Dr. The Honourable Leung Ka-lau v. The Commissioner of Inland Revenue
Read the full judgment text of FACV 5/2023 on BabelCite. This Court of Final Appeal judgment was delivered on 10 November 2023 before Chief Justice Cheung, Mr Justice Ribeiro PJ, Mr Justice Fok PJ, Mr Justice Lam PJ and Madam Justice McLachlin NPJ.
Tax law – salaries tax – income from employment – s.8(1) Inland Revenue Ordinance (Cap 112) – s.9(1)(a) – whether damages paid for deprivation of rest days and statutory holidays under sections 17 and 39 of the Employment Ordinance (Cap 57) are assessable to salaries tax – application of test in Fuchs v Commissioner of Inland Revenue (2011) 14 HKCFAR 74 – Hospital Authority Senior Medical & Health Officer required to be on call (resident and non-resident) on rest days, Sundays and statutory holidays – CFA judgment of 20 October 2009 holding doctors entitled to rest days and holidays – Sum of HK$1,765,821 awarded as damages for loss of rest days and holidays from 17 March 1996 to 1 October 2005 – whether the Sum arose from the Taxpayer acting as or being an employee, was a reward for past services, or an inducement to enter or continue the contract – distinction between damages for abrogation of contractual rights and damages for failure to perform – appeal against Board of Review's determination that the Sum was not income from employment – whether damages were for breach of the EO or for services rendered – whether the Sum caused double taxation – whether the Sum was a substitute for contractual benefits under sections 20 and 40A of the EO – application of Hochstrasser v Mayes, Shilton v Wilmshurst, Mairs v Haughey, Henley v Murray, Comptroller-General of Inland Revenue v Knight and Poon Cho-Ming v CIR – Court unanimously allowed the CIR's appeal and determined the question of law in the CIR's favour – the Sum held to be income from employment under s.8(1) of the IRO – order nisi that the Taxpayer pay the CIR's costs here and below, with liberty to lodge written submissions on costs within 14 days.
Legal issues: Whether damages for deprivation of rest days and statutory holidays constitute income from employment under s.8(1) IRO · Whether the abrogation of rights doctrine excludes the Sum from tax · Whether the Sum constitutes payment for past services or inducement under the Fuchs test
Outcome: Appeal allowed. The Court unanimously determined, in favour of the Commissioner of Inland Revenue, that the Board of Review erred in law in finding that the Sum was not income from employment within the meaning of s.8(1) of the Inland Revenue Ordinance.
Cites 3 cases
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FACV NO. 5 OF 2023 [2023] HKCFA 36 IN THE COURT OF FINAL APPEAL OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION FINAL APPEAL NO. 5 OF 2023 (CIVIL) (ON APPEAL FROM CACV NO. 278 OF 2021) ________________________
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________________________ JUDGMENT ________________________ Chief Justice Cheung: 1.I agree with the judgment of Madam Justice McLachlin NPJ. Mr Justice Ribeiro PJ: 2.I agree with the judgment of Madam Justice McLachlin NPJ. Mr Justice Fok PJ: 3.I agree with the judgment of Madam Justice McLachlin NPJ. Mr Justice Lam PJ: 4.I agree with the judgment of Madam Justice McLachlin NPJ. Madam Justice McLachlin NPJ: A. Introduction 5.The issue in this case is whether a sum of HK$1,765,821 (“Sum”) paid as damages by the Hospital Authority (“HA”) to the Taxpayer (“Taxpayer”) for standing by for work on rest days, statutory and public holidays, is taxable as salaries tax. 6.The Sum arose in this way. The Taxpayer argued that he (and other doctors in the same position) were entitled to rest days, statutory and public holidays pursuant to sections 17 and 39 of the Employment Ordinance, Cap 57 (“EO”), and by being on call they were deprived of this entitlement. This Court agreed in the judgment rendered on 20 October 2009 (“CFA Judgment”) and damages were assessed by Reyes J for the Taxpayer’s loss of rest days, statutory and public holidays from 17 March 1996 to 1 October 2005. 7.The history of these proceedings is as follows. The Commissioner of Inland Revenue (“CIR”) assessed salaries tax on the Sum under section 8 of the Inland Revenue Ordinance, Cap 112 (“IRO”). The Taxpayer filed an objection. The Deputy Commissioner of Inland Revenue affirmed the salaries tax assessment on 5 December 2018. The Taxpayer appealed to the Board of Review, which by its decision on 24 June 2020 upheld the determination of the Deputy Commissioner. On 27 April 2021, Anthony Chan J of the Court of First Instance granted leave to appeal against the decision of the Board of Review and allowed the Taxpayer’s appeal (“HCIA Judgment”). The CIR appealed this decision. By judgment issued on 22 February 2023, the Court of Appeal dismissed the CIR’s Appeal (per Kwan VP and Cheung JA, G Lam JA dissenting). On 11 May 2023, the Court of Appeal granted leave to appeal to this Court. 8.The following undisputed facts were set out in the HCIA judgment:
9.The relevant statutory provisions are as follows:
B. The Question of Law 10.Appeals from the Board of Review to the courts lie only on questions of law: Kwong Mile Services Ltd v Commissioner of Inland Revenue (2004) 7 HKCFAR 275 at §31. Therefore, the analysis must begin with a statement of the question of law. 11.The question of law, as formulated by Anthony Chan J, is whether the Board erred in law in finding that the Sum was income from employment within the meaning of section 8(1) of the IRO.[1] 12.The standard of review is one of “decent respect” or deference for the tribunal appealed from, in this case the Board of Review. In an appeal on law only, the duty of an appellate court is “no more than to examine those facts with a decent respect for the tribunal appealed from and if they think that the only reasonable conclusion on the facts found is inconsistent with the determination come to, to say so without more ado”: Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 at 39. See also Kwong Mile Services at § 37. C. The Issues 13.The ultimate issue is whether the Sum is income from employment. It is agreed that the test for income from employment is set out in Fuchs v Commissioner of Inland Revenue (2011) 14 HKCFAR 74 at §§ 16 to 18. The only issue is how Fuchs, properly understood, applies to the facts in this case. 14.In applying Fuchs, the majority of the Court of Appeal relied on the following propositions:
15.In applying Fuchs, Counsel for the CIR made the following submissions:
16.In his oral submissions, Counsel for the Taxpayer, Mr Ng, stated that he was not relying on the substitution argument, and was not pressing the double taxation argument. This removes from consideration these two points. 17.It emerges from the above that the central issue that divides the parties is how the Sum should be characterized, applying Fuchs. D. Analysis 18.The starting point of the analysis is the test for taxation from employment set out by this Court, per Ribeiro PJ, in Fuchs v Commissioner of Inland Revenue, which relies on the speeches of Lord Radcliffe and Viscount Simonds in Hochstrasser (Inspector of Taxes) v Mayes [1960] AC 376, and Lord Templeman in Shilton v Wilmshurst (Inspector of Taxes) [1991] 1 AC 684. I set out the relevant portions of Fuchs below:
19.Of particular relevance are the following phrases defining the test from the preceding paragraphs. To be taxable, the Sum must “arise from the office or employment”; the Sum is assessable “if it has been paid to [the Taxpayer] in return for acting as or being an employee”; the Sum “must be something in the nature of a reward for services past, present or future”; and the Sum is taxable if it is “a reward for past services” or “an inducement” to continue providing services or to enter into a contract to perform services in the future. 20.Ribeiro PJ, accepting the above, emphasized that taxability must be “viewed as a matter of substance and not merely of form and without being ‘blinded by some formulae which the parties may have used’.” Nor is it enough to be able to say that the payment can be characterised as being for “something else”; “where a payment falls within the test, it is assessable and the fact that, as a matter of language, it may also be possible to describe the purpose of that payment in some other terms … does not displace liability to tax.” 21.The next question is whether, viewing the Sum as a matter of substance rather than form, it is income from employment. As Fuchs makes clear, income from employment is broadly defined. It must arise “from” the “office or employment.” In other words, it extends to any payment made to the Taxpayer as a result of his “acting as or being an employee.” 22.The facts of this case reveal that the Sum was paid to the Taxpayer as compensation for the failure of the HA to accord him the holidays and statutory rest days to which he was entitled under the EO. The question, applying Fuchs, is whether that purpose falls within the phrase “acting as or being an employee”, rendering past services, or as an inducement to enter into or remain in the contract for future services. 23.Viewing the issue as a matter of substance, the answer to the question is clearly yes. First, the purpose for which the Sum was paid arises from the Taxpayer acting as or being an employee. The Taxpayer was required to be on standby at the request of the HA. He had to hold himself ready to go to the hospital at any time. This was what the Sum was aimed at compensating. The Taxpayer stood by on his holiday and rest days because he was an employee of the HA. In doing so, the Taxpayer was “acting as or being an employee.” 24.Second, the Sum may be viewed as a payment for past services. The Taxpayer provided the HA a service by being on stand-by, even if he was not called on to go to the hospital. The HA had a responsibility to properly staff its hospitals on holidays and statutory rest days. It fulfilled that obligation, in part, by requiring the Taxpayer to stand by on call on those days. That was a past service to the HA. 25.Third, the terms of the contract that provided for holidays and rest days, of which the Taxpayer was deprived, may be viewed as an inducement to prospective employees to enter into a contract for services with the HA. Hence it is related to employment, under the Fuchs test. 26.For all these reasons, it seems clear that the Sum arose out of employment, as discussed in Fuchs. 27.The arguments put against this conclusion fall within the category of fine distinctions and formalities which Fuchs warns against. 28.The Taxpayer’s first argument is that the Sum was not paid pursuant to the of contract of employment, but rather to abrogate the Taxpayer’s rights. While conceding that this distinction could be fine in some cases, the Court of Appeal saw it as pivotal in this case. It is therefore worth examining in detail. 29.In Fuchs, Ribeiro PJ referred to “abrogation of rights” to explain why a payment received where a contract of employment is prematurely terminated (or abrogated) was not taxable, referring to Henley v Murray (Inspector of Taxes) (1950) 31 TC 351. It is true that where a contract of employment is entirely set aside, or abrogated, it has been held that compensation for this is not taxable: see Henley, supra; Comptroller-General of Inland Revenue v Knight [1973] AC 428; Mairs (Inspector of Taxes) v Haughey [1994] 1 AC 303. But it does not follow that applying the label “abrogation of rights” means that the sum so described is not taxable. 30.One must apply the proper test, as described in Fuchs. As Yuen JA stated in Poon Cho-Ming, John v Commissioner of Inland Revenue [2018] HKCA 297, at §27.2, “‘abrogation of contractual rights’ is not itself the test of chargeability in every termination situation. The test is not whether the employer had acted in breach in terminating the contract. In every case, the test remains that of the purpose of the payment at the relevant time.” (emphasis added) 31.It may also be noted that the “abrogation cases” are all distinguishable from this case, being concerned with situations where the employment of the taxpayer with the existing employer had been brought to an end. The word describes the total abrogation of the contract, which terminates it. Wrongful dismissal can also be viewed as akin to the abrogation cases, since such situations connote that the employment contract of the taxpayer is no longer subsisting. The two are both distinguishable from the present case. 32.The employment contract in this case was never terminated, whether in whole or in part. The HA never terminated the contract or any of its terms, nor were they set aside by agreement or any other mechanism. The contract remained fully in force at all times. The Taxpayer’s right to be paid for the days he was on stand-by did not negate or “abrogate” those terms. The Taxpayer relied on the terms of the contract and his rights and asked that he be given compensation for the failure to fulfill them. This is not abrogation of the contractual rights, but a demand that they be fulfilled. 33.The majority of the Court of Appeal, with respect, appears to have equated failure to perform a contractual term with abrogation of that term. These are two different concepts. 34.A second distinction relied on by the majority of the Court of Appeal lies in the contention that the Sum was damages – not for the failure of the HA to pay the Taxpayer for standing by on holidays and rest days – but for the HA’s breach of the EO. Thus, the Sum, rather than arising from the contract of employment, arose from the HA’s infraction of the EO. 35.Again, the distinction fails to convince. While the HA may have arguably violated the EO, the principal reason the payment was ordered was the entitlement to payment for the Taxpayer’s standing by on holidays and rest days. 36.As noted, the Taxpayer no longer presses the distinctions between immediate and secondary causation. If pressed, this would be yet another fine distinction – the sort of distinction Ribeiro PJ stressed cannot override the test, viewed substantively. The Taxpayer’s contract was as much the source of the contract as the HA’s primary obligations breached. 37.While no longer pressed, the Taxpayer’s double taxation argument is misguided. The Taxpayer’s Letter of Appointment provided for a basic monthly salary. The Taxpayer has received this salary and has paid tax on it. 38.However, this basic monthly salary does not include compensation for denial of rest days or holidays by the HA. Section 8 of the IRO expresses tax to be chargeable in respect of an employee’s income from employment, not on discreet days worked. As G Lam JA, dissenting, pointed out, tax is paid on the amounts paid by the employer, regardless of when or whether they are paid pursuant to a court order rather than of the employer’s own volition. The employer paid the Taxpayer basic salary. This did not include compensation for being on call on holidays and rest days. The Sum as ordered in the CFA Judgment is paid to the Taxpayer as compensation for his loss of rest days and holidays, and is thus over and above the basic monthly salary of the Taxpayer. 39.While it is not necessary to consider it, I find the CIR’s argument on substitution unconvincing. The CIR argues that because the Sum was paid in substitution for lost holidays and rest days under the contract, the Sum should be considered as contractual, quoting Lord Woolf in Mairs (Inspector of Taxes) v Haughey: “It is inevitable that if a payment is made in substitution for a payment … [t]here will usually be no legitimate reason for treating the two payments in a different way.” It also argues that because the contract provides for payment of money where holidays and rest days are denied by consent or on termination under sections 20 and 40A(1) of the EO respectively, compensation for denial of holidays and rest days generally should be treated as payment for employment. We are not dealing with one payment being substituted for another in this case. Substitution arguments must be used with care to ensure both matters compared are identical. E. Conclusion 40.I would therefore allow the appeal. Chief Justice Cheung: 41.Accordingly, the Court unanimously allows the appeal and determines the question of law, namely whether the Board of Review erred in law in finding that the Sum was income from employment with the meaning of section 8(1) of the IRO in the CIR’s favour. The Court further makes an order nisi that the costs here and below be paid by the Taxpayer to the CIR, and the parties be at liberty to lodge written submissions on costs within 14 days of the date of this judgment, such submissions to be dealt with on the papers.
Mr Eugene Fung SC and Mr John Leung, instructed by the Department of Justice, for the Respondent (Appellant) Mr Godwin Ng, instructed by Wong & Co, for the Appellant (Respondent) | |||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment