3. Pride and greed

In a shopping arcade within a public low-cost estate, there was a medical service centre which had been in business for around 10 years. The centre had gradually built up its client base and was doing quite well.

The owner of the practice deemed that his income was really awesome. He concluded that it was a right time to buy a ‘dreamed home’ for self enjoyment. With the pleasant concurrence of his wife, the couple decided to acquire a decent house by paying HK$10M as initial deposit and the balance was financed by a bank loan of HK$5M. This loan would be repayable by monthly instalments of about HK$90,000 each over 5 years. The couple could not be more happier and had no thought on a ‘disaster’ would follow soon.

In the third year after the happy couple had moved into their dreamed home, the Inland Revenue Department issued a letter to require the owner to produce books and records of the preceding year for tax review. Shocked as any one would be, the owner went to seek consultation from a professional tax accountant to handle the anticipated trouble.

The professional accountant enquired the owner his daily operations, keeping of books and records, etc. The professional was told that the owner’s wife had acted in the role of a part time accountant for the centre. She was responsible to prepare financial statements and tax returns. The husband signed on the papers without knowing exactly what the contents were. During the past seven years, his annual reported profit was merely a few hundred thousand dollars on average. In fact, these amounts were substantially below the actual income. Under these circumstances, the professional accountant earnestly advised the client to make voluntary and complete disclosure to the Inland Revenue Department for review. The tax accountant also warned that there would be heavy additional taxes and penalties under this situation. The wife of the owner, apparently was not very willing, did not cooperate frankly to help the professional accountant sort out the real financial status. She mysteriously told the accountant that some transactions were irrelevant to the tax review and asked him not to go deeper. God would know this kind of attitude could hardly pass the tax examination. The Inland Revenue had then issued a few correspondences to demand the owner to report the full tax picture. Unfortunately, the wife considered the tax representative had given little help to resolve the issues and chose to talk to the tax officers directly instead. She felt she was smarter.

The Inland Revenue had not received satisfactory evidences and explanations from this tax payer and took the next step to issue large sums of protective assessments on the owner’s income. The investigation had been conducted for more than 20 months. It was finally found that this couple was really successful business people. They had earned a few extra sources of income relating to their practice, viz. suppliers’ cash discounts, introduction fee from beauty saloons for client referrals, commissions for purchasing large lots of consumables for pharmacy retailers, rebates from medical laboratories, etc. All these were privately pocketed into the couple’s personal bank accounts, not to mention that more than 50% of the practice’s normal daily takings were omitted on the past tax returns. As expected, the Inland Revenue would be tough and critical to penalize such incooperative and dishonest tax payers. The couple was taxed and fined up to a total sum of nearly HK$10 million!

We sincerely hope that this case has given a strong warning to the public. To report all tax income is the responsibility of a good citizen. There is no ‘luck’ that a tax payer can escape his/her tax charge. The best practice is of course to cooperate in a frank manner with your professional accountant to furnish true and complete information to the tax authority. In such a case, a tax representative can act in the best interest of the client to close the investigation case speedily, reducing the amount of financial burden and mental stress during the review.