90.2K

Verified Solution

Link Copied!

Question 2 Mr. Li, a Singaporean, has been working in Hong Kong for Famous Ltd, a company resident in Hong Kong (the "Company') since 1 April 2013, at a monthly salary of $90,000. Due to a failure in an important business project, Mr. Li was asked to resign and he submitted his resignation letter to the Company's director on 31 March 2021, notifying that he would terminate his employment with effect from 1 April 2021. However, his official last day of work in the Company would be 29 March 2021, after deducting two days of entitled annual leave. Other details of Mr. Li's termination arrangement and payment are as follows: 1. His total termination payment represented the following: (i) his final salary accrued up to 31 March 2021; (ii) compensation for the remaining balance of his entitled annual leave days as at 31 March 2021 of 15 days, of $45,000; (iii) his entitlement payment from the Company's provident fund registered under the Occupational Retirement Scheme Ordinance in the amount of $300,000 (Mr. Li and the Company had contributed equal amounts to the provident fund). The accrued benefit attributable to Mr. Li's service was $120,000. II. The Company's director agreed to pay Mr. Li an extra sum of compensation of $300,000 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. Li is planning to move back to Singapore. 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 two residential units in Wanchai and rent them out for income. (2) The purchases 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 purchase. (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 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. Required: (a) Advise Mr. Li of the general principles used for determining the taxability of EACH item of the termination payment received upon his cessation of employment. (You are NOT required to calculate his assessable/chargeable income or tax payable.) (18 marks) (b) Compare the tax implications for the rental income received from the residential units if the properties are held by: (1) an individual; and (6 marks) (ii) a company. (6 marks) Question 2 Mr. Li, a Singaporean, has been working in Hong Kong for Famous Ltd, a company resident in Hong Kong (the "Company') since 1 April 2013, at a monthly salary of $90,000. Due to a failure in an important business project, Mr. Li was asked to resign and he submitted his resignation letter to the Company's director on 31 March 2021, notifying that he would terminate his employment with effect from 1 April 2021. However, his official last day of work in the Company would be 29 March 2021, after deducting two days of entitled annual leave. Other details of Mr. Li's termination arrangement and payment are as follows: 1. His total termination payment represented the following: (i) his final salary accrued up to 31 March 2021; (ii) compensation for the remaining balance of his entitled annual leave days as at 31 March 2021 of 15 days, of $45,000; (iii) his entitlement payment from the Company's provident fund registered under the Occupational Retirement Scheme Ordinance in the amount of $300,000 (Mr. Li and the Company had contributed equal amounts to the provident fund). The accrued benefit attributable to Mr. Li's service was $120,000. II. The Company's director agreed to pay Mr. Li an extra sum of compensation of $300,000 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. Li is planning to move back to Singapore. 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 two residential units in Wanchai and rent them out for income. (2) The purchases 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 purchase. (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 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. Required: (a) Advise Mr. Li of the general principles used for determining the taxability of EACH item of the termination payment received upon his cessation of employment. (You are NOT required to calculate his assessable/chargeable income or tax payable.) (18 marks) (b) Compare the tax implications for the rental income received from the residential units if the properties are held by: (1) an individual; and (6 marks) (ii) a company. (6 marks)

Answer & Explanation Solved by verified expert

See Answer