BUSI 0018 Hong Kong Taxation

Tutorial Questions
Unit 6 Salaries Tax (4) and Personal Assessment
Answer 15(a)
Salaries Tax Liability under Separate Taxation
Year of Assessment 2009/10

$
Salaries ($50,000 x 12)
Commission ($4,000,000 x 1%)
Rental Value ($640,000 x 10%)
Less: Rent suffered ($1,000 x 12)

64,000
(12,000)

Share option [($10 - $8) x 10,000]

Net assessable income
Less: Concessionary deductions:
Approved charitable donation
Less: Basic allowance
Child allowances (2)
Net chargeable income

Mr. Mak
$
600,000
40,000
640,000

Mrs. Mak
$
50,000
Nil
50,000

52,000
692,000
20,000
712,000

Nil
50,000
Nil
50,000

(5,000)
707,000
(108,000)
(100,000)
499,000

Nil
50,000
(108,000)
Nil
Nil

Tax payable at progressive rates (need to show steps):

72,830

Nil

Tax payable at standard rate:

106,050

7,500

72,830

Nil

Therefore tax payable is

(ignoring the salaries tax relief in 2009/10)

Notes:
1.
As the commission is derived from services rendered under an employment contract
between Mr. Mak and Beta Ltd, it is subject to salaries tax rather than profits tax.
2.

The market value of the share at the date of acquisition under the share option scheme
is taken in the calculation. The subsequent selling price is irrelevant.

3.

The share option benefit is not included in the calculation of rental value.

4.

Child allowances are given for both children as they are under the age of 18 and
unmarried (even though the daughter married during the year).

5.

It is obvious that Mr. Mak should be the one who claims both the charitable donation
and child allowances in full.

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6.

Dependent grandparent allowance is not granted as Mr. Mak's grandmother is not

ordinarily resident in Hong Kong.

7.

Since Mrs. Mak has unabsorbed allowances, the couple should elect for joint
assessment under S.10(2)(a) in order to reduce the overall tax liability. The election
must be jointly made by Mr. and Mrs. Mak in a specified form within the stipulated
time under S11(2).

Answer 15(b)
Salaries Tax Liability under Joint Assessment
Year of Assessment 2009/10
Mr. Mak
$
712,000

Net assessable income

MrsMak Aggregate
$
$
50,000
762,000

Less: Charitable donation

(5,000)
757,000
(216,000)
(100,000)
441,000

Less: Married person's allowance

Child allowances
Aggregate net chargeable income
Tax payable at progressive rates (need to show steps):
Tax payable at standard rate: $757,000 x 15%
Therefore tax payable is
(ignoring the salaries tax relief in 2009/10)

113,550
62,970

By electing joint assessment, the couple saves

(ignoring the salaries tax relief in 2009/10)

9,860

Note: By S.10(3), Mr. Mak should be the one who is required to pay the tax.

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62,970

Answer 16(a)
Salaries Tax Liability of Mr Chan without relating back of gratuity
Year of Assessment 2006/07
Net assessable income (9,000 x 9 + 11,000 x 3)
Less: Married person's allowance
Child allowance (2)
Net chargeable income

$
114,000
200,000
80,000

280,000
Nil

Tax payable = Nil

Year of Assessment 2007/08

1.1.08-31.3.08
75,000
5,000
80,000
7,850
87,850
1,500
86,350

1.4.07-31.12.07
99,000
15,000
114,000
Add: Rental value
Nil
Assessable income
114,000
Less: Car running expense
Nil
Net assessable income
114,000
Less: Married person's allowance
Child allowance (1)
Net chargeable income
Salary
Bonus

Total
174,000
20,000
194,000
7,850
201,850
1,500
200,350
200,000
50,000
Nil

Tax payable = Nil

Year of Assessment 2008/09

Salary ($25,000 x 5 + $30,000 x 7)
Holiday journey
Rental value [10% x (335,000 + 10,000 - 5,300)]
Gratuity
Assessable income
Less: Car running expense ($500 x 5 + $400 x 7)
Net assessable income
Less: Married person's allowance
Child allowance (1)
Net chargeable income

335,000
10,000
33,970
378,970
90,000
468,970
5,300
463,670
216,000
50,000

Tax payable at progressive rates = $21,603

Tax payable at standard rate = $463,670 x 15% = $69,550 (does not apply)
Total tax liabilities for 2006/07, 2007/08 and 2008/09 are: $21,603
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266,000
197,670

Notes:
1.
Medical insurance premium paid by the employer is not taxable as it cannot be
converted into money's worth. Moreover, it only represents a discharge of the
employers liability since the medical insurance scheme is entered into between the
insurance company and the employer company.
2.

The reimbursement of medical expenses from the insurance company is not taxable
because the reimbursement is arising from the contract of insurance and not the
contract of employment. Mr. Chan received the reimbursement as a beneficiary under
the insurance policy rather than in his capacity as an employee.

3.

Running expenses of motor car are deductible to the extent that the car is essential for
employment.

4.

Bonus of $20,000 received by Mr. Chan on 20 April 2008 accrued in the year of
assessment 2007/08 (and is assessable in that year) because Mr. Chan was entitled to
claim the bonus payment by the end of March 2008. However, the bonus will not be
assessed until it has been received, i.e. assessment can only be raised on or after 20
April 2008.

5.

Up to the year of assessment 2002/03, holiday warrant granted by the employer was
exempt from tax by virtue of S9(1)(a)(i) so far as it is used for travel. However,
starting from 1 April 2003, such exemption was repealed and any amount paid by the
employer in connection with a holiday journey of the employee cannot be excluded
from income under S9(2A)(c). This is the case even though it is the sole and primary
liability of the employer to provide the benefit and it is not capable of being converted
into money by the recipient.
Therefore, holiday warrant of $10,000 was taxable even though it has been used. The
taxable amount is not the resale value but the amount paid by the employer.

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Answer 16(b)
Salaries Tax Liability of Mr. Chan with relating back of gratuity

Less: Allowances
Net chargeable income

2006/07
$
114,000
30,000
144,000
280,000
Nil

2007/08
$
200,350
30,000
230,350
250,000
Nil

2008/09
$
463,670
(60,000)
403,670
266,000
137,670

Tax payable:
at progressive rates
at standard rate

Nil
23,040

Nil
36,856

11,403
60,550

Nil

11,403

Net assessable income

Gratuity

Tax payable is

Nil

Total tax liabilities for all years is $11,403

Therefore, it is advantageous for Mr Chan to apply for relating back of his gratuity. Total tax
saved is ($21,603 - $11,403) = $10,200.

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