Coursework Assignment: Taxation
Question 1
Mr Bonnet, who has been living in London and working in a UK company wanted to seek overseas experience and tried to find a job having world-side exposure. He was finally offered a position of "Financial Director - Asia Pacific" by Win plc, a global company with head office in London. To take up the offer, Mr Bonnet was required to sign the "Employee Offer Letter", as well as a "Non-Compete Consent" agreement and to return both signed documents to the Human Resources (HR) of Win plc. for acceptance of employment. He then signed both documents and returned them to the HR of Win plc. The terms of the employment, which are enforceable in London under UK Company Law, require him to work in a number of member companies of the Group in the Asia Pacific region.
The employment contract contains a term which states that the contract may be terminated at any time by either party at the end of a calendar month, subject to six months' notice, and in such case the agreement of Non-Compete Consent will take effect. One of the terms of "Non-Compete Consent" provides that the employer, Win plc, will make a payment of £100,000 to the employee, Mr Bonnet, at termination, in order to (a) restrict him from competing with Win plc in the subsequent three years for the existing clients of Win plc, and (b) eliminates all contractual obligations between Win plc and the employee.
Since April 2015 Mr Bonnet has been working in the office of Win (Hong Kong) Ltd. though he frequently travelled to other Asia Pacific region to work in other member companies. His remuneration is paid to his bank account in Hong Kong for the sake of administrative convenience. However, all the costs incurred have been charged back to Win plc in UK. Win plc has the ultimate contractual liability to pay for Mr Bonnet's remuneration.
Before arriving in Hong Kong, Mr Bonnet was granted an employment visa from April 2015 for one year. Thereafter, the applications for extending Mr Bonnet's work visa was made by Win (Hong Kong) Ltd. that reported to SAR Immigration Department as the employer. Mr Bonnet has dually reported his job assignment to the Financial Director - Global (in UK) and the respective Chief Executives of the member companies. He was provided housing benefits by Win (Hong Kong) Ltd., and his business card bears the name of Win (Hong Kong) Ltd. He was also enrolled as employee under the Mandatory Provident Fund (MPF) schemes of Win (Hong Kong) Ltd. in Hong Kong.
On 1 May 2017 Mr Bonnet signed a new employment contract to be the Executive Director of another company, Superwin Ltd. (a company incorporated and carrying on business in Hong Kong) that required him to start work immediately or as soon as possible. Finally, it was agreed that the last working day of Mr Bonnet in Win (Hong Kong) Ltd was 30 September 2017 but he was required to pay his current employer $250,000, which being payment in lieu of notice. On his last working day, he received all his remuneration, including the termination payment of $1,055,000 (equivalent to £100,000) in accordance with the agreement of Non-Compete Consent.
The employment contract with Superwin Ltd. is very attractive to Mr Bonnet because it contains the following terms:
- Superwin Ltd (the Company) will reimburse Mr Bonnet any payment in lieu of notice that he has to pay to his immediate previous employer.
- The Employee (Mr Bonnet) is granted two share options on appointment date. Each option allows him to purchase 2,000 shares for $40 each in Champion Ltd. which is the associate of the Company. The vesting period for the first share option is end of December 2017 but there is no vesting period for the second option.
- The Employee is provided with housing scheme under which he can obtain a low interest loan to purchase a flat in Hong Kong. The maximum amount of the loan is $2,000,000 and interest charge is 1% per annum, with monthly interest to be deducted from his salaries but the repayment of principle is at termination of employment.
- The Employee enjoys the benefit of being the member of "The World Luxury Club (the Club)" during his employment period. The Company bears the entrance fee of $200,000 and monthly membership fee of $1,000 for each member.
Other information:
1. Superwin Ltd. has bought five corporate membership with the Club and it is given to five directors of the company during their employment period as staff benefit.
2. The statement of monthly expenses of each member in the Club is sent to his/her own address. Mr Bonnet settles the monthly statement but receives reimbursement from Superwin Ltd.
3. The share price of Champion Ltd. was $60 per share on the date when the share options were granted and Mr Bonnet paid $2,000 for the two share options. On 31 January 2018 he sold the first option to his colleague for $80,000 when the share price of Champion Ltd was $38 each.
4. Mr Bonnet exercised the second option to purchase the shares when the market price of Champion Ltd was $75 on 2 March 2018.
5. Mr Bonnet purchased a flat in Wanchai in the name of himself and his girlfriend as joint tenants. To finance the purchase, in addition to obtaining a $2m low interest loan from his employer, he secured a mortgage loan from Bank of East Asia. He is the person who pays the monthly mortgage repayment to the bank. For the year ended 31 March 2018, he paid a total of
$35,000 for interest, including $3,000 interest payment deducted from his salaries in respect of the loan from his employer.
6. Mr Bonnet spent 300 days, 70 days and 40 days outside Hong Kong for years of assessment 2015/16, 2016/17 and 2017/18 respectively.
Required:
(a) Explain whether or not Mr Bonnet's employment with Win plc was located in Hong Kong, and determine the extent of his income that should be assessed to Hong Kong Salaries tax in the year of assessment 2016/17.
Support your answer with relevant cases/Departmental Interpretation Practice Notes (DIPNs) and/or sections of the Inland Revenue Ordinance (IRO).
(b) Explain whether the following items can be allowed for deduction (item i) or assessed as income from employment (items ii and iii) of Mr Bonnet by Inland Revenue Department (IRD) for the purpose of Salaries tax in the year of assessment 2017/18. Support your answer with relevant cases/DIPNs and/or sections of the IRO.
(i) Payment of $250,000, representing payment in lieu of notice to Win plc.
(ii) Reimbursement of $250,000 by Superwin Ltd.
(iii) Termination payment of $1,055,000 received from Win plc.
(c) Assuming that Mr Bonnet's employment contract with Superwin Ltd. is a Hong Kong employment, explain whether the following benefits included in his contract is assessable for the purpose of Salaries tax. Support your answer with relevant cases/DIPNs and/or sections of the IRO.
(i) Member of "The World Luxury Club" with entrance fee and monthly membership fee paid by the employer.
(ii) Reimbursement of monthly expenses in "The World Club" by the employer
(iii) The share options granted by the employer.
(d) With reference to relevant sections of the IRO and/or cases/DIPN, explain whether the interest of $35,000 can be claimed by Mr Bonnet for concessionary deduction as home-loan interest for Salaries tax purpose and calculate the amount, if any, for the year of assessment 2017/18.
(e) Assuming that Mr Bonnet's employment is located in Hong Kong and the gain arising from share options is assessable, calculate the amount that should be included for Salaries tax purpose and state the year of assessment.
Questions 2
Mr Wang is a Malaysian Chinese but has been living and working in Hong Kong for ten years till end of June 2016. On 1 June 2016 he bought the apartment that he has been living in Quarry Bay. He then decided to rent out the apartment through an agent. Finally, before leaving Hong Kong for good on 15 June 2016 he entered into a lease agreement with Mr Hung. The terms of the lease are as follows:
Period of lease: Two years from 1 July 2016. Monthly rental: $25,000 payable in advance.
Rental deposit: $40,000 non-refundable paid on signing the lease agreement. Rates: $3,000 per quarter paid by the tenant directly to the government.
Management fee: $2,000 per month paid by the tenant directly to the management office.
Furthermore, Mr Wang agreed to offer a rent-free period for the month of July 2016 and all repairs to the property are borne by the landlord.
During the year ended 31 March 2017, Mr Wang incurred mortgage loan interest of $7,000 per month, payable to the Bank of China (Hong Kong) in respect of the let property. He paid an agency fee of
$15,000 for letting the property.
In February 2017, Mr Hung paid repair cost of $5,000 and then sent a letter to Mr Wang asking for reimbursement but was unsuccessful.
On 15 April 2017, a property tax return for the year of assessment 2016/17 was issued to Mr Wang. However, he ignored the tax return because he believed that he is no longer a resident of Hong Kong and there is no need to pay property tax.
Required:
(a) Without any calculation but with reference to relevant IRO and/or DIPNs, advise Mr Wang whether he needs to pay property tax for the year of assessment 2016/17 and 2017/18.
(b) Assuming that Mr Wang is subject to Hong Kong property tax, calculate and explain the property tax liability for the year of assessment 2016/17.
Question 3
Mr Tong has been operating an engineering business in Hong Kong for many years. He is married with a new born baby during the year ended 31 March 2018. The following profits (losses) have been agreed by the Assessor of Inland Revenue Department.
Year of assessment Profit (loss)
$
2016/17 (120,000)
2017/18 570,000
You are also supplied with the following information relating to the years of assessment 2016/17 and 2017/18.
|
|
2016/17
|
2017/18
|
|
|
$
|
$
|
|
1. Net assessable value of Mr Tong's property in North Point
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250,000
|
250,000
|
|
2. Mortgage interest paid by Mr Tong for bank loan obtained to finance the purchase of the let property in North Point
|
300,000
|
200,000
|
|
3. Property tax paid by Mr Tong for the year of assessment
|
37,500
|
37,500
|
|
4. Mrs Tong's remuneration from her employment
|
540,000
|
624,000
|
|
5. Salaries tax paid by Mrs Tong for the year of assessment
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25,230
|
5,040
|
|
6. Approved charitable donation made by Mrs Tong
|
300,000
|
300,000
|
Required:
Compute the tax payable / tax repayable under personal assessment in respect of Mr Tong and Mrs Tong for the years of assessment 2016/17 and 2017/18.
Attachment:- Tax Coursework.rar