TAX RATES AND ALLOWANCES The following tax rates and allowances for 2020/21 are to be used in answering the questions: Tax rates: Standard Rate 15% Progressive Rates First $50,000 Next $50,000 Next $50,000 Next $50,000 Remainder 2% 6% 10% 14% 17% Personal Allowances: HK$ 132,000 264,000 120,000 120,000 50,000 25,000 Basic allowance Married person's allowance Child allowance - 1st to 9th child - newborn child Dependent parent/grandparent allowance Aged 60 or above or subject to other criteria Ages 55 to 59 not eligible for disability allowance Additional dependent parent/grandparent allowance Aged 60 or above or subject to other criteria Ages 55 to 59 not eligible for disability allowance Dependent brother/sister allowance Disabled dependent allowance Personal Disability Allowance Single Parent allowance Deductions (Maximum): 50,000 25,000 37,500 75,000 75,000 132,000 HK$ Home Loan Interest Elderly Residential Care Expenses Mandatory Contribution to MPF/MPF-exempted retirement scheme Self-education Expenses Qualifying Premiums paid under Voluntary Health Insurance Premiums (VHIS) Qualifying Annuity Premiums and Tax Deductible MPF Voluntary Contributions Approved Charitable Donations 100,000 100,000 18,000 100,000 8,000 60,000 35% 1 Question 1 (45 marks) Elaine Lee, who is an Australian, finished her study of Bachelor of Laws in The University of Sydney in 2018. She got an employment offer of trainee solicitor for one year by Ma and Fan HK Company (MFHK) which is one of the biggest law firm incorporated in Hong Kong. The employment offer was on condition that she had to obtain the Postgraduate Certificate in Laws (PCLL) in one of the universities in Hong Kong and started the work in April 2020. The programme fee of $42,100 will be reimbursed by MFHK on graduation and if for whatever reason Elaine did not join MFHK as planned in April 2020, she should repay the firm any money previously paid to her in reimbursement of PCLL programme. Elaine's parents are living in Hong Kong. She stayed with them when she came back to Hong Kong and signed the contract with MFHK in early 2019. She studied the programme in The University of Hong Kong and got the PCLL qualification in February 2020. MFHK paid the reimbursement of PCLL programme fee to Elaine on 15 March 2020. Elaine started her employment with MFHK on 1 April 2020. It is the practice of MFHK to provide every employee with a mobile phone for business use and pay the monthly charge of Internet connection to HKT which offers favourable company packages to MFHK with a monthly charge of $335 per employee. MFHK restricts the employees to undertake that they would solely use the phone themselves for business purpose and would not resell it during the period of employment. The employment history of MFHK shows that its employees usually work for six years on average, so the firm normally does not ask the employees to return the mobile phone when they leave the firm. The first day when Elaine joined the firm, she was provided with a mobile phone MK12. She found that it was the latest model with a selling price of $9,850 and she also noticed that it had a resale value of $7,500 in a shop situated in Mongkok when she walked by. Since this employment was Elaine's first job and she needed to go to meet clients and attend court proceedings with her supervisor, she spent $6,000 on purchasing black suits which she wore to work in order to make her look professional. After working for two months, Elaine got the opportunity to have the trainee job for six months in Australia with a partner company of MFHK, Ma and Co Australia LLP (MCAP). When she arrived at the MCAP, she was directed to the HR department and signed a contract with MCAP. The contract contained one of the terms that she had to complete the six months training and report to her supervisor who was her only performance appraiser. During the six-month period, Elaine also needed to work for clients of MFHK in cases where she had been dealing with. Elaine's supervisor in MCAP was very satisfied with her performance and increased her salary after two months and asked her to stay in MCAP after the end of the contract. The salaries of Elaine during the six months in MCAP were paid to Elaine's bank account which was opened in Australia and borne by MCAP. Elaine also paid the income tax of the relevant salaries to Australian Taxation Office (ATO) for the year ended 31 December 2020. After the contract ended in November 2020, Elaine wanted to work in Australia and after discussing with MFHK, she could continue working in MCAP but needed to finalize the outstanding project with the clients of MFHK and worked until the contract with MFHK ended in March 2021. She went back to Hong Kong in early December and completed all the outstanding projects in MFHK by the end of February 2021. MFHK and Elaine came to an agreement that the contract between them could end in February 2021, but she forfeited her leave entitlement of 14-day salaries which amounted to $21,000. During the period from April 2020 to March 2021 Elaine Lee is on the MFHK's payroll list. In answering to the query of IRD on the employer's tax return, MFHK prepared a breakdown of the payments to Elaine Lee. 2 Reimbursement of PCLL programme fee HK$42,100 Date of payment 15 March 2020 April 2020 to May 2020 June 2020 to Nov 2020 Dec 2020 to Feb 2021 Paid by MFHK MFHK MCAP MFHK Salaries HK$90,000 A$48,000 HK$156,000 (including $21,000 of 14-day leave pay forfeited) When Elaine filed her salaries tax return for the year 2020/21, she claimed deduction of $21,000 which she considered as her loss upon termination of her employment contract. Required (a) With reference to relevant cases, Departmental Interpretation and Practice Notes (DIPNs) and/or sections of Inland Revenue Ordinance (IRO), explain whether Elaine Lee's employment was located in Hong Kong for the year of assessment 2020/21 and to what extent her income should be chargeable to Hong Kong Salaries tax (calculation of assessable income is not required). (20 marks) (b) Explain whether the reimbursement of PCLL programme fee, $42,100 to Elaine is chargeable income under Salaries Tax. If yes, state which year of assessment that income would be assessable. Support your answer with relevant cases, DIPNs and/or sections of the IRO. (6 marks) (c) Explain whether the cost of purchasing black suits amounting to $6,000 incurred by Elaine Lee can be allowed for deduction from her income for the purpose of salaries tax. Support your answer with relevant cases, DIPNs and/or sections of the IRO. (7 marks) (d) Explain whether the following items can be allowed for deduction (item i) or assessed as income from employment (items ii and iii) of Elaine Lee by Inland Revenue Department (IRD) for the purpose of Salaries Tax assessment 2020/21. Support your answer with relevant cases, DIPNs and/or sections of the IRO. (i) Loss of $21,000, representing her leave pay entitlement. (ii) The provision of mobile phone MK12 by MFHK (state the amount of assessable benefit if necessary) (iii) Monthly charge of Internet connection $335 paid by MFHK. (12 marks)