Outline for Hong Kong Taxation Presentation Question Q15 A) Objective / Outline - To compute the salaries tax liabilities

for Mr. and Mrs. Mak: - under separate taxation; and - if they elect joint assessment (JA) - Then we will determine if it is advantageous for them to choose joint assessment B) Mr. Maks employment income - Mr. Maks employment: Marketing Manager, Beta Ltd - Compensation/ Benefits he received from his employment in Y/A 2009/10: - Basic monthly salary - Commission on sales he solicited - Apartment provided by his employer at a subsidized rent - Realized his gain upon exercising share options, which were granted by Beta Ltd in Y/A 2008/09 B-1) Salaries and Commission - Interpretation of Assessable Income under the IRO General coverage: s.9(1)(a) - Income from employment includes wages, salaries, leave pay, fees, commission, bonus, gratuity, perquisite (i.e. fringe benefit), allowance, whether derived from employer or others - Mr. Maks employment: Marketing Manager, Beta Ltd For year ended 31 March 2010 (Y/A 2009/10), - Salary: $50,000/month, $600,000 for the year - Commission: 1% on the sales solicited by him - Mr. Mak solicited $4,000,000 sales in the year, his commission would be $40,000 - Mr. Mak was entitled to the commission under his employment contract The salary and commission, amounting to $640,000, are income arising from employment, and would be assessable under the general coverage of s.9(1)(a) B-2) Accommodation at subsidized rent - Beta Ltd leased a flat at $25,000/month, but provided the flat to Mr. Mak at a nominal rent of only $1,000/month, deducted directly from his salary. - This benefit for housing accommodation is included in assessable income under specific coverage If a place of residence is provided by the employer or its associated corporation at a nominal rent, rental value is taxable but to be reduced by the rent paid by the employee s.9(1)(c) Rental value is calculated as 10% x (income from employer outgoings & expenses depreciation allowance)

Income from employer excludes share option benefits and lump-sum received at retirement/ termination of contract, thus we need not consider Mr. Maks gain upon exercising the share options yet. Mr. Mak has no outgoings & expenses/ depreciation allowance Rental value = 10% x ($640,000 0) = $64,000 is assessable Rent suffered by Mr. Mak = $1,000 x 12 = $12,000 is deductible

B-3) Share option benefit - included under specific coverage - For share option obtained as holder of an office/employment, gain realized upon exercise/ assignment/ release would be taxable Mr. Maks share option was granted under Staff Share Option Scheme, i.e. obtained from his employment ****(Timeline)**** Taxable gain realized by exercise is deemed to be Market value on date of exercise Consideration given for the shares and option (i.e. cost of getting the option and acquiring the shares) Any subsequent gain on actual disposal of the shares is not taxable Taxable gain = 10,000 x $10 10,000 x $8 = $ 20,000

C) Net Assessable Income of Mr. Mak - Sum up the above income from employment to get Assessable Income - No outgoings and expenses/ Depreciation allowance/ loss b/f /Self-education expenses to be adjusted - NAI is simply the AI, $712,000 - **(show a table, may extract relevant part from the appendix table I)** D) Concessionary deductions - Can claim for Approved Charitable Donations under s.26C - Mr. Mak made a donation of $5,000 to Community Chest of Hong Kong - Meaning of ACD: A donation of money to any approved charitable institution or trust of a public character which is exempt from tax under s.88 or to the Government, for charitable purposes. - Community Chest of HK approved charity - Other requirement for claiming ACD: - in cash, not in kind - not less than $100 in aggregate ($5,000>$100) - has not been allowed under profits tax [Max. Limit for the claim: 35% of (AI expenses Depr. Allowance) for 08/09 onwards. Max. Limit for Mr. Mak = $712,000 x 35% = $249,200] amount claimed is within max. limit allowed ($5,000 < $249,000) no duplication of claims (Mrs. Mak does not need the deduction)

- ACD, as a concessionary deduction, is available to taxpayer under both progressive and standard tax rate

E) Mr. Maks Family - married with two children - His son was 15 and his daughter was 17 on their birthdays during Y/A 2009/10 - Mr. Maks grandmother living in London, supported by Mr. Mak. Personal Allowances for Mr. Mak E-1) Basic allowance - Basic Allowance of $108,000 - Granted to all taxpayers who are charged by salaries tax - Not granted married person allowance (Mr. and Mrs. Mak are taxed as separate individual, since they both have assessable income but do not elect JA) E-2) Child Allowance - granted if maintaining unmarried child at any time during the Y/A - age requirement: under age of 18/ age of or over 18 but under 25 and receiving full-time education/ age of or over 18, and incapacitated for work due to mental or physical disability Mr. Maks son and daughter turned 15 and 17 respectively during the Y/A Both within the age requirement Full allowance is given even if the conditions are satisfied for part of the year **(timeline showing the daughters marital status in the Y/A)*** the daughter was under 17 and also unmarried before her registration on 20th February, 2010 qualifying as an unmarried child for part of the year In Y/A 2009/10, Full Child allowance can be claimed on 2 children (Total CA = $50,000 x 2 = $100,000) since: Both children were qualifying as unmarried child for at least part of the year Both were maintained by Mr. Mak/ his spouse For husband and wife not living apart, all CA should be claimed by one person only, nominated by the spouses. As Mrs. Maks salary was only $50,000 for the year, that can be covered by her basic allowance, the $100,000 CA should be granted to Mr. Mak.

E-3) What about Mr. Maks Grandmother in London? Dependent Grandparent Allowance Granted if the person or spouse not living apart maintains his/her or spouse's grandparent who is: - ordinarily resident in Hong Kong; and - aged 60 or more, or if aged under 60, eligible to claim the Governments disability allowance Mr. Maks grandmother was: - 1) Maintained by Mr. Mak

Maintained means resided with the person or spouse for a continuous period of not less than 6 months other than for full consideration; or received from the person or spouse contribution of not less than $12,000 p.a. (w.e.f. 1998/99) in money towards the maintenance Mr. Mak remits $2,000 monthly to support her living, totaling a contribution of $24,000 p.a. (>$12,000) 2) aged 60 or more (she was 60 on her last birthday) 3) NOT ordinarily resident in Hong Kong

About Ordinarily resident in Hong Kong: - has a normal and usual place of resident in Hong Kong From Case Laws, Ordinarily resides means - regular and substantial period of visits from year to year (Lysaght v CIR) - a place of abode is maintained (Copper v Cadwalader) Mr. Maks Grandmother was living in London not staying in Hong Kong home for regular and substantial periods Not ordinarily resident in HK Mr. Mak CANNOT claim DGPA on his grandmother. F-1) Computation of Mr. Maks Tax - show appendix table I - After deducting the personal allowance, Net chargeable income = $499,000 - Applying progressive tax rate on NCI, tax liability = $72,830 - Standard rate is applied on the NAI remaining after concessionary deduction, but before the personal allowance, i.e. $707,000. - $707,000 x 15% = $106,050 - Mr. Maks tax liability for 09/10, ignoring provisional tax, is the lower of the two, i.e. $72,830 F-2) Computation of Mrs. Maks Tax - show appendix table II - Earned $50,000 salary in the Y/A from part-time job in a trading firm - No chargeable income after deducting the basic allowance - Hence, ACD deductions and CA, which can only be claimed by one spouse, shall be given to Mr. Mak. - No tax for Mrs. Mak Observation: - Mrs. Mak has unabsorbed allowance, while Mr. Mak is still chargeable to tax. - Would be great if there is a way to better utilize the allowance - this scenario actually aligns with the original objective of continuing to allow couples to elect for Joint Assessment G) Joint Assessment

Joint assessment aggregates the spouses income at NAI level, then applies the concessionary deductions and personal allowances Tax under JA system is smaller than that calculated separately when one spouse has unabsorbed allowance while the other spouse is chargeable to tax s.10(2)(a), or [As a combined married person allowance on the aggregate income can be better utilized then having two separate basic allowances on two separate incomes] aggregate of tax on respective NCI > tax on aggregated NCI s.10(2)(b) [the max. limit for concessionary deductions can be raised, since it is now calculated as a % of the aggregate income in JA] The former scenario is applicable in Mr. and Mrs. Maks case

G-1) Computation of Mr. and Mrs. Maks Tax under JA - show appendix table III - income are aggregated at NAI level, allowance fully utilized - Tax under progressive rate (on NCI) = $62,970 - Tax under standard rate (on NAI Concessionary deductions) = $113,550 - Applicable tax liability = Lower of the two = $62,970 Mr. Mak Separate Taxation $72,830 Joint Assessment / Mrs. Mak $0 / Tax saved Mr. and Mrs. Mak $72,830 $62,970 $9,860

G-2) Whose Liability? - The chargeable person would be Mr. Mak, since Mrs. Mak has no tax liability if under separate taxation. JA is elected to alleviate Mr. Maks tax liability only Under Joint Assessment s.10(3) spouse has unabsorbed deductions/allowance thus resulting in nil NCI: Chargeable person = the spouse who has positive NCI chargeable to tax if joint assessment was not elected s.10(3)(a)

G-3) Procedures for selecting JA - Election made in specified form - Both election/withdrawal must be made jointly by husband and wife - Time limit: - within that Y/A or the following Y/A, or - within one month after the date on which the assessment becomes final and conclusive; whichever is later H) Conclusion It is advantageous for Mr. and Mrs. Mak to elect Joint Assessment. This would reduce Mr. Maks salaries tax liability from $72,830 to $62,970.