Mr Fan is employed as the Accounting Manager by Top Ltd, a Hong Kong incorporated company. During the year ended 31 March 2017, Top suffered substantial losses from the economic downturn and therefore underwent a salary package restructuring with effect from the next financial year. In order to encourage the staff to accept the new package, each staff member who chose to continue under the new structure was paid a commitment incentive of $30,000. Mr Fan accepted the new salary package structure, and received the commitment incentive on 1 May 2017.

Details of Mr Fan’s new salary package, income and expenditure for the year to 31 March 2018 are as follows:

(1) Salary: $50,000 per month originally (20% cut of salary for all of this level in this assessment year).

(2) Productivity incentive: $50,000 based on senior management’s recommendation. A positive recommendation was submitted but has not yet been approved.

(3) Medical benefit: Green Cross Medicare, maximum coverage $100,000 per annum, $100 per month was charged by Top for this benefit. During the year, Mr Fan claimed a total reimbursement of medical expenses of $5,000 from Green Cross.

(4) Company car: Mr Fan uses a car owned by Top costing $400,000; the second hand value of the car at 1 April 2017 was $220,000. The petrol costs of $1,000 per month were reimbursed by Top.

(5) Housing benefit: Mr Fan and his family had been living in a leased flat at $14,000 per month. Top reimbursed him half of the rental. On 1 January 2018, he terminated the lease and moved into his parents’ flat for which he paid no rent. Top agreed to continue to pay him the same amount as before.

(6) Share option: Top operates an employee share option scheme and granted Mr Fan options to subscribe for 10,000 shares at $9 per share. Mr Fan paid $1,000 for the options on 9 September 2017. He exercised the right to acquire 5,000 shares on 10 October 2017, and sold the remainder of the options to a colleague for $3,000 on 11 November 2017. The 5,000 shares were sold on 12 December 2017. Details of the market price per share were:

9 September 2017 $10

10 October 2017 $11.50

11 November 2017 $9

12 December 2017 $6.50

(7) Directorship: Mr Fan was appointed as the managing director of Middle Ltd, a subsidiary of Top Middle Ltd is incorporated in Bermuda, and carries on an investment business in Hong Kong. During the year, Mr Fan received director’s fees of $110,000.

(8) In order to equip himself with updated knowledge, Mr Fan regularly attends investment seminars organised by The Hong Kong Society of Financial Analysts. He paid $10,000 for these seminars in the year to 31 March 2018, half of which was reimbursed by Top.

(9) Mr Fan contributed a total of $40,000 to a mandatory provident fund.

(10) Mr Fan paid the following annual membership fees:

The Association of Chartered Certified Accountants $2,200

The Taxation Institute of Hong Kong $1,500

The International Golf Club $4,000

The Hong Kong Society of Financial Analysts $2,400

Other information:

(1) Mrs Fan is a clerk earning a monthly salary of $15,000. She contributes 5% of her salary to a mandatory provident fund. On 31 January 2018, her employer without prior notice terminated her employment and made her a termination payment of $50,000 being ‘in settlement of all or any claims you may have against the company’.

(2) Mr and Mrs Fan have two children, aged 17 and 23, both of them are part-time students at Open University of Hong Kong.

(3) Mrs Fan’s mother (aged 58) and grandmother (aged 80) live in a nursing home. Mrs Fan paid all the nursing home bills amounting to $192,000 in the year to 31 March 2018.

(4) Mr Fan donated $200,000 to The Hong Kong Red Cross for the earthquake victims.

(5) Mr and Mrs Fan purchased a property as their dwelling as joint tenants by means of a mortgage loan from Hang Seng Bank. The monthly repayment was wholly made by Mr Fan. The mortgage loan interest of $160,000 was paid in the year.

Required:

a) Compute the salaries tax liability of Mr. and Mrs. Fan for the year of assessment 2017/18 assuming that:

- no joint assessment has been made by the couple; and

- any personal allowances are to be claimed by Mr. Fan.

b) Compute the salaries tax liabilities of Mr. Fan and Mrs. Fan for the year of assessment 2017/18 under joint assessment.

Ignore provisional salary tax. Show all your workings.

c) Explain whether, and if so to what extent, the following payments are chargeable to salaries tax:

(i) the commitment incentive; and

(ii) the director’s fees.