Logical Argumentation and Calculation: Case Study of Sun Limited, Hong Kong

Salaries tax matters of Mr Chan

Answer All of the following questions. Marks will be awarded for logical argumentation and calculation and appropriate presentation of the answers. Case Sun Limited is incorporated and carrying on an investment holding business in Hong Kong. Sun Limited prepares its accounts to 31 March annually. A. Salaries tax matters of Mr Chan Mr Chan was employed by Sun Limited as general manager. Mr Chan and the director of Sun Limited negotiated and signed the employment contract in Country A.

The employment contract is enforceable in Hong Kong. Mr Chan’s remuneration is paid directly into his bank account in Hong Kong. Based on the terms of employment, Mr Chan is required to perform duties in Hong Kong and Country A. No comprehensive double taxation arrangement has been made between Hong Kong and Country A.

(1) Salaries: HK$1,800,000

(2) During the year, Mr Chan performed his duties in Country A for 120 days. One-third of his salaries was attributable to services performed in Country A and was subject to tax in Country A. The amount of such tax in Country A paid by Mr Chan was HK$150,000.

(3) During the year, a flat owned by Sun Limited was provided to Mr Chan as his residence at a monthly rent of HK$7,000. The market rental value of the flat was HK$21,000 per month. The rateable value of the flat was HK$185,000.

(4) On 1 April 2019, Sun Limited unconditionally granted options to Mr Chan for the right to acquire 30,000 shares in Sun Limited at HK$5 each. Mr Chan paid HK$60,000 for the options. On 1 July 2019, Mr Chan assigned half of the options to his colleague at a consideration of HK$70,000. On 31 October 2019, Mr Chan exercised the remaining options. On 31 March 2020, Mr Chan sold all the shares obtained from exercising the options. The market prices per share in Sun Limited were as follows: 1 April 2019 HK$8 1 July 2019 HK$9 31 October 2019 HK$10 31 March 2020 HK$12

(5) On 26 August 2019, Mr Chan received a notice of salaries tax assessment from the Inland Revenue Department (“IRD”) with salaries tax payable of HK$127,000 and HK$35,000 due on 3 January 2020 and 3 April 2020 respectively. Sun Limited paid the tax for Mr Chan on the due dates.

(6) Sun Limited paid HK$50,000 to a travel agency to purchase a package tour for Mr Chan and his wife during vacation in December 2019. The second-hand value of the package tour was HK$45,000.

Fixed assets

(7) During the year, Mr Chan contributed HK$54,000 to a MPF scheme and donated cash of HK$10,000 to approved charitable organisations.

(8) During the year, Mr Chan’s wife worked as a part-time tutor in a tutorial centre in Hong Kong on an hourly basis and received salaries of HK$65,000.

(9) Mr Chan and Mrs Chan have a child aged 17 who is studying full time in Hong Kong. CP TAX89-90 Course Work 2 Copyright© Kaplan Financial 2021 B. Fixed assets During the year ended 31 March 2020,

Renovation work in existing office of HK$210,000 - Replacement of carpet in existing office of HK$96,000 - A motor vehicle of HK$400,000 (acquired under a hire-purchase agreement with initial down payment of HK$40,000 on 1 October 2019, and the balance was repayable in 20 monthly instalments of HK$20,000, comprising capital repayment of HK$18,000 and interest of HK$2,000, at the end of each month commencing from 31 October 2019) The tax written down value of fixed assets ranked into the 30% pool brought forward from the year of assessment 2018/19 is HK$200,000.

For commercial building allowance, the total ranking costs brought forward and the respective tax written down value are HK$980,000 and HK$720,000 respectively. The ranking cost of the building structure demolished (upon the renovation work in existing office as mentioned above) during the year and the respective residue of expenditure are HK$250,000 and HK$200,000 respectively. C. Property leasing business Moon Limited is a wholly owned subsidiary of Sun Limited, which carries on a property leasing business in Hong Kong.

On 15 June 2018, Moon Limited entered into a lease agreement with a tenant in respect of a residential property (“the Property”) on the following terms: - Term of lease - Rent - Rent-free period - Initial premium - Rental deposit - Rates - Management fees 2 years from 1 July 2018 HK$24,000 per month, payable in advance 1 month from 1 July 2018 HK$36,000, payable on 1 July 2018 HK$48,000, payable on 1 July 2018 and refundable upon completion of the lease HK$5,000 per quarter, payable by the tenant HK$1,600 per month, payable by Moon Limited Moon Limited paid bank mortgage interest of HK$11,000 per month for the acquisition of the Property.

A property agency fee of HK$24,000 for letting the Property was also paid by Moon Limited on 1 July 2018. On 30 March 2019, the tenant paid HK$1,000 to repair the keylock of the Property and did not deduct the repair cost from the rental payment. On 1 January 2020, the tenant moved out from the Property with outstanding rents for 3 months and could not be reached thereafter. The Property had been left vacant since then. The IRD agreed with Moon Limited that the outstanding rents were irrecoverable in March 2020.