In this blog, we will discuss that which income among the benefits or lump sums by a company or individual employer would be considered as true income from office or employment that is to be subjected to income tax and in order to thoroughly understand the topic we will go through some case studies. While in second part of article we will be looking in the deep that what would be the scenarios in which income that is still received by office or employment would be exempted from the income tax. For this part we will consider the different conditions like holiday journey benefits, income for services rendered, voluntary payment for individual services for Hong Kong company incorporation and compensation for loss of rights etc.
Tax is not only applicable to cash income. There are also some benefits-in-kind that belong to this category of tax net. These benefits-in-kind are also called fringe benefits. Taxes that are applicable on housing benefits, holiday travel and share options are dealt by IRO specifically. The Section 9 of constitution and case law define the taxability of these fringe benefits. As long as holiday benefits and benefits-in-kind are concerned DIPN 16 and DIPN 41 set out the practice of Inland Revenue department.
According to the Section 9 (1) (a) of the constitution the items that are given below are required to be included as income from an employment or office. It does not matter that whether these are derived from employers or from other sources. These items include gratuity, perquisite, fee, leave pay, salary, wages, commission and allowance. A point to be noted here is that if income is received by an employee or an office holder from any source other than his/her employer is also taxable. Like tips received by a waiter in a restaurant is also taxable.
As a judgement of a case Calvert (1947) 27 TC 475, tip received by a taxi driver that was hired by a taxi hire company was subjected to income tax as it was the income that he/she received as a result of rendering his/her services. In hearing of a case Lee Hung Kwong 3 to 2005, it was deduced by board of revenue that a taxpayer was recruited by a company in Hong Kong and was sent to work in certain offshore company incorporation in Mainland. During the hearing it was claimed by taxpayer that income for such services that he provided overseas was paid by Chinese entity. In spite of that income was paid by Chinese entity it was subjected to tax in Hong Kong. While in another British case Dooland 1955 1 ALL ER 93, during the contract of a professional cricketer, the collection from the crowds to which he was qualified was held to be taxable.
The implementation of tax on allowances that are received by an employee as a result of his services are covered by Section 9 (1) (a). As in D 9/87 the home purchase allowance that was given to an employee for the purpose of purchasing his own residence under government’s scheme of house purchasing was subjected to allowance tax. As a judgement of cases D 128/95 and D 120/95 it was ordered to assess the leave pays.
In the hearing of D 56/09, it was observed that employee T was hired by a company D, that employee originally belonged to Australia but as a result of his employment he was rendering his services in Hong Kong. So all of his remuneration was being paid in his bank account in Hong Kong. But the amount was being paid in Australian dollars. It was the claim of employee T that:
The appeal of employee T was dismissed by board of revenue and stance of BoR was that:
The Benefits as Lump Sum from Retirement Fund
The tax on benefits in the form of lump sums from retirement scheme has been discussed earlier in previous blogs and one can refer to these blogs to understand taxation system on superannuation (retirement) fund from company incorporation HK.
Benefits for Holiday Journey
In Hong Kong, the value of any authorization for holiday or transit granted to an employee by ensuring that it was used for travel, any benefit in the form of allowance for provision of such holiday authorization or ascertaining that this is expanded for that purpose in actual and any allowance for the transportation of personal effects of employee in relation with such travel were not chargeable to tax. And this exemption was before 1 April 2013. With effect from 1 April 2003 this exemption was taken back by taxation department of Hong Kong.
As long as:
Income as a result of Rendering Services
According to statement given for judgment of case Mayes (1959) 38 TC 673 that, if a lump sum or income is received as a result of services provided by an individual in present, future or past and not for any other purposes then it would be consider as income from employment or office and would be subjected to salaries tax.
It was observed in D 37/99 that, the employment of employee was terminated with immediate effect by employer and it was offered to him that as full and final settlement a package of $500,000 would be given to him as inter alia and ex gratia. As ex gratia this much payment would be given to employee when there would be no liability on employer to pay it. It was found by the board of revenue that payment would prevent the immediate departure of employee as it was given in order to settle the disputes between two parties. As this payment was given to him as sweetener in order to block his resistance and not as result of his services so it was not assessable for salaries tax.
Voluntary Payment made to Employee
If a payment is given to employee by employer or to a person by another person as gift of an exceptional kind or in order to acknowledge his/her personal qualities is not chargeable to tax. For example, if a wedding gift is given from an employer to employee then it is exempted. Also in case of retirement match by a professional cricketer he may receive personal gifts and testimonial and not income from his employment is exempted. The purpose of expressing this gratitude is to acknowledge his personal qualities as well as his services for what he had done, as in case Seymour (1927) AC 554.
Loss of Rights Compensation
Contract terminated before Time
In a case between Hunter (1932) 16 TC 605, a lump sum was paid to the director as consideration of resigning his right. The lump sum was paid as compensation on retirement. As benefits from retirement are subjected to income tax so in same was this lump sum as compensation on retirement was held to be exempt.
In other case Lavender (1965) 42 TC 607, an employee’s contract that was to be run for 4 years was terminated unfortunately. As this lump sum that was received by the employee was a result of compensation for termination of retirement so it was held to be non-chargeable for income tax. If it is mentioned in contract that sum would be provided as a result of compensation, then it may be taxable.
In Jarrold (1964) 41 TC 701, when status of rugby player was changed from amateur to professional then a singing-on fee that was paid to him upon change of status to professional from amateur was considered to be compensation for loss of previous status. As this payment was due to compensation of loss so it was not subjected to the income tax.
Moving to a different firm
In case of Arundale (1971) 47 TC 680, the practice of senior partner of accounting company was given up by him to join another company. In other company he was appointed as company’s managing director. In order to make him agree so that he may accept the post of managing director of company, the sum was paid to him by that company. This sum was exempted as it was not paid to him as a result of his services.
But in a similar case Shilton (1991) BTC 68 a payment was given to football player in order to induce him to change to another club. This payment that was given to him was detained to be taxable.
In D 19/92 it was observed that, a taxpayer was asked to be transferred to a company in Hong Kong. Before this he was working in a company in United Kingdom. In order to compensate the loss from his removal from one company, a payment was paid to him. It was held that as statues of law for income tax are different in England so these cases were not directly alike. This sum he received as compensation was due to his employment so it was chargeable to income tax.
Sum specified in agreement of Employment
If in case of termination, sum is specified in contract of an employee with the individual employer or company then it would be taxable as long as termination of employment before expiry of contract or retirement would occur. This judgement is taken from a proceeding CIR 5 of 2003. This is due to reason that this income may be a security for employer to enter into the employment and relinquish it as long as he/she does not consider it suitable to his/her skills. As these sums are for him to render his services for company so these are taxable.
Given in D 24/79, it was specified in the contract between employee and company that a compensation would be given to him if he would terminate the employment before expiry of contract period. The compensation was held to be taxable.
If an individual or group of people want to set up Hong Kong limited company, then it would be better for them to be aware of these above described implications in order to avoid any inconveniences in future.