Q1)

Peter Pang was employed by XYZ Company Limited at a monthly

salary of $20,000 up to 30 June 2009. In addition to his salary, the
company also paid him a housing allowance of $5,000 per month,
but he actually lived in his own property on Hong Kong Island.
On 1 J uly 2009, Peter was promoted to manager with a revised
monthly salary of $30,000. He moved into the companys quarter at
a rent of $3,000 per month payable to XYZ.
In December 2009, Peter was sent to London on a business trip for a
month and resided in a London hotel. The company paid all the
hotel accommodation expenses, which amounted to $24,000.
During his stay in London, his family continued to reside in the
company's quarter.
You are required to compute the assessable income for the year of
assessment 2009/10 for Peter Pang.
Peter Pang - Salaries tax assessment for 2009/10
1.4.09 - 1.7.09 30.6.09 31.3.10
$$
Salary 60,000 270,000
Housing allowance (5,000 x 3) 15,000
Rental value (9 months):
270,000 x 10% 27,000
Less: Rent paid (3,000 x 9) 27,000 0 0
75,000 270,000
Total assessable income 345,000
Notes:
1. During the one month when Peter Pang was sent to London on a
business trip, the
place of residence was still provided to and was used by Peter
Pangs family. Rental
value is therefore calculated.
The hotel accommodation expenses borne by the company is not
chargeable to
salaries tax since the payment is made by the company and the
stay is for business
purposes. The only principal place of residence is provided in Hong
Kong.
2. A reduction of rental value is available in respect of any rental
borne or suffered by

the employee for the provision of accommodation, i.e. 9 months at

$3,000 per month.
3. Rental value is calculated at 10% (4% or 8%) of that part of the
assessable income for
the period during which accommodation is provided.
Q2)
During the year ended 31 March 2010, Mr. Chan was employed as a
medical officer by a private hospital. He received a monthly salary
of $60,000 and was provided with quarter free of rent.
In May 2009, he was elected to be a Council member of the Tsuen
Wan District Council. He received a monthly honorarium of $20,000.
In his salaries tax return for the year of assessment 2009/10, Mr.
Chan claimed for tax deductions the following expenses:
1. $1,800: annual membership subscription to the medical
professional association in
HK.
2. $1,500: annual membership subscription to the medical
professional association in
UK.
3. $8,000: removal cost from his previous residence to hospital
quarter.
4. $12,400: cost of petrol consumed on travelling in his private car
between his quarter and the hospital.
5. $60,000: one month's salary paid on 31 March 2010 to the
hospital in lieu of an
adequate notice of resignation. He left the hospital with effect from
1 April 2010
and started his private practice in May 2010.
6. Expenses in relation to the District Council (not reimbursed by the
Government):
$60,000: rent for the office used for handling District Council's
affairs, and
$24,000: salaries for his part-time secretary working in his office.
Required:
(a) Explain the rules governing the deduction of outgoings and
expenses for salaries

tax purposes.
(b) Comment with reasons whether or not Mr. Chan would succeed
in his claim for
deductions.
Answer (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).

Answer (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.
Salaries Tax Liability of Mr. Ching
Year of assessment 2009/10
1.4.09 30.6.09
1.7.09 31.12.09
1.1.10 31.3.10
Salary 60,000 120,000 60,000
Housing subsidy - - 60,000
Meal allowance (1,000 x 3) 3,000 - Reimbursement of utilities - 3,000 Outstanding award 1,250 2,500 1,250
Club fee 375 750 375
64,625 126,250 121,625
RV (64,625 - 4,740) x 8% 4,790 - (126,250 - 9,480) x 10% - 9,000 - 2,677 Share option (5-2) x 600 - 60 435 870 435
Assessable Income 69,850 129,797 122,060
Less: Insurance & licence (10,000 x 60%)

1,500
3,000
1,500
Depreciation (21,600 x 60%) 3,240 6,480 3,240
4,740 9,480 4,740
Net Assessable Income (NAI) 65,110 120,317 117,320
Total NAI for the year 302,747
Concessionary deductions:
Approved charitable donation (limit to 35%) (105,961)
Elderly residential care expenses
- Mrs. Chings mother and father
(120,000)
Contribution to retirement scheme (12,000) (237,961)
NAI after concessionary deductions 64,786
Allowances:
Married persons allowance (216,000)
Dependent parent allowance Mr. Chings mother (60,000)
Disabled dependent allowance Mrs. Chings mother (60,000)
(336,000)
Net Chargeable Income (NCI) (271,214)
Salaries tax payable 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
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 J anuary 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.