Question
Mr Leung has been an active investor in properties in Hong Kong. In addition to his home in Causeway Bay, he owns the following three
properties:
Hung Hom flat
The Hung Hom flat was first rented to Ms Lam and subsequently to Mr Pok. The details of the leases are as follows:
• Lease to Ms Lam: The lease was for a three-year period from 1 January 2009 to 31 December 2011. The agreed rent was for $20,000 per month with Mr Leung being responsible for the rates of $2,500 per quarter and the management fee of $1,000 per month.
However, Ms Lam vacated the property early on 31 May 2011 with four months of rent in arrears. In November 2011, Mr Leung found out that Ms Lam had gone to Shanghai and the Assessor was satisfied that the debt became irrecoverable. Mr Leung did not ask for any rental deposit at the time of signing the lease.
• Lease to Mr Pok: The lease was for a five-year period from 1 July 2011 to 30 June 2016. The agreed rent was for $15,000 per month. Mr Leung agreed to the lower monthly rent on condition that Mr Pok paid an initial premium of $60,000. Also, after his previous unhappy experience with Ms Lam, Mr Leung demanded a rental deposit of $30,000 from Mr Pok. He also required that Mr Pok pay the rates of $2,500 per quarter and the management fee of $1,000 per month. Mr Leung incurred repairs and decoration expenses of $30,000 in June 2011 prior to handing over the flat to Mr Pok.
Assignment File 3
Chai Wan flat
This property has been occupied by Mr Leung's son since Mr Leung bought the property in 2009. His son contributed $30,000 a year to Mr Leung for Mr Leung's living expenses for the years of assessment 2010/11 and 2011/12 respectively.
Shenzhen flat
This property has been rented out to Mr Lee, a Hong Kong resident, at a monthly rent of HK$8,000 since 2009. The tenancy agreement was negotiated and signed in Hong Kong, and Mr Lee paid the monthly rent directly into Mr Leung's bank account in Hong Kong. The monthly management fee of RMB$200 and other charges were paid by Mr Lee.
Required:
a Determine the Hong Kong property tax liabilities for Mr Leung for the years of assessment 2010/11 and 2011/12. Ignore provisional property tax and any tax waiver or refund. The standard tax rate for years of assessment 2010/11 and 2011/12 is 15%.
b Provide a brief comment on the treatment of significant items where appropriate.
c In December 2012, Mr Pok ran into financial difficulty and negotiated with Mr Leung on whether he could sublet part of the flat to relieve his financial burden. Mr Leung agreed. Explain whether Mr Pok would be chargeable to property tax in doing so and include in your answer the definition of ‘owners' under Hong Kong property tax.