer pays the salaries tax of its employee, this is additional income subject to salaries tax (called tax on tax). If the employer withholds part of the salary of the employee for payment of the employee’s salaries tax, the amount withheld does not constitute deductible expense under s 12(1)(a).
(d)       Employer’s own liability – there will be no tax liability if the employer pays a sum in discharge of its own liability. Suppose an employer enters into a contract with the electricity company to supply electricity to the employee’s home, the liability is that of the employer, so that amounts paid to the electricity company are exempt.

However, even for contracts between the supplier and the employer, if the liability is guaranteed by any other persons, the exemption is not available. For example, if in the above contract between the electricity company and the employer, the employee guarantees the electricity company that his employer will duly pay the electricity bills, the sums paid to the electricity company will then constitute taxable benefits of the employee.

Proportionate benefit =

Accrued benefit in respect of employer’s contributions

x

Completed months of service

120

4.36

EXAMPLE 6

Mr Cheung resigns recently after working for his employer for seven years and 20 days – five years as a member of an ORSO scheme and two years and 20 days as a member of an MPF scheme. The amount of accrued benefit attributable to the employer’s voluntary contributions is:

$200,000 x 84 months / 120 months = $140,000

If the amount of accrued benefit attributable to the employer’s voluntary contributions received by Mr Cheung from the scheme exceeds $140,000, the excess will be treated as assessable income under salaries tax (s 8(4)).

The time the lump sum is received

Treatment

(a)     Not at the time of termination of employment, not upon retirement, not upon death, or not upon incapacity

Fully assessable

(b)     At the time of termination of employment, but not upon retirement, not upon death, not upon incapacity

Assessable on the amount paid in excess over the proportionate benefit

(c)     At the time upon retirement, upon death, upon incapacity

Fully exempt

(d)     For employees having joined an old retirement scheme formerly approved by the repealed Section 87A and such scheme was converted to ORSO

Fully exempt under s 8(4)(b) proviso

5.1

DEFINITION

Income accrues to a person when he is entitled to claim payment thereof (s11D(b)). This means the time when, under the employment contract, the income is required to be paid to the taxpayer.

5.2

KEY POINT

A person is deemed to have received income if that income has been:
(a)       made available to him;
(b)       dealt with on his behalf; or
(c)       dealt with according to his directions (proviso to s 11D(a)).

5.3

EXAMPLE 7

In the case of a bonus based on the company’s profits, the bonus is accrued when the profit is able to be ascertained and not before. In D 35/85, a bonus based on the profit for the year ended 31 March 1981 was paid on 23 May 1981 when the profit for the year ended 31 March 1981 could be ascertained. It was held that the bonus accrued in 1981/82 and not before because the bonus accrued in 1981/82 and not before because the bonus was not ascertainable before 1 April 1981.

5.4

EXAMPLE 8

A taxpayer was entitled to a special bonus. He requested that his employer to apply the sum in payment for certain shares. The sum was held to be taxable as it was dealt with on his behalf and according to his direction (D 22/94).

5.6

EXAMPLE 9

Mr Cheung retired from LM Ltd on 31 March 2009. On 5 April 2009, Mr Cheung received a bonus of $12,000 in respect of LM Ltd’s financial result for the year ended 31 December 2008. The bonus was deemed to accrue to Mr Cheung on 31 March 2009, the last day of his employment.

5.7

KEY POINT

According to section 11D(b), any lump sum received at the termination of employment or contract of employment may be related back for a maximum 3 years. If the contract period of the employment is less than 3 years, then the relate-back period is the contract period.

5.8

EXAMPLE 10

Mr Wong completed his four-year contract of employment with X Ltd on 31 December 2008. X Ltd paid Wong a gratuity of $150,000, representing 15% of his total basic salary for the contract period, on 1 January 2009.

As the gratuity was a lump-sum, Mr Wong can claim spreading back of the gratuity on or before 31 March 2011 (i.e. two years after the year of assessment 2008/09, which is the year of payment of the gratuity).

The amounts of gratuity related back to the years of assessment concerned are calculated as follows:

Non-taxable journey benefits

Business trip

Where a trip is for a business purpose, the associated costs (expenses on air, land or sea transportation, accommodation, meals, sightseeing tours, travel insurance and visa fees, etc.) will not be taxable.

Holidays incidental (附帶的) to business trip

In cases where a trip is taken partly for business and partly for holidays, i.e. where a trip spans over weekends. The IRD will refrain from taxing the benefit as the weekend days will not be regarded as a holiday journey.

Stopover (中途停留) incidental to business trip

Stopovers made in between the places visited during one single trip due to routing will be regarded as incidental to business journey provided that the stopover days were not excessive having regard to the circumstances of the case.

Journeys not for holidays

It could be established that a journey is not for holiday such as relocation of an employee and his family.

Redemption of mileage for free tickets

The value of the free ticket received from the redemption is not assessable as no payment was made by the employer.

Discounted or free ticket from airline companies

Airline staff who benefit from discounted or free air tickets from their employers will not be taxed on the benefit if their employers do not have to pay for the tickets.

Taxable journey benefits

Allowances for holiday trips

If an employer provides an allowance to an employee to take up holiday tour, the whole allowance is chargeable to salaries tax.

Discharge of liabilities for holiday trips

If an employer discharges a liability of an employee for payment of holiday tour, the discharge is money’s worth chargeable to salaries tax.

Pure holiday trips

All payments by an employer in connection with a holiday journey are taxable, irrespective of whether or not the benefit is:

• Convertible into cash;
• Discharge the liability of the employee.

Annual home trips provided to expatriate staff

Annual home trips provided to expatriate staff and their family members are normally for holiday purposes. They are therefore assessable.

Holidays journey organized or purchased by employers on group basis

Where the amount paid by the employer is not distinct and separable for individual employees, say 1-day tour for a group of employees, an appointment on a head count basis may be adopted.

EXAMPLE 11

Mr Fok took a 5-day business trip to Australia to be followed by 3-days’ vacation there. His employer paid $32,000 to a travel company of the entire trip. The cost of air ticket was estimated to be $8,000. Since the expenses for the journey relating to the vacation cannot be readily ascertained, an apportioned cost based on the holiday-days basis, excluding the cost of air ticket, would be appropriate, i.e. ($32,000 – $8,000) x 3/8 = $9,000.

6.1

EXERCISE 5

Mr Chiu was employed as an accounting manager by Marly Limited under a two-year contract starting from 1 January 2006. Marly Limited is a company incorporated and carrying on a business in Hong Kong. On 1 October 2007, Marly Limited told Mr Chiu that due to the economic downturn, the company would not renew his employment contract when it terminated on 31 December 2007. Mr Chiu was employed by Cheer Limited on 1 February 2008.

Mr Chiu received the following income from Marly Limited and Cheer Limited during the year ended 31 March 2008:

Marly Limited
(a)       Salary: $360,000 ($40,000 x 9 months)
(b)       Bonus: $55,000 (Note 1)
(c)       Travelling allowance: $9,000 (Note 2)
(d)       Passage allowance: $20,000 (Note 3)
(e)       Payment in lieu of leave: $18,000 (Note 4)
(f)        Contract gratuity: $240,000 (Note 5)
(g)       Performance gratuity: $96,000 (Note 6)
(h)       Refund of rent: $180,000 (Note 7)

Cheer Limited
(i)        Salary: $50,000 ($25,000 x 2 months)
(ii)       Housing allowance: $30,000 (Note 8)

Mr Chiu also paid the following expenses during the year ended 31 March 2008:
(a)       Mandatory contributions to MPF scheme: $11,000
(b)       Subscription to:
(i)        HKICPA $2,000
(ii)       ACCA $1,650
(c)       Rent paid to landlord: $264,000 ($22,000 x 12)
(d)       Rent deducted by Marly Limited: $9,000
(e)       Employment agency fee: $35,000
(f)        CPF seminars organized by HKICPA: $25,000
(g)       Cash donations to Hong Kong Community Chest: $15,000
(h)       Salaries tax: $24,000
(i)        Fees paid to a residential care home which provides residential care to his father, who is aged 70: $78,000

Notes:
(1)       On 1 May 2007, Marly Limited paid the bonus, which was based on the profits of the company for the year ended 31 December 2006.
(2)       The allowance was to subsidise Mr Chiu’s travelling expenses between home and office. Mr Chiu actually expended $28,800.
(3)       Mr Chiu did not take any trips during the year ended 31 March 2008.
(4)       The payment was received in respect of the leave not taken in the preceding year.
(5)       Mr Chiu was entitled to the contract gratuity upon satisfactory completion of his employment contract.
(6)       This was the extra gratuity paid to Mr Chiu upon the termination of employment in recognition of his good past performance. This performance gratuity was not provided for in the employment contract.
(7)       Mr Chiu was required to forward rental receipts to support the refund.
(8)       Cheer Limited did not exercise any control on the spending of the allowance.

Other information:
(i)        Mr Chiu’s spouse passed away three years ago. He was two sons who are aged 27 and 20 respectively. His elder son is not working due to mental disability and receives a government disability allowance. His younger son is receiving full time education in Hong Kong.
(ii)       Mr Chiu elected to have his gratuity related back under section 11D(b) of the Inland Revenue Ordinance.

Required:

(a)       What kind of income can be related back as provided under section 11D(b) of the Inland Revenue Ordinance?                                (3 marks)
(b)       Compute the salaries tax payable by Mr Chiu for the year of assessment 2007/08. Ignore provisional salaries tax. Show all your workings.    (15 marks)
(Total 18 marks)
(Adapted from HKIAAT Paper 5 Hong Kong Taxation December 2002)

6.2

EXERCISE 6

Mr Laird has been employed by Intellect Limited, a company incorporated and managed in England, for ten years. Mr Laird was required to render services in Hong Kong and other Asian countries. On 1 April 2007, he was appointed as a director of Intela Limited, a subsidiary of Intellect Limited that is incorporated and managed in Hong Kong. The assessor accepted that Mr Laird’s employment with Intellect Limited is located outside Hong Kong. You have been supplied with the following information in respect of Mr Laird for the last two years ended 31 March 2008.
(a)     He stayed in the following place during the relevant years of assessment:

(b)    He received the following income during the years of assessment 2006/07 and 2007/08:

Mr Larid spent the two years’ passage allowance ($42,000) during his vacation leave to Australia in the year of assessment 2007/08.

(6)   Intellect Limited rented a flat in Hong Kong for Mr Laird’s accommodation at a monthly rent of $30,000. The flat was available to Mr Laird even though he was not in Hong Kong. Nominal monthly rent of $1,000 would be deducted from his salary as rent contribution.
(7)   On 1 May 2006, Intellect Limited granted Mr Laird an unconditional option at a cost of $10,000 to purchase 100,000 shares of $2 each in Intellect (Holding) Limited, the parent company of Intellect Limited. Mr Laird purchased the option on 1 July 2006. On 31 March 2007, Mr Laird sold half of the option to his friend for a consideration of $50,000. On 31 March 2008, he exercised the remaining option. The market values of the shares at the relevant dates were as follows:

(c)     Mr Laird paid residential care expenses of $54,000 for each of the years of assessment 2006/07 and 2007/08 in respect of his father-in-law, who is aged 68 years old. The residential care home is located in Hong Kong.
(d)    Mr Laird is married and his wife is a housewife who used to live in Hong Kong. They have a son aged 20 who is studying full-time in England.

Required:

(a)     Compute the chargeable gains on Mr Laird’s share option for the years of assessment 2006/07 and 2007/08.                                               (5 marks)
(b)    Compute Mr Laird’s net assessable income before concessionary deductions for the year of assessment 2006/07.                          (5 marks)
(c)     Compute Mr Laird’s salaries tax liability for the year of assessment 2007/08. Ignore provisional salaries tax.                                    (8 marks)
Show all your workings.
(Total 18 marks)
(Adapted HKIAAT Paper 5 Hong Kong Taxation December 2003)