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 private
nature and capital expenditure, wholly, exclusively and necessarily incurred in the production
of the assessable income. This means that to be deductible, the expenditure must satisfy
each of the following tests in addition to not being expenditure of a domestic or private nature
or expenditure of a capital nature.
1.
2.
3.
4.

it must have been incurred,

wholly, exclusively and
necessarily
in the production of the income.

The incurred test means that the expenditure must either be paid or have given rise to an
established liability or a definite commitment arising in the year in which the deduction is
claimed. If payment has not been made, it is allowed only when an actual and known
liability 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 for
the sole purpose of producing the income. But, in practice, expenditure incurred for more
than one purpose would be apportioned and the part attributable to the employment will be
allowed, 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 the
employment, i.e. vital to the employment to the extent that it would not be possible for the
taxpayer to perform the duties and to produce the income from the employment without
incurring that expenditure.
"In the production of income" is considered to be the same as the meaning of the phrase "in
the performance of duties". Expenditure is not incurred in the production of income if it is
only incurred to enable the duties to be performed e.g. travelling to and from the place of
employment (CIR v Humphrey).

TA_U5_SalariesTax(3)

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

Membership subscription
Strictly speaking, the expense is not incurred in the production of assessable income
and thus not deductible. However, the IRD's practice is to allow deduction of one
professional membership subscription if the holding of a professional qualification is
a pre-requisite of employment and the retention of membership and the keeping
abreast 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's
case, but only limited to one professional association. In practice, its up to Mr. Chan
to choose which one he makes the claim. In the absence of other specific information
in the question, the one which incurred the higher cost will be claimed.

2.

Removal cost
The cost of removing ones properties from one place to the other is not regarded as
incurred 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 (see
D11/88). Therefore, Mr. Chan cannot claim the deduction for the removal cost. In
the question, it was not stated whether or not the removal cost was reimbursed by the
employer. However, if this is the case, the reimbursement will remain as taxable
while the removal cost is not deductible.

3.

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

4.

Salary in lieu of notice of resignation

This sum was paid in order to terminate his employment relationship with his
employer. It was not incurred in the production of his assessable income and is
therefore not a deductible expense. The fact that such payment would enable him to
start 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 secretary

The 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 are
deductible.

TA_U5_SalariesTax(3)

Answer 13
Salaries tax liability of Mr. Man
Year of assessment 2008/09
$
Salary ($20,000 x 12)
Holiday journey
Rental value [10% x (250,000 - 18,000 - 21,600)]
Less: Rent suffered ($1,000 x 12)

$
240,000
10,000

21,040
12,000
9,040
259,040

Assessable Income
Less: Car expenses ($24,000 x 75%)
Depreciation allowances
($28,800 x 75%)

18,000
21,600
39,600
219,440

Net assessable income

Year of assessment 2009/10

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

60,000
5,475
3,000

Provident fund ($100,000 x )

Payment in lieu of leave
Assessable Income
Less: Car expenses ($7,000 x 75%)
Add: Balancing charge ($13,400 x 75%)
Net Assessable Income
From 1.9.09 to 31.3.10:
Salary ($24,000 x 7)
Rental value ($168,000 x 10%)

168,000
16,800
184,800

Net assessable income for the year

TA_U5_SalariesTax(3)

2,475
50,000
9,333
121,808
5,250
10,050
126,608

126,608

184,800
311,408

Year of assessment 2008/09

1.

The marriage gift (red packet) is not taxable because it is paid as a personal gift and
not 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 even
though 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 that
they are necessarily incurred in the production of assessable income [S.12(1)(a)&(b)].

Year of assessment 2009/10

1.

Half of the provident fund which represents the employer's contribution is taxable as
the 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 that
it 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 from
employment or a reward for services (see BR 116/77).

4.

The income from provident fund, payment in lieu of leave and balancing charge are
not included in the calculation of rental value because the income from provident fund
and 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 and
it is unlikely to argue that Mr. Mans stay in HK is a visit. 60-days rule therefore
does 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 primary
and principal place of residence occupied by Mr. and Mrs. Man. The hotel
accommodation provided in Singapore was strictly not a place of residence under
S.9 since it is only a place provided for during the business trip. While Mr. Man was
in Singapore, the flat in HK was still provided to Mrs. Man.

TA_U5_SalariesTax(3)

Answer 14
Salaries Tax Liability of Mr. Ching
Year of assessment 2009/10

Salary
Housing subsidy
Meal allowance (1,000 x 3)
Reimbursement of utilities
Outstanding award
Club fee
RV (64,625 - 4,740) x 8%
(126,250 - 9,480) x 10% - 9,000
Share option (5-2) x 600 - 60
Assessable Income
Less: Insurance & licence (10,000 x 60%)
Depreciation (21,600 x 60%)
Net Assessable Income (NAI)

1.4.09 30.6.09

1.7.09 31.12.09

1.1.10 31.3.10

60,000
3,000
1,250
375
64,625
4,790
435
69,850

120,000
3,000
2,500
750
126,250
2,677
870
129,797

60,000
60,000
1,250
375
121,625
435
122,060

1,500
3,240
4,740
65,110

3,000
6,480
9,480
120,317

1,500
3,240
4,740
117,320

Total NAI for the year

Concessionary deductions:
Approved charitable donation (limit to 35%)
Elderly residential care expenses
- Mrs. Chings mother and father
Contribution to retirement scheme
NAI after concessionary deductions
Allowances:
Married persons allowance
Dependent parent allowance Mr. Chings mother
Disabled dependent allowance Mrs. Chings mother
Net Chargeable Income (NCI)
Salaries tax payable

TA_U5_SalariesTax(3)

302,747
(105,961)
(120,000)
(12,000)

(216,000)
(60,000)
(60,000)

(237,961)
64,786

(336,000)
(271,214)
Nil

Notes:
1.
Loss to be c/f for 2009/10 is nil. Calculation of loss to be c/f is made on the basis of
AI 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 excluding

lump sum payment and share option benefit.

3.

Subscription to Country Club is not allowable even though it is required by the

employer 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 thus
taxable.

5.

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

6.

Reimbursement of utilities is taxable as this represents a discharge of personal

liabilities of Mr. Ching.

7.

Payment of wages to domestic helper by employer is not taxable because the contract
was between the employer and the domestic helper directly. The payment represents
a discharge of employers own liability.

8.

60% of the insurance and licence fee as agreed by IRD is deductible (as incurred
wholly, 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 400
shares 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. or
Mrs. Ching.

11.

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

12.

In respect of Mrs. Chings mother, both elderly residential care expenses and disabled
dependent allowance are eligible. Although approval was not yet received until May
2010, it has been held in one Board of Review case (D92/97) that disabled dependent
allowance can be granted as long as the dependent is proved to be eligible for the
government disability allowance. It does not have to be actually receiving the
disability allowance.

TA_U5_SalariesTax(3)