5 [P.T.O.2 Mr Chan, a Malaysian, has been working in Hong Kong for World Ltd, a company resident in Hong Kong (the
‘Company’) since 1 April 2004, at a monthly salary of $80,000. Due to a failure in an important business project,
Mr Chan was asked to resign and he submitted his resignation letter to the Company’s director on 31 March 2012,
notifying that he would terminate his employment with effect from 1 April 2012. However, his official last day of work
in the Company would be 29 March 2012, after deducting two days of entitled annual leave.
Other details of Mr Chan’s termination arrangement and payment are as follows:
(I) His total termination payment represented the following:
(i) his final salary accrued up to 31 March 2012;
(ii) compensation for the remaining balance of his entitled annual leave days as at 31 March 2012 of 15 days,
of $40,000;
(iii) compensation for loss of office as agreed with the Company’s director, representing one month of his salary.
It has been the practice of the Company to pay an annual discretionary bonus equivalent to one month’s
salary;
(iv) his entitlement payment from the Company’s provident fund registered under the Occupational Retirement
Scheme Ordinance in the amount of $300,000 (Mr Chan and the Company had contributed equal amounts
to the provident fund). The accrued benefit attributable to Mr Chan’s service was $120,000; and
(v) compensation for the loss incurred by him from having to sell his car in Hong Kong as a result of his
termination of $10,000.
(II) The Company’s director agreed to pay Mr Chan an extra sum of compensation of $200,000 after six months
from the date of his termination on the condition that he did not work for the Company’s competitors during this
period.
Mr Chan is planning to move back to Malaysia. Before he goes back, he is interested in investing in residential
properties in Hong Kong. With various ideas in mind, he has approached you for advice on how to plan his investment
in a tax effective manner. His plans and ideas are:
(1) He will acquire one or two residential units in Tsimshatsui and lease them out for rental.
(2) The acquisitions will be financed partly by his personal savings (around 50%) and partly by bank mortgage
loans. It is expected that the rental income will not be sufficient to cover the mortgage interest.
(3) The residential units need to be renovated before they can be leased out. A substantial amount of renovation
costs is expected to be incurred after the acquisition.
(4) In two to five years’ time, he may consider disposing of the units if property prices go up to a satisfactory level.
(5) He has no idea as to how the properties should be owned, by an individual or by a special purpose company.
However, for the former, he prefers to have the properties owned by his daughter who is single, has always been
living in the UK and has no connection with Hong Kong. He believes that this will lead to a tax-free position in
respect of the rental received. Alternatively, he is considering setting up a company in an offshore tax haven to
hold the properties so that Hong Kong tax can be avoided; with minimal local tax payable in the tax haven
country.
6Required:
(a) Advise Mr Chan of the general principles used for determining the taxability of each item of the termination
payment received upon his cessation of employment.
Note: You are NOT required to calculate his assessable/chargeable income or tax payable. (14 marks)
(b) Compare the tax implications for the rental income received from the residential units if the properties are
held by:
(i) an individual; and (3 marks)
(ii) a special purpose company. (4 marks)
(c) Comment on the extent to which the tax planning ideas as described in note 5 above are feasible.
(3 marks)
(d) Explain the tax implications arising from the disposal of the residential units in two to five years’ time,
including how these may be affected by the different ownership structures. (6 marks)
(30 marks)
