Section B – TWO questions ONLY to be attempted
3 Mr Hui is working as the Regional IT Manager for GA Ltd (‘GAL’), a company incorporated and carrying on general
insurance business in Hong Kong. As of 31 August 2012, Mr Hui will have reached the retirement age. He has been
requested by his boss to extend his employment services for another two years, but with the following proposed
changes in his appointment terms:
(1) The employment contract between Mr Hui and GAL will be terminated with effect from 1 September 2012.
(2) Mr Hui will set up a consulting company which will enter into a service agreement with GAL. Under the service
agreement, the consulting company is obliged to provide IT related services to GAL and Mr Hui is designated as
the individual to provide the required services.
(3) In return for the services provided by Mr Hui, GAL will pay a monthly fee to the consulting company in an amount
equivalent to the monthly salary that Mr Hui currently receives. The payment will be made by direct bank transfer
into the consulting company’s bank account. Moreover, a profit-sharing bonus will be payable to the consulting
company on an annual basis, calculated based on the performance of GAL’s business for that year.
(4) Under the same service agreement, Mr Hui will be provided with an office together with secretarial and
administrative support by GAL. However, he will not be allowed to take vacation for more than 30 days in a year.
(5) During the period of providing services to GAL, Mr Hui will continue to hold the title of Regional IT Manager, and
will remain under the instruction and supervision of GAL’s Group IT Director, Mr Hui’s current boss.
(6) The service agreement also explicitly mentions that GAL does not act as the employer of Mr Hui and thus is not
obliged to comply with any necessary employment regulations and reporting obligations. Mr Hui will undertake
to enter into a separate employment contract with his consulting company so as to enable him to provide the
required services to GAL. However, GAL will not be involved in, or responsible for, the arrangement between
Mr Hui and his consulting company.
Required:
(a) Explain the criteria that the Inland Revenue Department will use to determine whether the proposed changes
to Mr Hui’s appointment terms will be acceptable as a contract for consultancy services rather than of
employment. Clearly identify the extent to which the terms specified in items (1) to (6) do/do not support the
contention that GA Ltd no longer acts as Mr Hui’s employer. (11 marks)
(b) Assuming that the Inland Revenue Department considers that Mr Hui remains an employee of GA Ltd after
1 September 2012, advise on the tax implications, if any, including any compliance obligations imposed
under the Inland Revenue Ordinance for Mr Hui, his consulting company and GA Ltd. (4 marks)
(15 marks)
