acct3161ABCmte2010_11ansWOmarks - SCHOOL OF ACCOUNTANCY THE...

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SCHOOL OF ACCOUNTANCY THE CHINESE UNIVERSITY OF HONG KONG ACCT3161 Taxation EXAMINATION Solution Problem 1 (35%) (a) 86% (i) Commitment incentive By virtue of s.8(1) of the IRO, a payment is subject to salaries tax when it is arising in or derived from an office or employment in Hong Kong. This also includes a gratuity, perquisite, or allowance whether derived from the employer or others. As far as the commitment incentive is concerned, it is taxable on the basis that it is sourced from the employment of Mr. Wan with his employer; and it is a payment to ensure his continued services with the company by way of an alteration to his current terms of employment. In Tilley v Wales (25 TC 136), it was also held that a payment to serve a purpose to obtain an agreement to accept a smaller salary package is effectively an advance payment of salary or reward for future services, and thus assessable. Having said that, based on D17106, a payment to compensate the reduction of salary in a demotion situation is considered as not arising from employment and thus not taxable. Each case has to be considered on its own merits. (ii) Termination payment Regarding the termination payment, it is not known how this figure is made up, and a breakdown of the payment is required. To the extent that it represents a payment in lieu of notice or other compensation for loss of employment, it is not chargeable: see BR 116/7. Similarly to the extent that it represents a payment from a recognized occupational retirement scheme upon termination of employment, it is exempt from salaries tax (subject to the proportionate benefit rule). Conversely, if it simply represents a payment for services, such as for an unpaid bonus or salary, or even a contractual payment made under the contract of employment (see D24/97), it will be liable to salaries tax. File: KSK/ch FILE:/KSK/EXAM/ acct3161ABCmte2010_11 2/8/1201:37:01 Page 1
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(b) (i) 20% Salaries Tax Computation for Mr. Wan -Year of Assessment 2009/10Δ $ $ Salary (80,000 x 12) 960,000 Commitment incentive 30,000 Petrol cost reimbursed ($3,000 x 1/3 x 12) 12,000 Director fees 10,000 1,012,000 Rental value (1,012,000 - 2,400)x 9/12 x10% 75,720 Less: rent suffered (9,000 x 9) (81,000 ) 0 Housing allowance (9,000 x 3) 27,000 Share option -on exercise [5,000 x (9.5-5)]-500 22,000 Share option -on sale (8,000 -500) 7,500 Assessable income 1,068,500 Less: allowable expenses - membership fee 2,400 Self-education expenses ($4,000 x 25%) 1,000 (3,400 ) Net assessable income 1,065,100 Less: concessionary deductions Approved charitable donation (50,000+80,000) 130,000 Contribution to MPF (MAX 12,000) 12,000 Elderly residential care expenses 60,000 (202,000 ) 863,100 Personal allowance 108,000
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acct3161ABCmte2010_11ansWOmarks - SCHOOL OF ACCOUNTANCY THE...

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