ACCT 4410 Taxation – Assignment 3

ANSWER

1
Question 1 i. (9 marks)

In order to determine whether or not an individual is having a contract for or a contract of

services, i.e., self-employed versus employment, the following three tests are usually used.
They are control test, integration test and economic reality test.

1. Control test – it refers to the degree of control that is exercised on the individual. For
example, whether the individual could be dismissed, works for others without
permission etc.

2. Integration test – it looks at whether the individual is part of the organization and how
(s)he represents himself or herself to third party.

3. Economic reality test – it could be considered as relatively more important. Does (s)he
require to put up his or her own tools? Does (s)he need to contribute capital and bear
economic risks?

Question 1 ii. (6 marks)

In light of the above factors, to a large extent, Mr. Poon has a contract for services with the
Firm for the following reasons:

From the case, there was not much relevant information regarding the degree of control that is
exercised on Mr. Poon other than the fact that he was not required to report duties to any
partners of the Firm. So, the degree of control over Aaron is minimal.

For the integration test, it seems that Aaron is a self-employed individual. His name card bears
no correspondence of the Firm and he is likely to represent to third parties he is not part of the
Firm organization.

The case facts seem to support that Aaron is self-employed under economic reality test even
though he was not required to bring along his own tools, in terms of stationery and assistants.
From risk perspective, Aaron accounts for his own work and personally liable for his acts. He
was not covered in whatsoever manner by the Firm. He was not entitled to have any benefits
given by the Firm.

To conclude, Mr. Aaron Poon should be a self-employed individual.

2
Question 1 iii. (5 marks)

Basically, the issues below concerning the tax implications under salaries versus profits tax.

Difference in tax rate – individuals are subject to progressive rate or standard rate @15%,
whichever the tax liability is lower. However, no such alternative is available under profits tax,
all being taxed under standard rate of 15% of 16.5% (with 2-tier tax rates effective 2018/19).

Difference in allowances and deductions – under salaries tax, there are personal allowances
available but the deduction rules are more rigid, it has to be wholly, exclusively and necessarily
incurred for the production of employment income. Whereas, under profits tax, even though
there is no personal allowance available, the general deduction principles under s.16(1) is more
lenient.

Difference in tax planning opportunities – relatively, there are more tax planning opportunities
available under profits tax than salaries tax.

Question 2 (10 marks)

i. If you were Kitty …

1. The completion bonus actually represented the compensation for the
loss of office.

2. It was not connected to employment services rendered to the Bank, her

corporate employer.

3. It was a lump sum of $600,000 without having any formula in calculating

such payment, without having any reference of her years of service.

ii. If you were the Assessor …

1. The IRD is not bound by any label, title or intention that the taxpayer
may use or have

2. Ex-gratia payment is income from employment within the meaning of

section 8(1)(a), Fuchs Case (2012)

3. The payment that represented a paid in lieu of gratuity should be

considered not only as a reward to Kitty for her past employment
services and to induce her to remain in employment with the Bank, but
further to induce her to enter into employment and provide future
services to the Buyer