Read the full judgment text of CACV 000048/1982 on BabelCite. This Court of Appeal judgment was delivered on 28 September 1982 before Leonard VP, Cons JA, Zimmern JA.
Inland Revenue – Profits Tax – deductions – section 16(1) of Inland Revenue Ordinance, Cap. 112 – 'outgoings and expenses... incurred during the basis period' – staff retirement lump sum scheme – whether deductible in ascertaining chargeable profits – whether amount no more than rough estimate of liability – respondents Lo and Lo, a firm of solicitors, introduced an employment clause on 3 January 1977 granting staff with at least 10 years of service a lump sum calculated by multiplying complete years of service by half the average monthly salary for the last 12 months of employment, with no payment to those dismissed for dishonesty, serious misconduct or gross inefficiency – during the 1977 basis period 23 staff had already completed 10 years of service but continued in employment – respondents set aside $770,000 in their books representing the minimum lump sum entitlements of those 23 staff – Commissioner allowed the $93,102 actually paid to retiring staff but disallowed the $770,000 provision – first issue whether the lump sum provision is properly deductible in ascertaining profits – second issue whether it is a rough estimate of liability that should be disregarded – held dismissing the appeal – the lump sum allowance is an 'expense incurred' in producing profits within s.16(1), liability being assumed when the employment contract was amended – Australian and English authorities on 'wholly and exclusively' or 'laid out or expended' do not apply because of material differences in statutory wording – Hong Kong follows the English approach of having regard to commercial accounting standards to identify permissible deductions where not expressly prohibited – section 16A does not alter the position – the $770,000 was an accurate measured provision and not a rough reserve, and was deductible – appeal dismissed.
Legal issues: Deductibility of retirement lump sum provision under s.16(1) Inland Revenue Ordinance · Whether the lump sum provision is no more than a rough estimate of liability
Outcome: Appeal dismissed; the respondents are entitled to deduct the sum of $770,000 in computing their assessable income under s.16(1) of the Inland Revenue Ordinance.