Salaries tax – Termination payment – Whether sum was income from employment – Inland Revenue Ordinance (Cap 112) s 9

MURAD, EXECUTORS v COMMISSIONER OF INLAND REVENUE [2009] 6 HKC 478

Court of First Instance
Inland Revenue Appeal No 1 of 2009
Chung J
30 September, 19 November 2009

Neil Thompson, instructed by Messrs
Norton Rose Hong Kong, for the appellants.
Yvonne Cheng, instructed by the Department of Justice, for the respondent.

The taxpayer was employed by a bank in Hong Kong from the late 1980s to 20 July 2004. The original service agreement dated 20 April 1999 provided that the service agreement shall continue until 30 September 2004 unless terminated by either party giving to the other not less than three months’ notice in writing. If the employer required the taxpayer to resign, the service agreement provided that the
employer shall:

(a) make an immediate lump sum payment on the date of termination of employment equal to the total basic annual salary, fixed bonus payment and housing allowance which the taxpayer should have received if he continued the
employment up to 30 September 2004;

(b) reimburse all removal and shipping expenses directly or reasonably incurred by the taxpayer by reason of having to re-locate from Hong Kong to Miami, Florida; and

(c) reimburse the cost of one first-class airfare from Hong Kong to Miami, Florida.

The bank requested the taxpayer to resign with effect from 20 July 2004. A separation agreement was entered into which operated as an amendment of certain provisions of the service agreement relating to termination of the employment and the financial consequences of termination. The separation agreement provided for payment of:

(a) US$1,946,057 representing the basic annual salary which the taxpayer would have received had he continued without interruption in the Employment (sum A);

(b) US$1,347,270 representing the total fixed bonus payment which the taxpayer would have received had he continued without interruption in the Employment
(of this sum, US$973,028 was the subject matter of this tax appeal (sum B);

(c) US$30,000 in respect of all removal and shipping expenses (sum D);

(d) US$5702 being the cost of one single first class airfare from Hong Kong to Miami, Florida (sum E). The taxpayer contended that sums A, B, D and E were not subject to salaries tax. The Commissioner of Inland Revenue determined otherwise and this appeal was brought by the taxpayer.

Held, dismissing the appeal:

Sums A, B, D and E were sums paid pursuant to the sums agreed in the service agreement. The sums were part of the taxpayer’s assured entitlements under these terms of employment.

The sums were not payment for damages for the breach of the service agreement, nor were they paid in abrogation of the service agreement. They were paid in return for acting as or being, or for becoming, an employee.

The main plank of the taxpayer’s case was that the sums were ‘compensation for loss of office’. This was not the true test as disputes of this kind always involved a loss of office, thus the phrase ‘compensation for loss of office’ was apt for all such cases irrespective of whether the sum should or should not be taxable.The true test was whether the payment was for the total abandonment or abrogation of contractual rights.

The contention of the taxpayer that the parties entered into a separation agreement which provided for the payment of the same sums and that the separation agreement provided for the ‘full and final settlement of all claims’ which the taxpayer had or might have had against the bank was considered to be irrelevant.

Per curiam
Four categories of payment were set out in Delaney v Staples:

(a) an employer gave proper notice of termination to his employee who
was not required to work and gave him the wages attributable to the notice period in a lump sum;

(b) the contract of employment provided expressly that the employment may be terminated either by notice or, on payment of a sum in lieu of notice, summarily;

(c) the employer and the employee agreed that the employment was to terminate forthwith on payment of a sum in lieu of notice;

(d) without the agreement of the employee, the employer summarily dismissed the employee and tendered a payment in lieu of proper notice.

The sum in (a) was taxable while the sum in (b), being payment in lieu in the case of a summary dismissal, appeared to be taxable. The taxability the sum in
(c) was left open. The court in Henley v Murray appeared to opine that the sum
in (d) was not taxable.