Taxation



I. Salaries Tax

According to section 8(1) of the Inland Revenue Ordinance (Cap. 112 of the Laws of Hong Kong), Salaries Tax shall be charged for each year of assessment on every person in respect of his/her income arising in or derived from Hong Kong from any office or employment of profit or any pension. In simple words, you may be required to pay Salaries Tax if you have rendered services and received salaries/remunerations under a contract of employment in Hong Kong. However, taxpayers can claim “deductions” and “allowances” in order to reduce their Salaries Tax burden.

Liability to Salaries Tax is based on the chargeable income of the year of assessment, but the total amount of income for the year cannot be ascertained until the year is past. Hence, the Inland Revenue Department will first demand payment of a Provisional Salaries Tax during the year of assessment, and then make adjustments in the following year. Any provisional tax paid for a year of assessment is applied firstly against the Salaries Tax payable on the income for that year, and secondly, if there is any excess, it will be applied against the following year's provisional tax liability. Further illustration can be found in the questions and answers below.

Year of assessment

A year of assessment runs from 1 April to 31 March of the following year.

Tax Return

The law requires both the employee and the employer to separately report employment income/employment expenses to the Inland Revenue Department.

A. Location of Employment

What is the taxation status of workers who partly render services in Hong Kong and partly in foreign countries?

Such workers can make an application for exemption on the form (B.I.R.60) “Tax Return –Individuals” and its Appendix, together with the supporting documents required (e.g. a copy of employment contract or any documents verifying tax payment in a foreign country, etc.) . Full or partial exemption of income, or relief from tax, may be available to these persons if they satisfy one of the following conditions:

i) Only part of the income was arising in or derived from Hong Kong from an employment (i.e. under Section 8(1A)(a) of the Inland Revenue Ordinance)

This exemption is only applicable for employees having a source of employment outside Hong Kong (e.g. assigned to work in Hong Kong by overseas employers). As Salaries Tax is in this circumstance levied on income derived from services rendered in Hong Kong, income attributable to services rendered outside Hong Kong is exempt from tax. The amount of income exempted is generally computed by time-basis apportionment by reference to the number of days spent outside Hong Kong .

For the purpose of counting the number of days in Hong Kong, the day of departure from Hong Kong and the day of arrival to Hong Kong together are counted as one day only.

Example

Arrival in Hong Kong

Departure from Hong Kong

No. of days in Hong Kong

1 February

4 February

 

at 23:30

at 00:30

3

 

 

 

1 March

1 March

 

at 11:30

at 18:30

1/2

Thus, broadly speaking, if your annual income for a year of assessment was $365,000 and you were in Hong Kong for 100 days in that year, your assessable income would be $365,000 x 100/365 = $100,000.

ii) All services were rendered outside Hong Kong during the year (i.e. under Section 8(1A)(b)(ii) of the Inland Revenue Ordinance)

This exemption is generally available to employees irrespective of the locality of the employment. Attending trainings, meetings or reporting in Hong Kong is regarded as services rendered in Hong Kong for the purpose of the exemption. You are exempt from Salaries Tax for a year of assessment if you rendered all your services outside Hong Kong in that year of assessment, unless you are a civil servant, or a crew member of a ship or an aircraft. Income from services rendered in Hong Kong during “ visits” not exceeding a total of 60 days in the year is also excluded from Salaries Tax.

Visit means a short or temporary stay. Whether the nature of a trip to Hong Kong made by a Hong Kong resident is "visit" or not depends on the circumstances of each case. In general, if a Hong Kong resident has a work base in a foreign country and is required to render services there as a permanent employee, the person's occasional return to Hong Kong will be recognized as a "visit".

In deciding whether visits to Hong Kong exceed a total of 60 days, the "days of presence" are counted. A day is counted although you may be present in Hong Kong for part of the day only. Therefore, the day of departure from Hong Kong and the day of arrival to Hong Kong are counted as two days.

Example

Arrival in Hong Kong

Departure from Hong Kong

No. of days in Hong Kong

1 February

4 February

 

at 23:30

at 00:30

4

iii) Part of the income has already been charged to the tax in Mainland China or other countries during the year (i.e. under Section 8(1A)(c) of the Inland Revenue Ordinance)

This exemption is generally only applicable for employees having a source of employment in Hong Kong . If you have paid tax of substantially the same nature as Hong Kong Salaries Tax to a territory outside Hong Kong in respect of income relating to services rendered by you in that territory, that part of the income which has already been subject to foreign tax will be exempt from Hong Kong Salaries Tax. Evidence of foreign tax payment is required.

For example, your annual income for a year of assessment was $300,000 and two-third of the income (i.e. $200,000) was attributable to services rendered by you in, say, Country A. If you had paid tax similar to Hong Kong Salaries Tax in Country A on the $200,000 income, your assessable income in Hong Kong would be $100,000 only.

If a Hong Kong resident provides services both in the Mainland and in Hong Kong, the income derived from that person's Hong Kong employment will be fully assessable. But he/she may either apply for tax exemption under section 8(1A)(c) in respect of that part of income already subject to Individual Income Tax in the Mainland or apply for a tax credit under the Arrangement between the Mainland of China and the HKSAR for Avoidance of Double Taxation ("the Arrangement") by respectively completing Section 6 or Section 4 of the Appendix to Tax Return – Individuals. Evidence of the payment of Individual Income Tax is required. In general, tax exemption under section 8(1A)(c) provides greater relief than that would be provided by tax credit. For further information regarding this Arrangement, please go to Section V.

To get more details about full or partial exemption of income relating to places of employment, you can also visit the Inland Revenue Department's webpage.

B. General guidelines on how to compute Salaries Tax

1. What income is assessable and what deductions (and allowances) can be claimed under Salaries Tax?

The following is only intended to provide an outline of what taxable income, deductions, and allowances are. These terms will be explained further in separate questions and answers in other sub-sections on this website.

a) Income

According to section 11B of the Inland Revenue Ordinance, the assessable income of a person in any year of assessment shall be the aggregate amount of income accruing to that person from all sources in that year of assessment.

For the purposes of Salaries Tax, the assessable income includes:

i) Salaries/wages

ii) Commission, bonus, leave pay, end-of-contract gratuities

iii) Allowances or perquisites

These include cash allowances for food, traveling, housing, cost of living and education benefits.

iv) Tips from any person

v) Salary tax paid by an employer

vi) The ‘rental v alue ' of a place of residence that is either: (a) provided by an employer, or (b) the rent for which is paid or refunded (fully or partially) to the employee by the employer. “Employer” here also includes a corporation associated with the employer

This is taken to be 10% of the income earned from the employer (excluding any lump sum payment or gratuity on termination of employment) after deductions and depreciation allowances (if any) for the period during which the residence is provided.

vii) Share option gain

This refers to the gain realized by the exercise, the assignment, or the release of a right to acquire shares or stock in a corporation.

viii) Back pay, gratuities and any terminal/retirement awards

You may apply to have the whole sum of money related back to the earning period for tax assessment (up to a maximum of 36 months).

ix) Certain p ayments received from Mandatory Provident Fund Schemes (MPF) or Recognized Occupational Retirement Schemes (except for those received due to retirement, death or incapacity) attributable to some voluntary contributions by an employer.

Income not chargeable to Salaries Tax (not required to be reported in tax return) includes:

  • fees paid for your having served as a juror;
  • severance payment or long service payment payable by the employer on termination of employment under the Employment Ordinance ;
  • payments received from MPFS on retirement, death, incapacity or termination of service attributable to mandatory contributions.

b) Deductions and Depreciation Allowances

i) Outgoings and expenses

To qualify for deduction, the relevant outgoing and expense cannot be of a private or domestic nature and must meet the very stringent conditions of being wholly, exclusively, and necessarily incurred in the production of your assessable income.

ii) Expenses of self-education

The maximum amount allowable for deduction (as from the year of assessment 2013/14) is $80,000 per year.

iii) Approved charitable donations

The minimum amount allowable for deduction is $100. The total amount to be deducted for the year should not exceed 35% of your assessable income less the deductions of outgoings and expenses and depreciation allowances.

iv) Mandatory contributions to MPFS or contributions to Recognized Occupational Retirement Schemes

Some of the contributions that you make to a mandatory provident fund (MPF) scheme or a recognised occupational retirement (ROR) scheme can be deducted from your assessable income. Mandatory contributions to MPF schemes are deductible in computing your assessable income as an employee or assessable profits as a self-employed person's own contribution. All contributions other than mandatory contributions are voluntary and are not deductible. The maximum deduction for each year of assessment is :

Year of assessment Maximum deduction ($)
2009/10 to 2011/12 12,000
2012/13 14,500
2013/14 15,000
2014/15 17,500
2015/16 onwards 18,000

v) Home loan interest (HLI)

You can get deductions of HLI paid on the mortgage of your home. The maximum amount of deduction for each year is $100,000.

With effect from the year of assessment 2012/13, the number of years of deduction for home loan interest is extended from 10 to 15 (not necessarily consecutive) years of assessment, while maintaining the current deduction ceiling of $100,000 a year.  The additional 5 years home loan interest deduction is not applicable to the year of assessment prior to the year of assessment 2012/13. However, it will not affect taxpayers’ entitlement (including those who had already got the deduction of home loan interest for 10 years of assessment) of the 5 additional years deduction from the year of assessment 2012/13 and onwards.

Following each HLI deduction, the Commissioner will notify you of the number of years for which deduction has been allowed and your remaining entitlement.

vi) Elderly residential care expenses (ERCE)

You can claim deduction of the ERCE actually incurred by you/your spouse in respect of the residential care for you/your spouse's parent/grandparent who is aged 60 or above at any time in the year of assessment, or who is under 60 but is entitled to claim an allowance under the Government's Disability Allowance Scheme; and is taken care of by a registered residential care home or nursing home situated in Hong Kong .

In respect of the same dependant, you can claim either Dependent Parent Allowance (see “Allowances” below), or ERCE, but not both . If ERCE and DPA are claimed simultaneously for the same dependant, you will only get a deduction for ERCE for that year.

Annual deduction ceiling :

Year of assessment Deduction ceiling ($)
2009/10 to 2010/11 60,000
2011/12 72,000
2012/13 to 2013/14 76,000
2014/15 onwards 80,000

 

vii) Depreciation allowances on plant & machinery

To qualify for such allowances, you must show that the use of the machinery or plant is essential to the production of your income and produce the relevant receipt for inspection, when required. This kind of de preciation allowance, however, is uncommon for salaries tax.

For details about various kinds of tax deductions, please visit GovHK.

c) Allowances

Please visit GovHK for updated allowance figures.

2. What are the current rates for salaries tax?

Tax rates for the year of assessment 2009/10 and onwards(also applicable to Personal Assessment):

Net chargeable income
(Total Income – Deductions – Allowances)

Progressive rate

on the first $40,000

2%

on the next $40,000

7%

on the next $40,000

12%

upon the remainder

17%

Net total income (Total Income – Deductions)

Standard rate: 15%

 

Salaries Tax is chargeable on your net chargeable income at progressive rate OR your net total income at standard rate, whichever is the lesser . Base on the above table, progressive rate is more advantageous to people with relatively lower income. On the other hand, standard rate will give more concession to people earning relatively higher income (since progressive rate will charge 17%, but not 15%, on the income after the first $120,000).

Please go to the next question for an illustration of how to compute salaries tax.

For more details on tax rates, you may also refer to the Inland Revenue Department's "Allowances, Deductions and Tax Rate Table".

3. How is Salaries Tax and Provisional Salaries Tax computed?

You may use the Inland Revenue Department's Salaries Tax Computation to assess your Salaries Tax and Provisional Salaries Tax.

4. When do I pay my Salaries Tax and Provisional Salaries Tax?

Normally you would be asked to pay the Salaries Tax and Provisional Salaries Tax by two installments: the first instalment to be paid by January, the second instalment to be paid by April. Generally speaking, when paying the first instalment, you are required to pay 75% of the provisional salaries tax for a year after you have earned the income for at least nine months in the same year, and the remaining 25% is paid after you have earned the income for the whole year (i.e. in April). Assuming that there is no change on your monthly income on this year comparing with the previous year, paying provisional tax is actually not paying tax in advance, nor paying tax on future income.

5. Under what circumstances can I apply for paying less tax, or for holding over (deferring payment) of Provisional Salaries Tax?

An application for holding over of provisional salaries tax may be made on one of the following grounds:

  • You have become entitled to an allowance, which was not given in the notice for payment of provisional tax, for example:
    • You are getting married this financial year and your spouse does not have any income. You are entitled to a married person’s allowance;
    • Child allowance for your newborn baby; or
    • Dependent parent allowance for your parent who has attained the qualifying age in the year of assessment for which provisional tax was charged.

  • Your net chargeable income for the year of assessment for which provisional tax was charged is, or is likely to be, less than 90% of the net chargeable income for the preceding year or of the estimated sum in respect of which you are liable to pay provisional tax.

  • You have ceased, or will before the end of the year of assessment for which provisional tax was charged cease, to derive income chargeable to salaries tax. You should state the estimated amount of income for the whole year of assessment in your application and give reason for the reduction of income such as unemployment, retirement and salary reduction.

  • The amount of contributions to a recognized retirement scheme paid or to be paid by you in 2015/16 will exceed $17,500.

  • You have objected to your salaries tax assessment for the year preceding the year of assessment for which provisional tax was charged.

Your application must be made in writing and received not later than 28 days before the due date for payment of the Provisional Salaries Tax, or 14 days after the issue of the demand note concerned, whichever is the later.
If the provisional tax is payable by two instalments and the first instalment has been settled by the due date, an application for holding over of the whole or part of the second instalment may be made subject to the prescribed time limit and grounds for application.

6. How can married persons report their salary income?

Married persons can choose "separate taxation" or "joint assessment":

i) Separate taxation

A husband and a wife are treated as separate individuals. Each is required to:

  • complete a tax return,
  • declare his/her income,
  • claim expenses (and deductions), and
  • pay any tax due.

ii) Joint assessment (applicable only if advantageous)

If the earnings of one spouse are less than his/her tax allowance, there will be some un - utilized allowance when the husband and wife are assessed separately under separate taxation. If a couple chooses to have a “joint assessment”, income and allowances for both husband and wife will be added together, and the married person's allowance will be deducted from their joint total income. Obviously, this will result in some savings in tax for the couple.

Hence, where it appears that a joint tax bill may be smaller than your two tax bills added together, both you and your spouse should choose the “joint assessment” option in each of your tax returns. If a joint assessment does not result in less tax, the Assessor will automatically issue separate tax bills to each of you instead.

Please note that there is a time limit for the selection/withdrawal of a joint assessment. After initially choosing to have a joint assessment, should you change your mind and withdraw you selection, you will not be allowed to request a joint assessment again in the same year of assessment.

Any married couple may choose “joint assessment” under Hong Kong Salaries Tax regulations, irrespective of their residential status. The point to note for joint assessment is that both spouses should have income assessable to Hong Kong Salaries Tax for the specific year of assessment in question.

C. Income chargeable to Salaries Tax

1. My salaries income includes bonus, allowance, and commission. How should I report such income?

You should add up all of the above and fill in Part 4.1 of your tax return by entering the total amount in item (1). You should also fill in Box no. 22, which is the grand total of all income from all of your employers (see example below). Besides, you also should report the total amount of commission income in Box no.25.

Example

Details of income from Company A

$

$

 

Salary

80,000

 

 

Commission

5,000

 

 

Bonus

5,000

90,000

Details of income from Company B

 

 

 

Salary

180,000

 

 

Commission

5,000

 

 

Cash allowance

5,000

190,000

 

 

 

280,000


How to complete/fill in the data on your tax return

2. I have drawn a salary from my business. How should I report this income on my individual tax return (i.e. Tax Return – Individuals [B.I.R. 60])?

If your business is a sole-proprietorship business or partnership business, any salary paid to you should be included as part of your business profits and is chargeable to "Profits Tax" but not "Salaries Tax".

For sole-proprietorship business, the salary paid should be declared as part of the business profits in item 7 [Assessable Profit] in Part 5 [Profits Tax] of the Tax Return – Individuals (B.I.R.60) , and should not be reported again under Part 4 [Salaries Tax] of this Return.

As for a partnership business, the salary paid should be declared as part of the business profits and reported in Profits Tax Return (B.I.R. 52) for that business, and should not be reported again under Part 4 [Salaries Tax] of the Tax Return – Individuals (B.I.R.60).

Note :

Do not file Employer's Return of Remuneration and Pensions (I.R. 56B) in respect of the amount of salaries drawn by you and / or your spouse from your sole-proprietorship / partnership business.

3. I was laid off. I received from my employer (a) payment in lieu of notice and (b) severance/long service payment. Are these taxable?

Payment in lieu of notice, if paid under the Employment Ordinance (“EO”) or the terms of your employment contract, is not your earned income and hence non-taxable.

Severance/long service payment, if computed in accordance with the formula laid down in the EO, is also non-taxable. However, if the sum paid to you exceeds the amount so calculated, the excess is an extra award for your services and is part of your assessable income.

Example

After working for 8 years, an employee left his employment. By applying the formula in the EO, his entitlement to severance payment was $80,000, but his employer paid him $100,000. His tax position is as follows:

Severance payment

$80,000

(This part is exempt.)

Extra award

$20,000

(This part is taxable.)

Total amount received

$100,000

 

Note: For more information about the statutory calculations of payment in lieu of notice, severance payment and long service payment, please click here.

4. Is the lump sum received by way of commutation of pension (replacing the monthly pension) on my retirement taxable? On the other hand, is monthly pension taxable?

In general, any sum received by way of the commutation of a pension to certain Government officials or civil servants under the Pensions Ordinance (Cap. 89 of the Laws of Hong Kong), the Pension Benefits Ordinance (Cap. 99), or the Pension Benefits (Judicial Officers) Ordinance (Cap. 401) is NOT taxable.

If you were employed in the private sector, the monthly pension received by you after retirement is considered similar to your monthly salary and is taxable if it is sourced in Hong Kong . However, there is no Hong Kong court decision on the source of Hong Kong pensions although in practice this is normally decided by the place where the fund from which the pension is payable is managed and controlled. (Note: Where a pension is partly attributable to past services rendered outside Hong Kong , a proportion of the pension is exempt.)

 

5. I am a member of a Mandatory Provident Fund Scheme (“MPFS”). What is the tax treatment of the accrued benefits that I would receive or be deemed to have received from the MPFS upon my termination of employment?

There are different scenarios. See below for the appropriate tax treatment:

Relevant portion

Reason for withdrawal

Whether Taxable

Employee's mandatory contributions

Employment terminated under any circumstances

Always fully exempt

Employee's Voluntary contributions

Employment terminated under any circumstances

Always fully exempt

Employer's mandatory contributions

Employment terminated under any circumstances

Always fully exempt

Employer's voluntary contributions

(1) Retirement, death or incapacity (lost of working ability due to injury/illness)

(2) Termination of service
  (a) 10 years of service or more
  (b) Less than 10 years of service

Exempt

Exempt

If the sum does not exceed the Proportionate Benefit, it is fully exempt. If exceeded, the amount exceeding the PB is taxable.


Proportionate Benefit
= Accrued benefits# x No. of months of service*
                                                                                               120

# The part relating to employer's voluntary contributions
* Only completed months of service will be counted

Example

If after serving 7 years 6 1/2 months an employee left his employment, and from the MPFS he received accrued benefits representing his employer's contributions of $100,000, the amount that will be exempt from Salaries Tax should be:

PB = $100,000 x 90 complete months
                                          120
       = $75,000

For more details on the taxation matters relating to MPFS, please read the MPF Circular Letter No.1 issued by the Inland Revenue Department.

6. I was a member of a Recognized Occupational Retirement Scheme (“RORS”) but not a MPF Scheme, and I left my employment. Are the accrued benefits withdrawn from the RORS taxable?

In broad terms, the tax treatment for the accrued benefits withdrawn from an RORS is as follows:

Relevant portion

Reason for withdrawal

Whether Taxable

Employee's contributions

Employment terminated under any circumstances

Always fully exempt

Employer's contributions

(1) Retirement, death or incapacity (lost of working ability due to injury/illness)

(2) Termination of service
  (a)10 years of service or more
  (b)Less than 10 years of service

Exempt



Exempt


If the sum does not exceed the Proportionate Benefit, it is fully exempt. If exceeded, the amount exceeding the PB is taxable.


Proportionate Benefit
= Accrued benefits# x No. of months of service*
                                                                                               120

# The part relating to employer's contributions
* Only completed months of service will be counted

Example

If after serving 7 years 6 1/2 months an employee left his employment, and from the RORS he received accrued benefits representing employer's contributions of $100,000, the amount that will be exempt from Salaries Tax should be:

PB = $100,000 x 90 complete months
                                          120
       = $75,000

7. I completed a two-year-contract of employment and received a lump sum contract gratuity. Then I renewed my contract with my employer for another two years. Do I have to report the entire sum for the first contract's gratuity in this year's tax return? Can I apply to spread it evenly as my income over the two years covered by the first contract?

You must report this lump sum gratuity payment in this year's tax return. Please include the amount of the contract gratuity in the "Total amount" under item (1), Part 4.1 of the tax return. However, you may apply to have the lump sum related back to the period in respect of which the payment was made.

Example

$

Details of income from Company A during the year 2015/16:  

Salary

372,000

Contract gratuity for the past two years (period : 1/7/2013 - 30/6/2015)

150,000

 

522,000

Contract gratuity may be related back to relevant years as follows:

1/7/2013 - 31/3/2015

$150,000 / 24 months x 21 months = $131,250
-- as income related back evenly to the years of assessment 2013/14 and 2014/15 (i.e. your income in those years would be re-assessed together with any un-utilized allowances and deductions.)

1/4/2015 - 30/6/2015

$150,000 / 24 months x 3 months = $18,750
-- as income for the year of assessment 2015/16

Before you decide to relate back your gratuity, you should check with the Inland Revenue Department or a professional accountant to see if there is any “advantage” for such action.

8. How is the benefit of the provision of a place of residence assessed with respect to an employee's Salaries Tax?

If the Assessor accepts that what the employer provides to the employee is a place of residence, only the “Rental Value” ( RV ) will be computed and charged to tax. If not so acceptable, the benefit provided by the employer must be assessed as a “ perquisite” at its cash value (which is fully chargeable to tax under section 9(1)(a) of the Inland Revenue Ordinance).

Examples of "perquisites" (employee is not provided with a place of residence) are :

  • rent allowance,
  • refunds of mortgage payments, and
  • subsidies on mortgage interest payments.

Employee is provided with a place of residence

Housing benefits arising from employment are part of the employee's income. If the employee is provided with a place of residence by the employer or by a corporation associated with the employer, the "Rental Value" ( RV ) of that place of residence must be included in the employee's Assessable Income. The RV is calculated at either 4%, 8% or 10% of the total net income after deducting outgoings and expenses, depending on the type of accommodation provided:

Type of Accommodation

Percentage

A residential unit

10%

2 rooms in a hotel, hostel or boarding house

8%

1 room in a hotel, hostel or boarding house

4%


Example 1

Mr. C earned $600,000 in a year and was provided with a flat as his place of residence. He claimed deductions for his annual subscription to the Institute of Engineers $2,000 (i.e. outgoing & expenses), contributions to MPF $17,500 and expenses of $27,500 for self-education in that year. Mr. C's Assessable Income would be computed as follows :

 

$

Income

600,000

RV $(600,000 – 2,000) x 10%

59,800

Total income:

659,800

Less: Outgoings and expenses

(2,000)

MPF contributions

(17,500)

Expenses of self-education

(27,500)

Assessable Income

612,800


Example 2

Mr. L came to work in Hong Kong on 1 April 2014. He was remunerated at salaries of $50,000 per month, plus a place of residence. During his first month in Hong Kong , he occupied one room in a hotel. The monthly rental was $8,000. On 1 May 2014, his wife and children arrived and the family moved into a 2-bedroom suite in the hotel. The rent was $16,000 per month. On 1 July 2014, he and his family moved into a flat provided by the employer.

The RV should be computed as follows :

 

$

1/4/2014-30/4/2014 ($50,000 x 1 x 4%)

2,000

1/5/2014-30/6/2014 ($50,000 x 2 x 8%)

8,000

1/7/2014-31/3/2015 ($50,000 x 9 x 10%)

45,000

RV

55,000

9. What happens with respect to assessable income if the employer does not provide a place of residence to the employee, but refunds all or part of the rent paid by that employee?

S uch an arrangement can be treated the same as the employer directly providing a place of residence to the employee. The rental value ( RV) will be calculated and included in the employee's Assessable Income, and the actual reimbursement of rent paid to the employee will not be treated as income (i.e. the reimbursement will not be directly added to the employee's assessable income).

The contract of employment should specifically describe the rent reimbursement payment as rent paid by the employee. The employer and the employee then act in accordance with the contractual term. For these purposes, both parties should keep all the documents evidencing that the employer has made reasonable supervision over the reimbursements (e.g. copies of the tenancy agreement, rental receipts and employment contract, etc.). Otherwise, the Assessor may regard the payment as cash allowance and include the full amount as income in the employee's assessable income.

Example

Ms. H was paid a salary of $50,000 and an accommodation benefit of $10,000 per month. She occupied a flat for which she paid $8,000 per month. How should her Assessable Income be computed?

If Ms. H's employer has implemented proper procedures controlling how employees' housing benefits are actually utilized (e.g. stating that benefits on her employment contract and keep written record on how the money was spent), the Assessor would accept that Ms H was provided with a place of residence by her employer. However, as Ms. H only used $8,000 on the payment of rent, the remaining $2,000 would be regarded as a cash allowance. Her Assessable Income would be computed as follows:

 

$

Salary $(50,000 x 12)

600,000

Cash allowance $(2,000 x 12)

24,000

 

624,000

RV $(624,000 x 10%)

62,400

Assessable Income

686,400


On the contrary, if the employer has NOT implemented proper controlling procedures over housing benefits, the Assessor will treat the full amount of $10,000 as a cash allowance. Ms. H's assessable income would then be computed as follows:

 

$

Salary ($50,000 x 12)

600,000

Cash allowance ($10,000 x 12)

120,000

Assessable Income

720,000


Retention of documents

When filing the Tax Return, there is no need to attach the tenancy agreement, rental receipts, or other documents evidencing payments of rent. Such documents, however, should be retained so that they can be produced to the Assessor for review upon request.

10. How are benefits related to companies' share awards or share options taxed?

You have to pay Salaries Tax on benefits associated with stock-based awards arising from your office or employment.

If you are granted a right to acquire shares within a period of time in the future (i.e. a share option), you will be assessed for tax under section 9(1)(d) of the Inland Revenue Ordinance (IRO) when you exercise, assign, or release that option, but not at the time the option is granted to you.

An award of shares to you other than in the form of options (that is, you are given actual shares) may also give rise to a benefit assessable as a perquisite under section 9(1)(a) of the IRO. In this case you will be assessed for tax in the year you are awarded the shares.

Benefits related to share awards

If shares are awarded to you free of charge, the market price of the shares will be included in your assessable income. If the market price is $5, then that $5 would be added to your assessable income.

If you are allowed to buy shares at 80% of the market price and you pay $4 for a share that is worth $5, then $1 would be added to your assessable income.

If you are allowed to buy shares at $5 when the market price is $5, there is no benefit and therefore there is no tax implication.

Benefits related to share options

In broad terms, if you exercise a right to buy shares at $3 when the market price is $5, you pay tax on $2.

The amount of gain made from the assignment or release of a share option is usually the actual amount of money received by you from such assignment or release, less costs for acquiring the option, if any.

Example

Company X is a listed company in Hong Kong . On 25 March 2013, it granted Mr. C, its marketing manager, the following share option: A right to acquire 500 shares of Company X at a price of $100 per share within 3 years from 1 May 2013.

Mr. C exercised the option on 2 June 2014 and paid $50,000 to acquire 500 shares of Company X. On the exercise day, the market price of Company X's share was $140.

Mr. C has obtained a "share option gain" chargeable to Salaries Tax by the exercise of his share option. His assessable income for the year of assessment 2014/15 is computed as follows:

 

$

Share option gain $(140 - 100) x 500

20,000

Add: Other assessable income, say

600,000

Total assessable income

620,000


Mr. C's employer should report this "share option gain" in the Employer's Return.

For more information on the above issue, please read the Inland Revenue Department's Departmental Interpretation and Practice Notes No. 38.

D. Deductions relating to income chargeable to Salaries Tax

1. I resigned (without advance notice) and left the company on 1 March 2015. As I was required to pay one month's salary in lieu of notice to my employer, my employer did not pay me the salary for February 2015. For the year of assessment 2014/15, should I pay tax on my salary for 10 months or 11 months?

Your assessable income is salary for 11 months (i.e. 1 April 2014 to 28 February 2015). Although you had not received the salary for February 2015, it was actually used to offset the money in lieu of notice that you ought to pay.

Section 12(1)(a) of the Inland Revenue Ordinance stipulates that “in ascertaining the net assessable income of a person for any year of assessment, there shall be deducted from the assessable income of that person all outgoings and expenses……. wholly, exclusively and necessarily incurred in the production of the assessable income .” There was also an Inland Revenue Appeal Case heard at the High Court (Commissioner of Inland Revenue v Sin Chun Wah) in which the Court held that the salary paid by the employee in lieu of notice of termination was not expenditure incurred in the production of emoluments, and hence it was not deductible from the employee's assessable income.

Therefore, you cannot claim a deduction of the salary in lieu of notice paid by you as an expense for producing income.

2. How are the contributions made to an MPF scheme deducted for tax purposes?

With effect from 1 December 2000, employees (full-time or part-time) and self- employed persons, except persons exempt under the Mandatory Provident Fund Schemes Ordinance, are required to participate in MPFS.

Under Section 26G and Schedule 3B of the Inland Revenue Ordinance, mandatory contributions to MPFS are deductible in computing the assessable income/profits of an employee or a self-employed person, but the deduction does not include contributions made by a self-employed person in respect of his/her employees. All contributions other than mandatory contributions are voluntary contributions and are not deductible for tax purposes.

For the latest information on deduction for contributions to MPFS and Recognised Occupational Retirement Schemes, please click here.

*Note: Normally the profit derived from a partnership business is not reported on “Individual” Tax Return (B.I.R.60). But if the taxpayer switched from an “employee” to a “partner of a business” during the year of assessment, all of the relevant income/profit can be reported through an Individual Tax Return.

3. I am a director of a company and receive director's remuneration. Can I claim deductions for tax purposes from my MPF contributions?

An executive director receiving salaries under a contract of employment is required to join a MPFS, and is entitled to a tax deduction for mandatory contributions each year. Any voluntary contributions to a MPFS are not deductible for tax purposes.

4. If I contribute to a Recognized Occupational Retirement Scheme (“RORS”) rather than a MPF scheme, can I still claim deductions?

If you opt to participate in a MPF-exempted RORS, contributions you make to that scheme are also deductible, subject to the following restrictions:

  • the amount deductible is the lesser of two amounts, that is, the amount you actually contributed to the RORS or the amount of mandatory contribution that you would have been required to pay had that scheme been an MPF scheme; and
  • the maximum deduction for each year of assessment is :

Year of assessment

Maximum deduction ($)

2009/10 to 2011/12

12,000

2012/13

14,500

2013/14

15,000

2014/15

17,500

2015/16 onwards

18,000

5. What are expenses of self-education? Can I claim a deduction for tax purposes if I undertake a course related to my employment?

Under sections 12(1) and 12(6) of the Inland Revenue Ordinance, self-education expenses are expenses paid for fees (including tuition and examination fees) in connection with a prescribed course of education conducted by , or examination fees paid for examinations held by, a specified institution (or education provider) for the purpose of gaining or maintaining qualifications for use in any employment. The amount of deduction per year must not exceed $80,000.

Doing self-study is not undertaking “a prescribed course of education”. Hence, expenses incurred in connection with self-study, such as on the purchase of books, cannot be claimed. However, the scope of self-education expenses is extended to cover fees for qualified examinations set by professional bodies without requiring the taxpayers to undertake a prescribed course of education. Examples of these professions include certified public accountants, surveyors or architects, etc.

Fees that have been reimbursed or are reimbursable by an employer, the Government or any other person cannot be deducted.

What is a “prescribed course of education”?

A “prescribed course of education” (as defined under section 12(6) of the Inland Revenue Ordinance) is a course undertaken at a specified institution (or education provider) to gain or maintain qualifications for use in the current employment, or a planned new employment. In other words, the course must be related either to the present job or a job in the future.

For examples , course fees in the following situations may be qualified for deductions:

  • a management course taken by a business executive;
  • a commercial or computer course taken by a secretary or clerk;
  • a vocational training course taken by a technician;
  • a continuing professional development seminar taken by an accountant or a lawyer.

Starting from the year of assessment 2004/05, a prescribed course of education also covers a training or development course not necessarily provided by, but recognized or accredited by the Vocational Training Council, the Construction Industry Training Council, and the major trade associations for the regulated professions as specified in Schedule 13 of the Inland Revenue Ordinance. Taxpayers applying for the deduction are required to provide a confirmation letter from one of those relevant institutions confirming that the course taken is recognized or accredited by them.

What are specified education providers?

In general, they include:

  • any university, university college or technical college either in Hong Kong or overseas;
  • any technical institute, industrial training centre, vocational training centre or skills centre in Hong Kong ;
  • any Government school or other school registered or exempted from registration under the Education Ordinance;
  • any institution approved by the Commissioner of Inland Revenue;
  • any trade, professional or business association providing a training or development course.

6. If I did not undertake any prescribed course of education but just sat the professional examination set by a professional body (such as the Hong Kong Institute of Certified Public Accountants) for its members, can I claim the examination fee as a tax deduction?

If you sat for the examination for the purpose of gaining or maintaining a professional qualification for use in your employment, the examination fees are deductible (see section 12(6)(b)(ii) of the Inland Revenue Ordinance).

If the relevant examination fee is reimbursed or will be reimbursed by you employer, you cannot claim deduction under this item.

7. Who are eligible to claim deductions under “Elderly Residential Care Expenses”(ERCE)? What is the maximum deduction?

With reference to Section 26D of the Inland Revenue Ordinance, persons may claim deductions for elderly residential care expenses paid by them (or their spouses) to residential care homes in respect of their parents or grandparents or (their spouses' parents or grandparents). The deduction may be allowed under salaries tax and Personal Assessment. A person subject to tax at the standard rate is also entitled to the deduction.

The following conditions must be satisfied before the deduction is granted:

i. The parent/grandparent is a parent/grandparent of the taxpayer or his/her spouse.
ii. The parent/grandparent is aged 60 or above at any time in the year of assessment, or under 60 but entitled to claim an allowance under the Government's Disability Allowance Scheme.
iii. The parent/grandparent was receiving residential care in a residential care home in the year of assessment.
iv. The expenses were paid to a residential care home or any person acting on its behalf.
v. The expenses were paid by the taxpayer or his/her spouse in the year of assessment. A husband may claim deduction for payments made by his wife, and vice versa.
vi. The residential care home is situated in Hong Kong and is licensed or exempted from licensing under the Residential Care Homes (Elderly Persons) Ordinance, or is a nursing home registered under the Hospitals, Nursing Homes and Maternity Homes Registration Ordinance.
vii. Only one person may be granted the deduction in respect of the same parent or grandparent for a year of assessment. Where more than one person, who is entitled to claim the deduction, contributes to the payment of the residential care expenses of a parent or grandparent, it is necessary for them to agree amongst themselves as to which of them will claim the deduction for the year of assessment. In the event that they are unable to agree, no deduction may be allowed.

"Parent" means:

i. A natural father or mother of the taxpayer or his/her spouse; or
ii. A parent by whom the taxpayer or his/her spouse was legally adopted; or
iii. A step-parent of the taxpayer or his/her spouse; or
iv. A parent of the taxpayer's deceased spouse.

"Grandparent" means:

i A natural grandfather or grandmother of the taxpayer or his/her spouse; or
ii An adoptive grandparent of the taxpayer or his/her spouse; or
iii A step-grandparent of the taxpayer or his/her spouse; or
iv A grandparent of the taxpayer's deceased spouse.

Allowable deduction amounts

The deduction allowed is for expenses actually paid in the year of assessment to a residential care home in respect of the residential care received, subject to a maximum of $80,000 for the year of assessment 2014/15 and onwards for each parent or grandparent . The deduction covers only the cost of care provided to the parent or grandparent who is resident in a residential care home. Medical expenses, for example, paid to doctors and/or hospitals are not deductible.

In respect of the same dependant, you can claim Dependent Parent Allowance or ERCE, but not both .

8. What is the maximum amount of tax deduction under Home Loan Interest?

Under Section 26E(2) and Schedule 3D of the Inland Revenue Ordinance, if you are the sole owner of a dwelling, you can get deductions of HLI paid on the mortgage of your home. The maximum amount of deduction for each year is $100,000.

With effect from the year of assessment 2012/13, the number of years of deduction for home loan interest is extended from 10 to 15 (not necessarily consecutive) years of assessment, while maintaining the current deduction ceiling of $100,000 a year.  The additional 5 years home loan interest deduction is not applicable to the year of assessment prior to the year of assessment 2012/13. However, it will not affect taxpayers’ entitlement (including those who had already got the deduction of home loan interest for 10 years of assessment) of the 5 additional years deduction from the year of assessment 2012/13 and onwards.

If you are the joint tenant or the tenant in common of a dwelling, the home loan interest is regarded as having been paid by the joint tenants each in proportion to the number of joint tenants, or by the tenants in common each in proportion to his or her share of ownership in the dwelling. The amount of allowable deduction for each person is calculated accordingly, and the maximum deduction is also similarly reduced.

Example 1 - A dwelling owned by joint tenants

Mr. A and Mr. B are joint owners of a dwelling which they used exclusively as their place of residence throughout 2014/15. The dwelling was acquired 4 years ago with a mortgage loan, borrowed by them jointly from a bank, repayable by monthly installments over a 10-year period. During 2014/15, the total interest paid amounts to $180,000. Both Mr. A and Mr. B claim a deduction for home loan interest in 2014/15.

Result
The share of interest paid by Mr. A and Mr. B in 2014/15 is $90,000 each. A deduction limited to $50,000 is allowed to Mr. A and Mr. B each, which is the maximum allowable deduction in proportion to the number of the joint tenants (sections 26E(2)(b)(i) and 26E(2)(c)(i) of IRO). Remember that the total available deduction in respect of the property is $100,000.

Example 2 – A dwelling owned by tenants in common

Same facts as in Example 1 except for that Mr. A and Mr. B are tenants in common with the proportion of shares being 1/4 and 3/4 respectively.

Result
The share of interest paid by Mr. A and Mr. B in 2014/15 is $45,000 and $135,000 respectively. A deduction of $25,000 and $75,000 is allowed to Mr. A and Mr. B respectively, which is the maximum allowable deduction in proportion to their respective share of ownership in the dwelling (sections 26E(2)(b)(ii) and 26E(2)(c)(ii) of IRO).

Is the "penalty interest" paid to a bank for the early redemption of a mortgage on the dwelling deductible?

Not deductible. This is a penalty levied by the bank. It is not loan interest.

What are the requirements for the grant of deduction?

According to Section 26E of the Inland Revenue Ordinance, all the following conditions must be satisfied before the deduction is granted:

i. the person (taxpayer) claiming the deduction is the owner of the dwelling (either as a sole owner, a joint tenant or a tenant in common);
ii. the dwelling is a separate rateable unit under the Rating Ordinance (i.e. it is situated in Hong Kong );
iii. the dwelling is wholly or partly used by the person as his place of residence in the year of assessment;
iv. home loan interest is paid by the person during the year of assessment on a loan for the acquisition of the dwelling;
v. the loan is secured by a mortgage or charge over the dwelling or over any other property in Hong Kong; and
vi. the lender is an organization prescribed under Section 26E(9) of the Inland Revenue Ordinance, i.e.

    • the Government,
    • a financial institution,
    • a registered credit union,
    • a licensed money lender,
    • the Hong Kong Housing Society,
    • the person's employer, or
    • any organization or association approved by the Commissioner of Inland Revenue.

If the property is not used as the owner's dwelling but is let out with rental income, please refer to Personal Assessment for how to claim a deduction on loan interest.

9. Can mortgage interest paid for the acquisition of a car parking space be claimed for tax deduction?

Home loan interest paid for the acquisition of a car parking space is deductible if:

  1. the car parking space is located in the same development as the dwelling in respect of which home loan interest is being claimed in the same year of assessment; and
  2. the car parking space is for the use of the owner of the said dwelling.

10. If I own two dwellings, both of which are used as my place of residence, am I entitled to a deduction of loan interest paid for both dwellings?

As a taxpayer, you are not entitled to a deduction of interest paid on both dwellings. You will only be allowed a deduction of interest paid for the acquisition of the dwelling that you regard as your principal place of residence.

 

E. Allowances relating to Salaries Tax

1. Who are eligible to claim the “married person's allowance”? What is the amount of that allowance?

Under section 29 of the Inland Revenue Ordinance, a taxpayer is eligible to claim the married person's allowance if he/she was, at any time during a year of assessment,

  • married and not living apart from his/her spouse; or
  • living apart from his/her spouse but was maintaining or supporting him/her;
    AND
  • the spouse of the taxpayer did not have any income chargeable to salaries tax; or
  • the taxpayer and his/her spouse have chosen joint assessment; or
  • the taxpayer and his/her spouse have chosen personal assessment.

“Marriage” is defined in Section 2 of the Inland Revenue Ordinance as meaning:

  1. any marriage recognized by the law of Hong Kong; or
  2. any marriage, whether or not so recognized, entered into outside Hong Kong according to the law of the place where it was entered into and between persons having the capacity to marry,

but shall not, in the case of a marriage which is both potentially and actually polygamous, include marriage between a man and any wife other than the principal wife.

The amount of the married person's allowance (for a married couple) in 2015/16 and onwards is $240,000. Taxpayers cannot claim an individual basic allowance if they have already claimed the married person's allowance.

2. I am married. How do I claim the "Married Person's Allowance", choose either "Joint Assessment" or "Personal Assessment", or nominate my spouse to claim the deduction for "Home Loan Interest"?

a) Claiming the "Married Person's Allowance"

  • If you are married for the full year or part of the year and your spouse does not have any income chargeable to Salaries Tax during the year, you should complete Part 8.1 in order to get the "Married Person's Allowance" under Salaries Tax assessment. There is no need for you to complete either Part 4.4 to elect "Joint Assessment" or Part 6 to elect "Personal Assessment".
  • If you have chosen "Joint Assessment" under Salaries Tax in Part 4.4 and/or "Personal Assessment" in Part 6 of your tax return, you should also complete Part 8.1 in order to get the "Married Person's Allowance".

b) Choosing "Joint Assessment"?

Generally speaking, if both husband and wife have income from salaries and one of them has an assessable income lower than his/her entitlements to allowances and concessionary deductions, choosing Joint Assessment will be advantageous. In order to choose the “Joint Assessment” option, both husband and wife have to complete their own tax returns.

If only one spouse has income from salaries and the other does not, there is no need to choose "Joint Assessment". Under Salaries Tax, so long as the salary-earning spouse has completed Part 8.1 of the Tax Return properly, the "Married Person's Allowance" will be granted.

c) Choosing "Personal Assessment"?

There is no need to choose "Personal Assessment"; if you ONLY have salary income. You may still claim allowances and deductions under Salaries Tax assessment. However, if you earn rental income (on which you may be required to pay property tax) or have business profits, you should consider if the choice of "Personal Assessment" can reduce your overall tax liability. For instance, if you have borrowed money to purchase a property for letting out, deduction of mortgage interest from your rental income can only be claimed when you choose "Personal Assessment".

For married taxpayers, their spouse must sign Part 9 of the Tax Return to confirm their agreement to choose either the "Joint Assessment" or the "Personal Assessment".

d) The nomination of a spouse to claim the "Home Loan Interest" deduction is applicable only if your spouse has no income chargeable to tax (including rental income, salaries income and business profits). If your spouse has income chargeable to tax, he/she cannot nominate you to claim this deduction. However, you may seek the full "Home Loan Interest" deduction through the choice of either "Joint Assessment" or "Personal Assessment".

3. How is eligibility for claiming the “child allowance” determined? What is the current amount of that allowance?

Under section 31 of the Inland Revenue Ordinance, a taxpayer is eligible to claim child allowance if, at any time during a year of assessment, he/she maintains an unmarried child, who was:

  • under the age of 18; or
  • of or over the age of 18 but under 25, and was receiving full time education at a university, college, school or other similar educational establishment; or
  • of or over the age of 18, and was, by reason of physical or mental disability, incapacitated for work.

"Child" refers to:

  • the child of the taxpayer or his/her spouse or former spouse; or
  • the adopted child of the taxpayer or his/her spouse or former spouse; or
  • the step-child of the taxpayer or his/her spouse or former spouse.

If a married couple, not being a husband and wife living apart, have more than one child for whom child allowance is claimed, all child allowances must be claimed by either the husband or the wife (but not both). They must decide who shall claim the allowance.

The allowance for each child is $100,000 each for the year of assessment 2015/16 and onwards.

4. I have a brother and a sister whose living expenses are fully supported by me. Can I claim the "dependent brother/sister allowance" under this circumstance?

According to section 30B of the Inland Revenue Ordinance, you are eligible to claim dependent brother/sister allowance if you or your spouse, not being a spouse living apart, maintains your (or your spouse's) unmarried brother or sister, who was at any time in the year of assessment,

  • under the age of 18; or
  • of or over the age of 18 but under 25, and was receiving full time education at a university, college, school or other similar educational establishment; or
  • of or over the age of 18 and was, by reason of physical or mental disability, incapacitated for work.

"Brother/Sister" refers to:

  • the natural brother/sister of the taxpayer or his/her spouse; or
  • the adopted brother/sister of the taxpayer or his/her spouse; or
  • the step brother/sister of the taxpayer or his/her spouse.

A brother/sister is only treated as maintained by the taxpayer or the taxpayer's spouse if at any time during the year, the taxpayer or his/her spouse had sole or predominant care of the brother/sister.

If your brother and sister meet the above requirements, you could claim a dependant brother/sister allowance of $33,000 each for the year of assessment 2015/16 and onwards.

5. I have to maintain my two parents. Under what circumstances can I claim the “dependent parent allowance” or the additional dependent parent allowance”?

Under section 30 and section 30A of the Inland Revenue Ordinance, a taxpayer is eligible to claim a dependent parent/grandparent allowance (of $40,000 each) if the taxpayer or his/her spouse (not being a spouse living apart) maintain his/her own parents/grandparents or the spouse's parents/grandparents, who at any time in the year of assessment:

  • were ordinarily resident in Hong Kong; and
  • were aged 60 or more, or being under the age of 60, were eligible to claim an allowance under the Government's Disability Allowance Scheme; and
  • had either resided with the taxpayer and his/her spouse, otherwise than for full valuable consideration, for a continuous period of not less than 6 months, or had received from the taxpayer or his/her spouse not less than $12,000 in money towards the maintenance.

Taxpayers are eligible to claim an additional dependent parent/grandparent allowance (of $40,000 each) in respect of each dependent parent/grandparent who resided with them, otherwise than for full valuable consideration (i.e. without any payment or compensation), continuously throughout the year of assessment.

For the year of assessment 2015/16 onwards, a new dependent parent/ grandparent allowance is also granted to taxpayers maintaining dependent parents/grandparents who do not attain the age of 60 in the year of assessment, but on condition that the dependants:

  • are aged 55 or more but are under the age of 60 at any time during the year of assessment; and
  • are not eligible to claim an allowance under the Government's Disability Allowance Scheme throughout the year of assessment; and
  • are ordinarily residents in Hong Kong; and
  • have either resided with the taxpayers, otherwise than for full valuable consideration, for a continuous period of 6 months or have received from them or their spouses not less than $12,000 each in money towards their maintenance.

A new additional dependent parent/grandparent allowance will also be granted if the dependant has resided with the taxpayer, otherwise than for full valuable consideration, continuously throughout the year of assessment. The rates of these two new allowances are $20,000 respectively.

"Parent" refers to:

  • the natural father/mother of the taxpayer or his/her spouse; or
  • a parent by whom the taxpayer or his/her spouse was legally adopted; or
  • a step-parent of the taxpayer or his/her spouse; or
  • a parent of the deceased spouse of the taxpayer.

"Grandparent" refers to:

  • a natural grandfather/grandmother of the taxpayer or his/her spouse; or
  • an adoptive grandparent of the taxpayer or his/her spouse; or
  • a step-grandparent of the taxpayer or his/her spouse; or
  • a grandparent of the deceased spouse of the taxpayer.

Only one person can be granted an allowance in respect of any one parent or grandparent. If more than one person is entitled to the allowance in respect of the same parent or grandparent, they must agree among themselves as to who shall claim the allowance.

In respect of the same dependant, you can claim either the dependent parent allowance or the or elderly residential care expenses, but not both.

6. How to determine whether or not a dependent parent ordinarily resides in Hong Kong ?

To determine whether or not the dependent parents ordinarily reside in Hong Kong , the Department will consider their social and economic ties with the territory. Objective factors taken into consideration include:

  1. the number of days they stayed in Hong Kong;
  2. whether or not they have a permanent dwelling in Hong Kong;
  3. whether or not they own a property for residence outside Hong Kong;
  4. whether or not they work or carry out a business in Hong Kong or outside Hong Kong;
  5. whether or not their relatives are mainly residing in Hong Kong or outside Hong Kong.

Generally speaking, the Department does not consider a dependent parent, who possesses a Hong Kong identity card, as ordinarily resident in Hong Kong if he/she lives outside Hong Kong continuously and stays in Hong Kong for a limited number of days just for paying a visit to relatives.

7. We maintain my wife's stepfather who is over 60 years old this year but he has not registered a marriage with my mother-in-law. Can we claim the dependent parent allowance in respect of my wife's stepfather?

Without a registration of marriage, your wife's stepfather does not satisfy the definition of “parent” under the Inland Revenue Ordinance. You are not entitled to a dependent parent allowance unless your wife ' s stepfather married your mother-in-law according to traditional Chinese custom before amendment of the matrimonial law on 7 October 1971.

8. I am eligible to obtain a “child allowance”, but I was divorced 2 years ago. Can I claim the “single parent allowance”?

With reference to section 32 of the Inland Revenue Ordinance, a taxpayer is eligible to claim the single parent allowance if he/she was single throughout the year of assessment and had at any time during that year the sole or predominant care (provide the daily care and supervision on on-going basis for the child) of a child in respect of whom he/she is granted child allowance. In other words:

  1. Throughout the year of the claim the claimant must be single, divorced, or widowed, or living apart from the spouse. Therefore, no allowance can be claimed for the year of marriage, divorce, death of spouse or separation with the spouse. The earliest opportunity will be the year following these events.
  2. The claimant is granted child allowance for the year of the claim. (Please note that partial child allowance may be granted when both parents have contributed money towards the child's maintenance and education. Under the law the Commissioner is empowered, in case of dispute, to split the allowance according to the amount of contribution made by each parent during the year of assessment concerned.)

Whilst the child allowance is granted on account of financial contributions to maintenance and education; the single parent allowance is granted on account of time spent on the provision of daily care and supervision.

The law also specifies that no parent can claim the single parent allowance on the grounds that he/she had made contributions to the maintenance and education of the child during the year of assessment. Moreover, no allowance is permitted in respect of any second or subsequent child.

The single parent allowance for the year of assessment 2015/16 and onwards is $120,000.

9. I have separated from my spouse recently and I have to solely maintain my children. Can I claim the “single parent allowance”?

Not immediately, as the allowance will not be granted for the year during which the separation or divorce takes place. For example, a couple divorced in August 2014. They will not be entitled for single parent allowance in the year 2014/15. Such allowance will only be considered as from the year 2015/16.

10. Under what circumstances can I claim the “disabled dependent allowance”?

Under section 31A of the Inland Revenue Ordinance, taxpayers are eligible to claim the disabled dependant allowance if they or their spouses, not being a spouse living apart, maintain a dependant who is eligible to claim an allowance under the Government's Disability Allowance Scheme .

The dependant may be:

  • the spouse of the taxpayer; or
  • a child of the taxpayer; or
  • a parent or grandparent of the taxpayer or his/her spouse; or
  • the brother or sister of the taxpayer or his/her spouse.

This allowance is granted in addition to the following allowances or deductions in respect of the disabled person:

  • married person's allowance; or
  • child allowance; or
  • dependent parent/grandparent allowance or elderly residential care expenses; or
  • dependent brother/sister allowance.

The disabled dependent allowance for the year of assessment 2015/16 and onwarsd is $66,000.

11. What evidence is required from applicants for the “disabled dependant allowance” when a review is made?

On reviewing applications, the Inland Revenue Department may require the applicants to submit evidence showing that the dependants are eligible to claim an allowance under the Government's Disability Allowance Scheme.

If the dependant has applied to the Social Welfare Department (SWD) for the disability allowance, the taxpayer can provide the file number the dependant used in making the application. For dependants that have not claimed the disability allowance, a Medical Assessment Report issued by a public hospital or a registered medical practitioner is required to substantiate the dependant's eligibility for disability allowance in the relevant year. This Medical Report should be in the same format as that required by the SWD in assessing the prescribed disability under the Comprehensive Social Security Assistance Scheme or Social Security Allowance Scheme. The Inland Revenue Department will accept this Medical Assessment Report as evidence for the purpose of the Disabled Dependant Allowance under the Inland Revenue Ordinance.

F. Penalties for Salaries Tax avoidance

1. What will happen if I fail to file my tax return or provide false information to the Inland Revenue Department?

The duty to furnish tax return and information to the Commissioner for Inland Revenue is governed by section 51 of the Inland Revenue Ordinance.

Under section 80(2) of the Inland Revenue Ordinance, any person who without reasonable excuse-

  1. makes an incorrect return by omitting or understating anything in respect of which he is required by the Ordinance to make a return, either on his behalf or on behalf of another person;
  2. makes an incorrect statement in connection with a claim for any deduction or allowance under the Ordinance;
  3. gives any incorrect information in relation to any matter or thing affecting his own liability (or the liability of any other person) to tax;
  4. fails to comply with the requirements of a notice given to him under section 51(1) or (2A); or
  5. fails to comply with section 51(2),

commits an offence and is liable on conviction to a fine of $10,000 and a further fine of treble the amount of tax which has been undercharged in consequence of such incorrect return, statement or information, or would have been so undercharged if the return, statement or information had been accepted as correct, or which has been undercharged in consequence of the failure to comply with a notice under section 51(1) or (2A) or a failure to comply with section 51(2), or which would have been undercharged if such failure had not been detected.

G. Objection and Appeal

1. I received a Salaries Tax assessment and found that the income assessed and the tax charged are too high. Can I raise objection against this?

Yes. You must lodge a written notice of objection with the Inland Revenue Department within one month after the date of issue of the assessment, stating the grounds for your objection clearly. You may complete the relevant parts of the Form I.R.831 for objection / application for revision of assessment, and return it to the IRD either by post ( P.O. Box 28777 , Gloucester Road Post Office, Hong Kong ) or by fax (2877 1232).

If the income was estimated or you do not get the full entitlement to allowances, you should find out if the assessment was an estimated assessment raised under section 59(3) of the Inland Revenue Ordinance. If it is, you must submit a completed tax return together with your objection letter.

Pending the ultimate settlement of the objection, you should pay as indicated on the demand note, or follow the Assessor's advice regarding how much tax you should pay (whether you have to pay the full tax or, are allowed to pay a lesser amount of tax in the first instance). The Commissioner of the IRD may impose a surcharge on any tax not settled by the due date.

If you are still not satisfied with the determination of the Commissioner of the IRD, you may further lodge a n appeal against the determination with the Board of Review (Inland Revenue Ordinance) which is an independent tribunal. Your appeal should be made in writing to the Clerk to the Board of Review (Inland Revenue Ordinance) within one month of the date of the Commissioner's written determination.

H. Preliminary Calculation and Filing of Tax Returns via the Internet

1. Can I get a preliminary calculation of my Salaries Tax through the Internet?

The Inland Revenue Department has developed a simple Salaries Tax Computation Program to help you calculate your own Salaries Tax liability. To make use of this program, please go to the IRD's webpage.

2. Who can use Internet Filing? What types of tax return can be submitted through the Internet?

Individual taxpayers who either hold valid digital certificates issued by the Hongkong Post or the Digi-Sign Certification Services Limited, or have registered an e-Tax Password with the Inland Revenue Department, can use Internet Filing service provided by the Department.

Through the Internet Filing service, taxpayers may lodge their Tax Returns - Individuals (B.I.R. 60) and Property Tax Returns - Property Jointly-owned or Co-owned by Individuals (B.I.R. 57) for the current year of assessment.

The only exceptions are:

  1. Tax Return - Individuals (B.I.R. 60)
    • Returns which require submission of supporting documents. Example: During the relevant year, the taxpayer was operating a sole-proprietorship business that had a gross annual income of more than $2,000,000, or the taxpayer claims full or partial exemption of employment income.
    • The taxpayer has obtained an advance ruling on any of his/her tax matters in relation to the year of assessment concerned.

  2. Property Tax Return (B.I.R. 57)
    • The property is owned by more than 2 owner

How can I sign my electronic tax return?

You need to digitally sign your tax return by using a digital certificate that is either issued by the Hongkong Post or the Digi-Sign Certification Services Limited.  Alternatively, if you have registered an e-Tax Password with the Department, you can sign your return with your e-Tax password.

Where and how can I acquire a password for electronic filing?

a) Apply through the Internet / Telephone

You may apply on-line through the Internet under the ESD Scheme or call the 24-hour Automated Telephone Registration Hotline at 183 2033. Follow the interactive instructions to enter your Taxpayer Identification Number (TIN), as printed on the front page of your Tax Return - Individuals or Notice of Assessment for Salaries Tax, and your Hong Kong Identity Card Number. Your Access Code together with your e-Tax Passward will be sent to your correspondence address by post within 3 working days.

b) Apply By Form

Alternatively, you may also choose to apply by using Form I.R.6104.

After completing the Form I.R.6104, you may return it by post, by fax (fax number: 2519 3566) or in person. The signature on the form should be the same as that in your tax return.

For application by Form I.R.6104, the Inland Revenue Department will send you the Access Code Notice and the e-Tax Password after verifying the details on the form.

Register a taxpayer's own Password

At the issue of Access Code, the Inland Revenue Department will also provide the e-Tax Password, a copy of the TeleTax User Guide, and the Terms and Conditions for the Use of the Password.

Upon receipt of the Access Code Notice, please follow the registration procedures stated in the notice to change the password you received to a password of your own choice through either the Internet under the ESD Scheme, or by calling the TeleTax Hotline at 183 2088. You may then use the Department's electronic services via the Internet or Telephone immediately upon successful registration of your chosen password.

For more details on Internet Filing of tax returns, please visit the Inland Revenue Department's webpage.



II. Profits Tax

With reference to section 14 of the Inland Revenue Ordinance, profits tax shall be charged for each year of assessment on persons carrying on a trade, profession or business in Hong Kong in respect of their assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of "capital assets").

“Persons” (in the context of Profits Tax) include corporations/limited companies, sole proprietorships, partnerships and trustees, etc. Self-employed persons are also included.

There is no distinction made between Hong Kong residents and non-residents. A resident may therefore derive profits from abroad without suffering tax in Hong Kong. Conversely, a non-resident may suffer tax on profits arising in Hong Kong . The question of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong is largely a question of fact. No tax is levied on profits arising abroad, even if they are remitted to Hong Kong.

Provisional Profits Tax

Profits Tax is chargeable on the actual profits of the year. As the profits for any particular year cannot be known until after the year end, a provisional tax charge is raised during the course of the year. In the following year, when the profits of the previous year are ascertained, an assessment is made and credit is given for the provisional tax paid.

Limited Company's taxation matters

Every corporation or limited company must appoint an auditor at the company's annual general meeting (section 131 of the Companies Ordinance), and such auditor can handle the taxation matters of such company (section 129C) . Therefore, please check with your auditor/accountant for any profit tax issues concerning with a limited company.

A. General guidelines on how to compute Profits Tax

1. What are the current rates for Profits Tax?

Profits Tax rates as from 2008/09 onwards:

(1) Normal rate

Corporations (businesses/companies incorporated according to the Companies Ordinance e.g. limited company):

16.5%

Unincorporated Businesses (businesses/companies NOT incorporated according to the Companies Ordinance e.g. sole-proprietorship or *partnership):

15%

(*If one of the partners in a partnership is a corporation, the profit tax rate on that partner is 16.5%)

(2) Concessionary rate

A tax rate at 50% of the normal profits tax rate will be applied to trading profits and interest income received or derived from qualifying debt instruments issued in Hong Kong, and to the offshore business of professional reinsurance companies.

2. What are “assessable profits”? How to interpret the “basis period” for Profits Tax purposes?

The term “profit” is not clearly defined in the Inland Revenue Ordinance. In general, the assessable profits (or adjusted loss) are calculated by normal accounting principles with further reference to the statutory allowable income/receipts and deductions for the basis period. The basis period is not necessary the same as the year of assessment (1 April to 31 March of the following year).

The basis period of your business can be either:

  1. the year ended 31 March during the relevant year (i.e. same as the year of assessment);
  2. where the annual accounts are made up to any day other than 31 March, the year ended on that day in the relevant year (e.g. if your company's annual A/C closed on 31 May every year, the account you have to submit in the year of assessment 2015/16 will be from 1/6/2014 to 31/5/2015);
  3. where the accounts are made up for each lunar year, the lunar year ended in the relevant year;
  4. where you commence a new business, please refer to the following :

"Basis period" for Profits Tax in the case of a new business

Suppose your business commenced on 1 July 2014 and your company's accounting period ends on 31 December every year (i.e. the first accounting period ends within the year of assessment 2014/15), the basis periods would be:

  • Year of assessment 2014/15: 1 July 2014 – 31 December 2014;
  • Year of assessment 2015/16: 1 January 2015 – 31 December 2015

If your business commenced on 1 July 2014 but the accounting period ends on 31 May every year (i.e. the first accounting period does not end within the year of assessment 2014/15), the basis periods would be:

  • Year of assessment 2014/15: Nil
  • Year of assessment 2015/16: 1 July 2014 – 31 May 2015
  • Year of assessment 2016/17: 1 June 2015 – 31 May 2016

(Note: For cessation of business, the basis period for your tax return depends on whether or not the business commenced on or after 1 April 1974. It involves complex calculation rules so you should seek advice from the Inland Revenue Department or a certified accountant.)

3. Is there any difference in the reporting requirements for a sole-proprietorship business and a partnership business?

The reporting requirements are basically the same but the relevant tax returns are different:

  • For a sole proprietorship business, the proprietor should declare the profit / loss in Part 5 of the Tax Return – Individuals (B.I.R. 60).
  • For a partnership business, the precedent partner should complete and sign a Profits Tax Return - Persons Other Than Corporations (B.I.R. 52).
  • When there is a change from sole-proprietorship to partnership during the accounting year or vice versa, the profit / loss for the full year should be reported in the Profits Tax Return - Persons Other Than Corporations (B.I.R. 52).

4. I run a business on my own and need to declare “assessable profits” in the tax return. Must I engage a professional accountant to prepare the accounts?

There is no requirement under the law for engaging any professional service for the preparation of accounts for sole-proprietorships or partnerships. If you possess the necessary accounting and taxation knowledge, you may prepare your own accounts. You may also employ a bookkeeper to do so.

Since the calculation of accessible profits always involves the use of accounting principles, you may find it both helpful and safer to hire an accountant/auditor to handle your taxation matters.

 

5. If I have not appointed any accountant to handle my company's taxation matters, are there any calculation aids available to help me compute the "assessable profits"?

The "assessable profits" are the net profits (or losses) for the basis period, arising in or derived from Hong Kong and calculated in accordance with the Inland Revenue Ordinance.

The Inland Revenue Department has provided samples of Proforma Tax Computation Form (Form IR 957A(e)) (for sole-proprietorship business), and Pro forma Profits Tax Computation Form (Form IR957) (for partnership business). You may use these forms to make the necessary adjustments to your net profit in your accounts in order to arrive at the amount of profit you will be assessed on.

If you have further queries about the computation method, please seek professional advice from a certified accountant.

6. Can I apply for paying less tax, or for the holding over (deferring payment) of Provisional Profits Tax?

There are some grounds for the holdover of Provisional Profits Tax as stipulated in section 63J of the Inland Revenue Ordinance. To highlight a few, they include:

  1. Your assessable profits for the year of assessment are, or are likely to be, less than 90 per cent of the assessable profits for the preceding year; or
  2. You have ceased, or will before the end of the year of assessment cease, to carry on your trade, profession or business.

Your application must be made in writing and received by the Inland Revenue Department not later than 28 days before the due date for payment of the provisional tax, or 14 days after the issue of the demand note concerned, whichever is the later.

7. The gross income of my sole-proprietorship business during the year was below $500,000. Do I need to retain this year's business records, and if so, for how long? Do I need to attach the Balance Sheet and Profit & Loss Accounts to my Tax Return?

As the gross income of your sole-proprietorship business did not exceed $500,000, you are not required to submit the Balance Sheet, the Profit and Loss Accounts and the supporting schedules with your tax return.

However, according to section 51C of the Inland Revenue Ordinance, any person carrying on a business in Hong Kong must keep sufficient business records of income, expenditure, assets and liabilities, in English or in Chinese, to enable his/her assessable profits to be readily ascertained. Records relating to any business transaction must be retained for at least 7 years after the completion of the transactions, acts or operations to which they relate.

Failure to keep sufficient records may result in a fine of up to $100,000, and estimated assessments being raised on your business.

8. If not every receipt/income from my business is taxable, which is taxable and which is not?

General Rule

Receipts arising from day to day business operations are normally your operating income and are taxable.

Proceeds from the sales of fixed /capital assets are capital receipts and are usually non-taxable.

Income closely connected with your business operations is also taxable, including:

  • rental income received from sub-letting part of your business premises;
  • rebates received from trade associates; and
  • the forfeiture of trade deposits or compensation money from customers arising from the cancellation of ordinary business contracts.

Sale proceeds arising from the sale of your business entity as a going concern or of your fixed assets are normally of capital nature and are non-taxable. You should however keep in mind the specific provisions in the Inland Revenue Ordinance which relate to the treatment of stock and machinery and plant under such circumstances (seek advice from a practicing lawyer or accountant if required).

The following income/receipts are also taxable:

  • trade debts that were claimed irrecoverable, and deducted from the previous years' assessable profits, but which have subsequently been recovered from customers;
  • grants and subsidies (unrelated to capital expenditures) you received from the Government or other parties;
  • rental/charges for the hiring of your computers, equipment and machines;
  • sums for the use or right to use in Hong Kong of a patent, design, trademark, copyright material or a secret process/formula etc. received by you; and
  • sums received for the transfer of a right to receive income.

 The following income/receipts are non-taxable:

  • proceeds from the sale of fixed/capital assets;
  • proceeds from the sale of business interests/goodwill;
  • compensation for early termination of business tenancies;
  • dividends from corporations subject to Profit Tax separately;
  • amounts already included in the assessable profits of other persons chargeable to Profits Tax;
  • interest on Tax Reserve Certificates;
  • interest on, and any profit made in respect of a bond issued under the Loans Ordinance (Cap. 61 of the Laws of Hong Kong) or the Loans (Government Bonds) Ordinance (Cap. 64), or in respect of an Exchange Fund debt instrument or in respect of a Hong Kong dollar-denominated multilateral agency debt instrument;
  • interest income and trading profits derived from long term debt instruments; and
  • sums received or accrued in respect of a specified investment scheme by or to a person :
    1. in relation to a mutual fund, unit trust or similar investment scheme that is authorized as a collective investment scheme under section 104 of the Securities and Futures Ordinance (Cap. 571); or
    2. in relation to a mutual fund, unit trust or similar investment scheme where the Commissioner is satisfied that the mutual fund, unit trust or investment scheme is a bona fide (truly and honestly) widely held investment scheme which complies with the requirements of a supervisory authority within an acceptable regulatory regime.

9. If not every expense/outgoing is deductible from the assessable profits, which ones are deductible?

General Rule

Business expenses related to your day to day operations are normally deductible as your operating expenses, such as:

  • rents paid on business premises/quarters for employees;
  • light, water and telephone charges for business premises;
  • salaries, wages, allowances, bonuses for the hiring of employees;
  • employer's mandatory and voluntary contributions to MPF schemes or MPF-exempted Recognized Occupational Retirement Schemes (but the deduction is limited to 15% of the total emoluments of the employee for the period to which the payments relate);
  • MPF mandatory contributions as a self-employed person for the sole proprietor or partner, not exceeding $18,000 per year per person for the year of assessment 2015/16 and onwards;
  • severance or long service payments paid at the termination of employment;
  • interest on funds borrowed for normal business operations, such as for the purchase of stock (but must satisfy the conditions laid down in section 16(2) of the Inland Revenue Ordinance);
  • bad or doubtful debts (i.e., sales duly recognized as your turnover but for which you cannot collect payments from customers);
  • costs of repairing articles, premises, machinery and plant used in producing profits; and
  • approved charitable donations of not less than $100, but not exceeding 35% of your assessable profits.

There are also some allowable deductions by way of tax incentives which include:

  • registration costs of a trademark, design or patent for use by the business;
  • expenditures on the purchase of patent rights or rights to any know-how for use in Hong Kong in the production of assessable profits (However, the relevant patent rights or rights to any know-how must not be purchased from an associated or related person. ) ;
  • expenditures for scientific research including: any systematic, investigative or experimental activities for the purpose of any feasibility study in relation to any market, business or management research; and the costs of machinery and plant for such purposes;
  • payments for technical education subject to certain rules;
  • 100% write-off of cost in the year of purchase of a “prescribed fixed asset”, which includes: machinery or plant used specially and directly in any manufacturing process, computer hardware (other than that which is an integral part of any machinery or plant), and computer software and computer systems, but does not include any leased item or item acquired under hire-purchase terms;
  • capital expenditures incurred on the renovation or refurbishment of buildings by 5 equal deductions over 5 successive years of assessment;
  • industrial building allowance;
  • rebuilding allowance for commercial buildings.

Expenditure on Building Refurbishment

A person who incurs capital expenditure on the renovation or refurbishment of business premises (including hotels and guesthouses) is allowed to deduct that expenditure over a period of 5 years in equal installments commencing in the year in which the expenditure is made.

10. Which expenses/outgoings are NOT deductible from the assessable profits?

Expenses not deductible include (this is not an exhaustive list):

  • any loss of capital;
  • withdrawals by the sole proprietor/partners;
  • any withdrawal of capital;
  • any expenditure of a capital nature (e.g. purchase fixed assets);
  • the costs of any improvements;
  • rent or expenses relating to premises not occupied for the purpose of producing assessable profits;
  • any sum recoverable under insurance or contract of indemnity;
  • taxes paid under the Inland Revenue Ordinance, except Salaries Tax paid in respect of employees’ remuneration;
  • any remuneration or interest on capital or loans payable to:
    for a sole proprietorship - the proprietor or the proprietor's spouse,
    for a partnership - the partners or their spouses;
  • domestic or private expenses, including:
    medical expenses, insurance premiums, birthday celebration expenses for the sole proprietor/partners and their family members, etc., and
    costs of travelling between residence and place of business;
  • traffic penalty incurred during the delivery of goods to customers (this is a fine for breaking the law);
  • any sum not expended for the purpose of producing assessable profits.
  • contributions made to a mandatory provident fund scheme in respect of the proprietor (except mandatory contributions) or the proprietor's spouse or, in case of a partnership, to its partners (except mandatory contributions) or their spouses.

11. Apart for those allowable deductions mentioned in the above Q&A, are there any other allowances available under Profit Tax assessments?

The tax payers may also enjoy "depreciation allowances" as follows:

a) Industrial Building Allowances on Industrial Buildings and Structures

    • Initial allowance: 20% on the cost of construction of the premises.
    • Annual allowance: 4% on the cost of construction of the premises.
    • Balancing allowance or charge will be due upon disposal of the premises.

b) Commercial Building Allowances on Commercial Buildings and Structures

    • Annual allowance: 4% on the cost of construction of the premises.
    • Balancing allowance or charge will be due upon disposal of the premises.

c) Plant and Machinery

    • Initial allowance: 60% on the cost.
    • Annual allowance: at rates of 10%, 20% or 30% as prescribed by the Board of Inland Revenue in the Inland Revenue Rules, on the reducing value of the asset. Items qualifying for the same rate of annual allowance are grouped under one "pool".
    • A balancing allowance is available only on cessation of a business to which there is no successor. A balancing charge can, however, arise whenever the disposal proceeds of one or more assets exceed the reducing value of the whole "pool" of assets to which the disposed items belong.

12. What is the effect on my liability for Profits Tax if I did not make any profit, but incurred a loss in my business?

The loss can be carried forward for setting off against the future profits of your business. ( NOTE: Losses incurred in a partnership are apportioned between the partners in accordance with their agreed profit/loss sharing ratio. These losses are then dealt with according to whether each partner is an individual or a corporation. Special rules are applicable to limited partnerships, i.e. p artnership with more than 20 partners, as per section 22B of the Inland Revenue Ordinance. )

Alternatively, if you have other income (e.g. salary income) for the same year of assessment, you can select the Personal Assessment option on your tax return. This will enable you to set off the business loss against your other taxable income. Any unutilized loss can be carried forward for setting off against your taxable income in future years.

You are warned not to falsify your accounts to show a loss in order to evade tax liability. The Inland Revenue Ordinance contains contains anti-avoidance provisions to punish people who evade tax.

B. Deductions relating to taxable profits

1. What should be included under the section of Employee and/or Director's remuneration in the tax return?

The "employee" referred to here includes all employees whose remuneration has been charged in the Profit and Loss accounts of the company, irrespective of whether the employees perform their duties in Hong Kong or elsewhere. Remuneration paid by you, as an employer, to overseas employees or staff working in the Mainland should also be included. "Employee" also includes a director of a corporation. However, "employee" does not include a proprietor or partners or their spouses of an unincorporated business.

It is the sum of all salaries, bonuses, wages, cash allowances etc. paid to employees and includes director's fees.

Fringe benefits such as reimbursement of rent for living quarters, reimbursement of travelling expenses, share options granted, passages, medical expenses etc. need not be added unless these have already been grouped under "employee remuneration" in the Profit and Loss account of the company.

2. Is there any limit on deductions for MPF contributions made by employers for their employees?

Regular/monthly contributions (whether mandatory or voluntary) made to a MPF scheme by persons as employers for their employees are allowable for deduction. The deduction, however, is limited to 15% of the total remuneration of employees for the period to which the payments relate.

3. I made mandatory contributions of $17,500 in a year of assessment as a self-employed person. I also employed my wife in running the business and she joined the MPFS. My MPF contribution for her during the same year was $10,000. Can I claim a further deduction for profit tax purposes from her part of contributions?

As the Inland Revenue Ordinance does not permit deduction for MPF contributions in respect of the spouse of a proprietor (or partner), only the mandatory contribution of $17,500 made by you as a self-employed person will be allowed as a deduction in calculating the assessable profits of your business.

4. After the commencement of the MPF scheme, are there any changes to the employer's responsibilities in filing the Employer's Return?

Besides the reporting of employees' emoluments, the employer is also required to report the taxable portion of the accrued benefit that the employees received under the RORS or the MPF schemes. As to the circumstances in which the accrued benefits withdrawn by the employee are taxable under Salaries Tax, please refer to Appendix A and B of the "MPF Circular letter No. 1" issued by the Inland Revenue Department .

5. An employer may occasionally receive a Recovery Notice issued under Section 76(1) of the Inland Revenue Ordinance requiring him/her to deduct the employee's salary for tax payments. Should the employer fulfill this obligation under the Recovery Notice before or after making the income deduction required under the Mandatory Provident Fund Schemes Ordinance?

The Inland Revenue Department is prepared to accept, in the absence of legal precedent to the contrary, the priority of the income deduction for making mandatory contributions to a registered MPF scheme over the income deduction for paying default tax . Mandatory contributions refer to those contributions which an employer has a statutory responsibility to make under section 7A(1)(b) and section 7A(2)(b) of the Mandatory Provident Fund Schemes Ordinance (Cap. 485 of the Laws of Hong Kong). They do not cover other contributions including the employee's voluntary contributions made through the employer under section 11 of that ordinance.

For enquiries about a recovery notice issued by the Inland Revenue Department, please call the telephone number printed on the recovery notice.

C. Allowances relating to Profits Tax

1. I am the sole-proprietor and a partner of 2 companies who is liable to pay Profits Tax. Am I entitled to the basic or other tax allowances (such as child, single parent, dependent parent, dependent grandparent or dependent brother/sister allowances), and Home Loan Interest deduction?

Profits from sole-proprietorship or partnership businesses are taxed at the standard rate (15% for year of assessment 2014/15 onwards) under "Profits Tax". However, if you are eligible to choose "Personal Assessment", you may also claim the following deductions and the tax on your income will be computed at the progressive rates applicable to "Salaries Tax":

  1. interest incurred on money borrowed for the purpose of producing property income (the amount deductible should not exceed the net assessable value of the individual property let);
  2. approved charitable donations;
  3. elderly residential care expenses (from year of assessment 1998/99 onwards);
  4. home loan interest (from year of assessment 1998/99 onwards);
  5. business losses incurred in the year of assessment;
  6. losses brought forward from previous years under "Personal Assessment"; and
  7. Personal allowances (include but not limited to basic allowance, child allowance, dependent parent allowance, etc.).

If you are married and your spouse has assessable income, the option of Personal Assessment must be chosen by both of you in the tax returns (so that you and your spouse can enjoy the above allowances and deductions).

2. I bought two machines for $200,000 and a second-hand lorry for $50,000. The purchase costs are capital expenditure and cannot be deducted from my assessable profits. Is there any relief that I can claim?

You can claim for depreciation allowances. Please refer to the summary below:

  • Initial Allowance ("IA") is 60% of the cost of the machinery or plant, to be granted in the year of asset purchase.
  • Annual Allowance ("AA") is by nature a "wear and tear" allowance, granted annually on the reducing value of machinery or plant at 10%, 20% or 30% as laid down in the Inland Revenue Rules, a subsidiary legislation under the Inland Revenue Ordinance.
  • Some examples of the rates of AA for the more common machinery or plant :

Air-conditioning plant

10%

Room air-conditioners

20%

Electric refrigerators 20%

Washing machines and boilers

20%

Furniture (excluding soft furnishing)

20%

Motor vehicles

30%

Tractors

30%

  • A "Pooling System" was introduced in 1980/81. All items of machinery and plant qualifying for AA at the same rate are brought together in one “Pool”, with additional items added to, and disposal proceeds subtracted from, the “Pool”.
  • A balancing charge arises where the disposal proceeds exceed the reduced value of the "Pool".
  • A balancing allowance can only be granted to you on the cessation of the business.
  • The allowances that you may claim for your machines and lorry for the year of purchase and the next two years are shown in the table below.

Year 1 (The Year of purchase)

20% Pool
$

30% Pool
$

Purchase Costs

200,000

50,000

Less: IA (60% of cost)

120,000

30,000

 

80,000

20,000

Less: AA

16,000
(20% of 80,000)

6,000
(30% of 20,000)

Reduced value c/f to Year 2

64,000

14,000

Less: AA

12,800
(20% of 64,000)

4,200
(30% of 14,000)

Reduced value c/f to Year 3

51,200

9,800

Less: AA

10,240
(20% of 51,200)

2,940
(30% of 9,800)

Reduced value c/f to Year 4

40,960

6,860

If sold in Year 4
Less: Sale proceeds

23,000

9,900

Balancing charge in Year 4

 

*3,040

 

**17,960

 

Less: AA for Year 4

3,592
(20% of 17,960)

 

Reduced value c/f to Year 5

14,368

 

Less: AA for Year 5

2,874
(20% of 14,368)

 

Reduced value c/f to Year 6

**11,494

 

Notes:

* Your assessable profits for Year 4 will be increased by the balancing charge of $3,040.

** An AA will be given in respect of the sold machines every year until the balance of the “20% Pool” is reduced to zero. (In practice, this will rarely happen. Under normal circumstances, there would be new assets added to this “20% Pool”.)

3. Are all properties bought by my company for business purposes qualified for building allowances?

No. Certain specified conditions have to be satisfied before an allowance is granted. Broadly speaking, the relevant allowances are classified into 2 groups: “industrial buildings allowances” and “commercial buildings allowances” . For details, please refer to the Inland Revenue Department's Departmental Interpretation & Practice Notes No. 2 (Revised) .

D. Scenarios on partnership business

1. I started a partnership business with my brother and our first accounts closed on 31 March 2015. How should I report my share of the profits of the partnership to the Inland Revenue Department?

For Profits Tax purposes, a partnership is treated as a separate legal “person”. As such, the assessable profits of a partnership are calculated as a single amount and the tax in respect of the profits is charged in the name of the partnership (but not charged to your or your brother's individual name).

The precedent partner of the partnership should complete for the partnership a “Profits Tax Return – Persons Other Than Corporations” (B.I.R.52) for the year of assessment 2014/15.

The “net profits” shown in the accounts of the business have to be converted into its "assessable profits" and declared in B.I.R.52.

Normally, a Profits Tax Assessment would be raised on the partnership at the Standard Rate of Tax. However, if Personal Assessment is elected, the partners' tax liabilities may be reduced.

Where it is apparent that a partner will obtain a tax advantage by electing Personal Assessment, Profits Tax is not, in practice, charged on his/her share of assessable profits from the partnership (tax is separately charged under Personal Assessment). Nor is Provisional Profits Tax charged on that portion of assessable profits from the partnership.

2. Under a partnership agreement (with 2 partners in total), I draw a monthly salary of $10,000 from the business and the balance of the profits is divided between my partner and myself in equal shares. How will the assessable profits of the business be allocated between us?

The allocation of the assessable profits (or adjusted loss) between partners takes into account any salary or interest on loans or capital invested which has been paid to a partner or his/her spouse. Such a payment is treated as though it were a distribution of profits to the partner concerned and the balance of the assessable profits is then apportioned on the basis of the agreed profit sharing ratio. The following examples illustrate how this is done:

Example 1

 

$

Assessable profits

300,000

Less: Salary paid to Partner A

(120,000)

Remaining balance

180,000

Allocation of Assessable Profits

Partner A

Partner B

 

$

$

Salary

120,000

---

Sharing ratio (profit)

50%

50%

Share of balance

90,000

90,000

Share of assessable profits

210,000

90,000


Example 2

 

$

Assessable profits

100,000

Less: Salary paid to Partner A

(120,000)

Remaining balance

(20,000)

Allocation of Assessable Profits

Partner A

Partner B

 

$

$

Salary

120,000

---

Sharing ratio (profit/loss)

50%

50%

Share of balance

(10,000)

(10,000)

Sub-total

110,000

(10,000)

Reallocation

(10,000)

10,000

Share of assessable profits

100,000

---

As the partnership in Example 2 was in a profitable position overall (i.e. it had assessable profits of $100,000), no partner could be allocated any loss. Hence, the notional loss ($10,000) of Partner B was re-allocated to Partner A who was in a “profit position” after the initial allocation.

You do not have to separately report the salary you draw from the partnership business in a Tax Return - Individual (B.I.R.60) as the amount will be included in the assessable profits of the business.

3. Our partnership business had an assessed loss in the previous year of assessment and one of the partners, who is an individual, retired at the end of that year. In this regard, can the share of the loss allocated to the partner who retired be used to set off the profits of the partnership of this year and subsequent years?

Where an individual incurs a share of a loss in a business carried on by a partnership and does not choose personal assessment for for that year of assessment, the amount may be carried forward and set off against his/her share of the assessable profits from the partnership business in subsequent years of assessment until it is fully set off.

However, any remaining balance of the loss lapses if the partner retires before the loss is fully set off, i.e. the balance cannot be utilized to reduce the subsequent profits of the partnership.

Please note that you are required to inform the Business Registration Office of any admission or retirement of partners within 1 month of such change. You may use the Form I.R.B.R.64 as provided by the Inland Revenue Department.

4. One of the partners has a separate employment, and mandatory contributions (for a MPF scheme) have been made by him both in the capacity of a self-employed person and an employee. How should tax deductions be claimed under profits tax?

In arriving at the deductible amount, sums already deducted in the partner's salaries tax assessment, and profits tax assessments of his other businesses have to be taken into account. In other words, the aggregate amount to be deducted for that partner in respect of MPF contributions should not exceed $18,000 in any year.

E. Objection and Appeal

1. I received a Profits Tax assessment and found that the profits assessed and the tax charged are too high. Can I object to this assessment?

Yes, but you must lodge a written notice of objection with the Inland Revenue Department within one month after the date of issue of the assessment, stating the grounds for your objection clearly. You may complete the relevant parts of the Form I.R.831 for objection / application for revision of assessment, and return it to the IRD either by post ( P.O. Box 28777 , Gloucester Road Post Office, Hong Kong ) or by fax (2877 1232).

If it is against an estimated assessment issued because of the failure to lodge a return, a properly completed return together with the accounts, where applicable, must also be submitted with the notice of objection.

Pending the ultimate settlement of the objection, you should pay the sum indicated on the demand note, or follow the Assessor's advice regarding how much tax you should pay (whether you have to pay the full tax initially assessed, or are allowed to pay a lesser amount while the objection is being investigated). The Commissioner of the IRD may impose a surcharge on any tax not settled by the due date.

If you are still not satisfied with the determination of the Commissioner of IRD, you may further lodge a n appeal against the determination to the Board of Review (Inland Revenue Ordinance) which is an independent tribunal. Your appeal should be made in writing to the Clerk to the Board of Review (Inland Revenue Ordinance) within one month of the date of issue of the Commissioner's written determination.

F. Anti-Avoidance measures concerning Profits Tax payment

1. What happens if I fail to file my tax return or provide false information to the Inland Revenue Department?

Similar to Salaries Tax matters, any person who fails to file tax returns for Profits Tax or provide false information to the Inland Revenue Department is guilty of an offence and liable to prosecution result in penalties or even imprisonment.

In addition, section 61 of the Inland Revenue Ordinance addresses any transaction which reduces or would reduce the amount of tax payable by any person where the Assessor is of the opinion that the transaction is artificial or fictitious or that any disposition is not actually in effect. When it applies the Assessor may disregard any such transaction or disposition and the person concerned shall be assessed accordingly.

Also, section 61A of the Inland Revenue Ordinance applies to any transaction entered into after 13 March 1986 for the sole or dominant purpose of enabling a person to obtain a tax benefit. Where it applies, the section provides for an assessment to be made i) as if the transaction had not been entered into or carried out, or ii) in such other manner as the Assistant Commissioner considers appropriate to counteract the tax benefit which would otherwise be obtained.



III. Property Tax

Under section 5(1) of the Inland Revenue Ordinance, Property Tax is charged on the owners of land and/or buildings in Hong Kong who let out their properties in return for rental income and/or other charges. This tax is payable by the owner(s) at the standard rate (15% for the year of assessment 2014/15 onwards), by the year of assessment, on the net assessable value of the relevant property.

The net assessable value is the assessable value (after deduction of rates paid by the owner, if applicable), and then less an allowance of 20% of that assessable value for repairs and outgoings.

The assessable value is computed by reference to the rent and other charges payable to the owner in respect of the right of use of the property. Such items include rent, payment for the right of use of premises under licence (licence fee), a lump sum premium, service charges and management fees paid to the owner, and owner's expenditure (e.g. repairs) borne by the tenant. Rent receivable (due but not yet received) should also be included in the assessable value. The above calculation is generally described as follow:

(a)   Rental Income
(b) Less: Allowable Deductions (including rates paid by the property owner)
(c)   Assessable Value (a - b)
(d) Less: 20% of Assessable Value for repairs and outgoings
   

Net Assessable Value (c - d)

(e) Property Tax: Net Assessable Value x 15%


A year of assessment runs from 1 April to 31 March of the following year.

As similar to the situations in Salaries Tax and Profits Tax, provisional property tax would be raised during the course of the year as the rental income for any particular year cannot be confirmed until after the year end.

Properties for Owner's Business Use

If the income from property chargeable to Property Tax is included in the taxpayer's assessable profits for Profits Tax purposes (e.g. the rental income is received from a trade/business) , the amount of Property Tax paid may be deducted from the amount of Profits Tax assessed. Corporations carrying on a trade, profession or business in Hong Kong , on application made in writing to the Commissioner of Inland Revenue, may be exempted from paying the Property Tax which would otherwise be set off against their Profits Tax.

A. More information about assessable value and deductions

1. How should taxpayers report their rental income for Property Tax assessment to the Inland Revenue Department?

Rental income from a solely-owned property should be declared in the owner's Tax Return – Individuals (B.I.R. 60), which is the same form used for reporting salary or profit of individual persons.

Rental income from a jointly-owned or co-owned property can be declared by any owner in a Property Tax Return (B.I.R. 57) . Annual Property tax Returns are issued to the owners of jointly-owned or co-owned properties on a property-by-property basis, and can be completed and submitted by any one of the owners.

Do I have to keep records of rental income?

Yes, the law requires you to keep and retain sufficient rent records for 7 years to enable the assessable value of your property to be readily ascertained. It is recommended that you retain lease agreements, correspondence relating to modification of lease terms and recovery of rent in arrears etc.

2. I received a Property Tax Return (B.I.R.57) last week. When should I return it to the Inland Revenue Department? Do I have to attach any supporting documents to the Return as proof for the figures that I filled in? Can I file my Tax Return via the Internet?

You should submit the Return to the IRD within 1 month from the date of issue of the Return.

However, if your case meets the criteria specified by the Commissioner of Inland Revenue, you may choose to file the Return by means of "tele-filing" or through the Internet, and an extension of 2 weeks will be granted automatically. To know more about electronic filing, please click here .

You are not required to attach supporting documents at the time of filing the Return. The law requires the owners to keep and retain sufficient rental records for 7 years. You have to provide documents as evidence for deductions/claims when the Assessor requires you to do so.

3. I have to pay building management fees and certain other out of pocket expenses for the property. Are they deductible? Should I deduct them from the rental income and report the net amount of the income?

The following items can be claimed as deductions:

  1. rates (if payable by the owner);
  2. irrecoverable rent and other income from the property (sums so deducted as irrecoverable rent and later recovered should be included in arriving at the assessable value in the year of recovery);
  3. 20% statutory allowance on the property's assessable value for repair and outgoings. This is a flat rate deduction irrespective of the actual amount spent, and is to be given after deduction of rates (if payable by the owner) and irrecoverable rent.

Except for the above items, no other expenses are allowable as deductions for Property Tax purposes. You should not claim any deduction for, such as Government rent, building management fees, decoration fees, repair expenses, rent-collection fees, commission and insurance premiums paid by you.

Deduction for mortgage interest incurred on the acquisition of the property can only be claimed by property owners who are eligible for and have chosen Personal Assessment. The amount of the interest deduction allowable under a Personal Assessment is limited to your share of the net assessable value of the property concerned. Your may also enjoy other personal allowances under Personal Assessment.

How do property owners apply for Personal Assessment?

Individual property owners may indicate their wish to elect “Personal Assessment” by stating their names and Hong Kong identity card numbers in Part 5 of the Property Tax Return (B.I.R.57). If more than 2 owners wish to elect “Personal Assessment”, the additional owners can state their names and Hong Kong identity card numbers in the space below the boxes, or provide the particulars on a separate sheet.

Regular taxpayers usually receive their annual Tax Return - Individuals (B.I.R.60) on/about the first working day of May. To elect “Personal Assessment”, the electors should complete Part 6 of their tax returns.

However, if your total income is lower than your tax allowances (which means that you do not have to pay any tax after choosing Personal Assessment), the Inland Revenue Department may no longer send you a B.I.R.60 annually. You need only indicate your wish to be assessed under “Personal Assessment” but you do not have to complete a B.I.R.60.

Selection of “Personal Assessment” is voluntary and so you are required to select it year-by-year.

4. I bought a property and took out a mortgage loan for 10 years. Can I get any relief for the mortgage interest paid?

The availability of relief depends on the usage of the property.

Usage of your property

Where to claim deductions

Let for rental income which is subject to Property Tax

Deduct mortgage interests from net assessable value under Personal Assessment (limit: reducing net assessable value to zero)

Occupied for use as the premises of your business

Deduct mortgage interests from your assessable profits under Profits Tax.

Occupied as your residence

Deduct home loan interest under Salaries Tax or Personal Assessment.

Vacant or occupied as dwelling by relatives rent-free (i.e. not for self-occupation or let-out)

No deduction.

5. If the tenant fails to pay rent, can I report the uncollected rent and claim deductions in Property Tax?

You can claim a deduction for the amount of rent remaining unpaid only when the rent has become irrecoverable (e.g. your tenant has gone bankrupt and does not have any assets from which you can recover your outstanding rent). If the tenant only defers the payment of monthly rent and has not moved out, the uncollected rent is unlikely to be treated as “irrecoverable rent”. You are advised to check with the Inland Revenue Department or other legal/accounting professionals before claiming the rent as irrecoverable on your tax return .

If you have used the rental deposit to set-off part of the irrecoverable rent, only the balance un-recovered could be claimed as irrecoverable rent.

Irrecoverable rent can be excluded from the assessable value in the year in which it became irrecoverable. Any amount subsequently recovered is assessable to tax as income in the year of recovery.

6. What is a “lease premium”? Should it be included in the assessable value for Property Tax?

A lease premium is a non-refundable lump sum payment made by the tenant to the owner upon the signing of the tenancy agreement (e.g. a consent fee payable to the owner for accepting the transfer of tenancy from the “old tenant” to the “new tenant”). It is part of the consideration/money paid for using the property and is chargeable to Property Tax. Owners may elect to have the lease premium spread over the lease period, up to a maximum period of 36 months, for assessment purpose.

On the other hand, a rent deposit is returnable to the tenant at the end of the tenancy. Therefore, it is not income and should not be declared in the owner's tax return.

7. Will the letting of common areas of a building cause liability to Property Tax?

Normally the common areas of a building such as a side shop, carpark, external wall, rooftop, etc. are collectively owned by the individual owners of the building. If any part of the common areas is let out, the rental income derived is chargeable to Property Tax. The owners are responsible for reporting the rental income and paying the tax. If the owners have not received the Property Tax Return relating to the common areas let, they are required to notify the Commissioner in writing.

However, when an owners' corporation is formed, section 16 of the Building Management Ordinance (Cap. 344 of the Laws of Hong Kong) provides that the rights and duties of the owners relating to the common parts of the building shall be exercised and performed by the incorporated owner/owners' corporation of the building . Therefore, the incorporated owner is required, on behalf of all the owners of the building, to report the income (via Property Tax Return B.I.R.58) and pay the tax.

8. If I received a Property Tax assessment and found that the net assessable value (NAV) and the tax charged are incorrect, what should I do?

You must lodge a written notice of objection with this Department within one month after the date of issue of the assessment, stating the grounds of objection clearly.

You should find out why the NAV was incorrect. If the assessment was an estimated assessment raised under section 59(3) of the Inland Revenue Ordinance, you must submit a completed tax return together with your objection letter.

If you are eligible for, and wish to select, Personal Assessment, you should double-check your tax returns to ensure that your selection is valid.

Pending the ultimate settlement of the objection, you should pay as indicated on the demand note or follow the Assessor's advice as regards tax payment - whether you have to pay a lesser amount of tax or the full tax in the first instance.

B. Scenarios involving solely-owned properties

1. I let a property on 1 July 2014 for $30,000 per month. Rates for the 3 quarters to 31 March 2015 paid by me amounted to $12,000. How is Property Tax computed for 2014/15? Do I have to pay Provisional Property Tax for 2015/16?

 

$

Rent for 9 months ($30,000 x 9)

270,000

Less: rates paid by owner

(12,000)

 

258,000

Less: 20% allowance for repairs and outgoings

(51,600)

Net assessable value (NAV)

206,400

2014/15 Property Tax @15%

30,960


Calculation of Provisional Property Tax for 2015/16 is based on the NAV for 2014/15, but grossed up to 12 months, as follows:

 

$

Estimated NAV ($206,400 [see above] x 12 / 9)

275,200

2015/16 Provisional Property Tax @15%

41,280


You will receive a Property Tax demand note that carries two components:

 

$

2014/15 Property Tax

30,960

2015/16 Provisional Property Tax

41,280

Total tax payable

72,240

2. My solely-owned property yielded a rental income of $30,000 per month until the tenant left on 31 May 2015. It was let again after 3 months' vacancy at a reduced monthly rental of $24,000. Can I apply to pay less property tax (or to holdover/defer payment of provisional tax)?

Yes, compared with that for 2014/15, your rental income for 2015/16 would be reduced by more than 10%. You can apply for a partial holdover of the provisional property tax on the grounds of rent reduction.

Your written application must be received by the Inland Revenue Department not later than 28 days before the due date for payment of the provisional tax, or 14 days after the issue of the relevant demand note, whichever is the later. The amount of provisional tax to be held-over would be $15,840 ($43,200 – $27,360), computed as follows:

Amount of provisional tax demanded

$

Assessed assessable value ($30,000 x 12)

360,000

Less: 20% allowance for repairs and outgoings

(72,000)

Estimated NAV, per demand note

288,000

2015/16 Provisional Property Tax charged@15%

43,200

Computation for reduced tax (1/4-31/5/2015 and 1/9/2015-31/3/2016)

$

Estimated assessable value ($30,000 x 2 + $24,000 x 7)

228,000

Less: 20% allowance for repairs and outgoings

(45,600)

Estimated NAV

182,400

Revised 2015/16 Provisional Property Tax @15%

27,360


Can I apply for holdover of provisional tax on other grounds?

You may apply for complete or partial holdover of provisional tax within the time limit described above if any one of the following conditions can be satisfied:

  • a reduction in more than 10% of provisional year's estimated assessable value (please refer to the figures shown in the demand note);
  • you cease to own the property;
  • you have chosen the Personal Assessment and it would likely reduce your overall tax bill; or
  • you have raised an objection against the Property Tax assessment for the preceding year.

C. Scenarios involving jointly-owned properties

1. My 3 sons and I are the joint owners of a property. How should I state my share of ownership?

You should treat the total ownership as 100% and divide it equally amongst the owners. This means each person's share of ownership is 25%.

Please note a property ownership under joint owners (the legal term is "joint tenants") must be in equal shares as illustrated on the above example. While an ownership under co-owners (the legal term is "tenants-in-common") may be in equal or unequal shares. For example, you might own 40% and your 3 sons own 20% each.

2. I have received a Property Tax Return for a property owned by my parents and myself. My mother passed away on 1 August 2014. How should I complete the Property Tax Return for 2014/15?

The death of your mother gives rise to a change of ownership.

If your parents and you are the joint owners (the legal term is “joint tenants”) of the property concerned, your mother's share of ownership will be passed to you and your father. In order to distinguish new ownership from old ownership, a new Property Tax file will be opened in the name of you and your father.

If your parents and you had owned the property as co-owners (the legal term is “tenants-in-common”), your mother's share of ownership will be passed to the beneficiary named in her will or according to the law of intestacy. Again, in order to distinguish the new ownership from the old ownership, a new Property Tax file will be opened in the name of you, your father and the personal representative / executor of the estate of your mother. When the legal title is passed to the beneficiary, another new Property Tax file will be opened in the name of you, your father and that beneficiary.

Two Property Tax returns will be issued for the year of assessment 2014/15. You should report the total rental income for the period from 1 April 2014 to 1 August 2014 in the tax return for the 1st ownership (before the death of your mother), and the total rental income for the period from 2 August 2014 to 31 March 2015 in the tax return for the 2nd ownership (after the death of your mother).

Suppose your father is not one of the owners while you and your mother were the only joint owners of the property concerned, you (as the surviving owner) will become the sole owner of the property on 2 August 2014. As the rental income of any sole-owned property should be reported in a Tax Return – Individuals (B.I.R.60) , the rental income from that property for the period from 2 August 2014 to 31 March 2015 should be reported in your own B.I.R.60.

3. My parents are joint owners of the property. If they are unable to write, how can they sign the Tax Return (B.I.R.57)?

If the owner is unable to write, the affixing of a name-chop, thumbprint or mark (such as “x”) as the owner's signature can be accepted, if properly witnessed by a person aged 18 or above. The witness should sign and date the form, and state his/her full name and Identity Card number beside his / her signature.

An alternative to the above is that if you have a written authorization from the owners, you can complete the Return on their behalf. You should attach a copy of the relevant Power of Attorney or Letter of Authorization to the tax return if this is the first time you act as the agent or representative for them.

 

4. My spouse and I let out a flat and a parking space together to the same tenant at one lump sum rental. However, I received two separate Property Tax Returns, how should I fill in Part 4 of the Return?

You must complete and submit both Property Tax Returns. The rental income can be apportioned by reference to the rateable values per demand for rates issued by the Rating and Valuation Department.

5. My husband and I jointly own a flat and a parking space. The flat is let for rental income and the parking space is used for parking our own car. The Property Tax Return shows the location of property as consisting of both the flat and the parking space. How should we report this situation in the Tax Return?

When a flat and a parking space constitute a single unit of property and it is partly let, the owner should put a “ ” in the box against “Yes” in the top portion of Part 4 and report the rental income of the flat in Part 4.2 of the Return.



IV. Personal Assessment (may provide more tax relief in some cases)

What is "Personal Assessment (PA)"?

Under the Inland Revenue Ordinance, there are 3 types of direct taxes, namely, Salaries Tax, Profits Tax and Property Tax. Personal Assessment is not a tax levy. It is a method of computation of tax that may lighten the tax burden of certain taxpayers who are subject to Profits Tax and/or Property Tax and/or Salaries Tax. However, there is no merit for choosing PA if the relevant taxpayer only liable to pay Salaries Tax.

Deductions and allowances under PA

Sole-proprietor or partners of a business and property owners who receive rental income are assessed to Profits Tax and Property Tax respectively at standard rate. By choosing “Personal Assessment”, they may claim the following deductions and/or allowances on their income/profits and their tax liabilities will be computed at progressive rates applicable to Salaries Tax:

  1. interest incurred on money borrowed for the purpose of producing property income, (the amount deductible should not exceed the net assessable value of each individual property);
  2. approved charitable donations;
  3. elderly residential care expenses (from year of assessment 1998/99 onwards) ;
  4. home loan interest (from year of assessment 1998/99 onwards);
  5. business losses incurred in the year of assessment;
  6. losses brought forward from previous years under Personal Assessment; and
  7. personal allowances as follows:
    • basic allowance
    • married person's allowance;
    • child allowance;
    • dependent brother/sister allowance;
    • dependent parent/grandparent allowance;
    • single parent allowance;
    • disabled dependant allowance.

    (For details of these allowances, please click here.)

If the total of the tax already paid exceeds the tax chargeable under personal assessment, a refund will be made.

1. Who are eligible to choose Personal Assessment?

With reference to section 41 of the Inland Revenue Ordinance, an individual (but not a corporation or limited company) may select Personal Assessment if:

  1. the person is 18 years of age or over, or under that age if both of his/her parents are deceased; and
  2. the person is or, if he/she is married, his/her spouse is a permanent or temporary resident in Hong Kong.

(Note: In respect of a partnership business, each partner must choose Personal Assessment individually.)

For the purpose of Personal Assessment:

  1. "permanent resident" means an individual who ordinarily resides in Hong Kong;
  2. "temporary resident" means an individual who stays in Hong Kong for a period or a number of periods amounting to more than 180 days during the year of assessment in respect of which the election of Personal Assessment is made or for a period or periods amounting to more than 300 days in 2 consecutive years of assessment, one of which is the year of assessment in respect of which Personal Assessment is chosen .

Selection of Personal Assessment must be made in writing. It can be made by completing the relevant section in the Tax Return.

2. If I received monthly rental of $40,000 from letting a property under mortgage (interest of $42,000 was paid during the year), can I pay less tax under Personal Assessment? When will the selection of Personal Assessment not be advantageous?

(Note: The following calculation is based on the tax rates for the year of assessment 2014/15.)

Property Tax payable

$

Rental income ($40,000 x 12)

480,000

Less: 20% allowance for repair and outgoings

(96,000)

Net assessable value

384,000

Property tax payable (at standard rate 15%)

57,600

 Personal Assessment Not Elected

$

Net assessable value ($40,000 x 12 x 80%)

384,000

Property tax payable (at standard rate of 15%)

57,600 

 Personal Assessment Elected

$

$

Net assessable value

  384,000

Less:

Mortgage interest

42,000

 
  Basic allowance

120,000 

162,000

Net chargeable income

  222,000

Tax thereon (at progressive rates)

  25,740

Less: 75% tax reduction (capped at $20,000) (Note)

  19,305

Tax payable

  6,435


There is a saving of $51,165 (i.e. $57,600 – $6,435) if you elect for personal assessment which enables you to claim deductions for mortgage interest and personal allowance.

(Note) For 2014/15, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

When will the selection of Personal Assessment not be advantageous?

Under Personal Assessment, tax is calculated at progressive tax rates on the aggregated income from all sources. As the marginal scale of the progressive rates (17%) is higher than the standard rate (15%), it may not be advantageous for larger income taxpayers to elect Personal Assessment.

Suppose you also earned a salary of $500,000 in addition to your rental income during the year:

Salaries Tax payable

$

Salaries income

500,000

Less : Basic allowance

(120,000)

Net chargeable income

380,000

Personal Assessment Not Elected

$

Salaries income

500,000

Less: Basic allowance

120,000

Net chargeable income

380,000

Tax thereon (at progressive rates)

52,600

Less: 75% tax reduction (capped at $20,000) (Note)

20,000

Salaries tax payable

32,600

   
 

$

Property tax payable

57,600

Salaries tax payable

32,600

Total tax payable

90,200

Personal Assessment Elected

$

$

Salaries income

  500,000

Net assessable value

  384,000

Total income

  884,000

Less:

Mortgage interest

42,000

 
  Basic allowance

120,000

162,000

Net chargeable income

  722,000

Tax thereon (at progressive rates)

  110,740

Less: 75% tax reduction (capped at $20,000) (Note)

   20,000

Tax payable

  90,740

As your income is chargeable to salaries tax at the marginal rate of 17%, any property income required to be aggregated under personal assessment will also be charged at 17%. Hence, it is not advantageous for you to elect for personal assessment.

If you have elected for personal assessment, the Inland Revenue Department will issue a salaries tax assessment and property tax assessment separately and will, by way of an Assessor’s note in the respective notices of assessment, advise that it is not advantageous for you to elect personal assessment for the relevant year of assessment.

(Note) For 2014/15, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

3. If I suffered a business loss of $100,000 but received salaries income of $400,000 from a separate employment, can I pay less tax under Personal Assessment?

(Note: The following calculation is based on the tax rates for the year of assessment 2014/15.)

Salaries Tax payable

$

Salaries income

400,000

Less: Basic allowance

(120,000)

Net chargeable income

280,000

Tax thereon at progressive rate

35,600

Less: 75% tax reduction (capped at $20,000) (Note)

(20,000)

Tax payable

15,600

Profits Tax payable

$

Business profits (or losses)

(100,000)

Tax payable

0

Tax payable under Personal Assessment

$

Salaries income

400,000

Business losses

(100,000)

Chargeable income

300,000

Less: Basic allowance

(120,000)

Net chargeable income

180,000

Tax thereon (at progressive rates)

18,600

Less: 75% tax reduction (capped at $20,000) (Note)

(13,950)

Tax payable

4,650


By electing personal assessment, your tax liability reduced by $10,950 (i.e. $15,600  $4,650) because you business loss can be utilised to set off against your other assessable income in the year.

(Note) For 2014/15, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

4. The profit of my sole-proprietorship business was assessed at $460,000. My wife received a monthly rent of $10,000 from a property under mortgage. She paid mortgage interest of $56,000 during the year. How is Personal Assessment applied to a married couple?

(Note: The following calculation is based on the tax rates for the year of assessment 2014/15.)

Tax payable under Personal Assessment

$

Your business profits

460,000

Your wife's property income:

$

Net assessable value ($10,000 x 12 x 80%)

96,000

 

Less: Mortgage interest

(56,000)

40,000

Chargeable income

500,000

Less: Married person's allowance

(240,000)

Net chargeable income

260,000

Tax thereon (at progressive rate)

32,200

Less: 75% tax reduction (capped at $20,000) (Note)

20,000

Tax payable

12,200

Your share of tax payable

 

($12,200 x 460,000 / 500,000)

11,224

Your wife's share of tax payable

 

($12,200 x 40,000 / 500,000)

976


You and your wife will each receive notice of assessment and a demand for payment.

Separate taxation for husband and wife is not applicable under Personal Assessment. The total income of an individual, as appropriately reduced, will be aggregated with that of his/her spouse to arrive at the joint total income of the couple for assessment purposes. Normally, the tax payable on the Joint Assessment is proportionally allocated to the husband and the wife on the basis of their respective reduced total income, and a notice of assessment will be issued to each of them.

(Note) For 2014/15, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

5. Is there a time limit for selecting Personal Assessment?

Personal Assessment must be selected:

  • not later than 2 years after the end of the year of assessment in respect of which the election is to be made (e.g. election of Personal Assessment for the year of assessment 2013/14 has to be made not later than 31 March 2016), OR
  • 2 months after the issue of a notice of assessment, or a notice of additional assessment to tax, for the year of assessment in respect of which the election is made, whichever is the later.


V. Taxation Arrangement between China and Hong Kong (to avoid double taxation)

Information in this part aims to highlight some tax issues affecting Hong Kong residents who are employed both in Hong Kong and in the Mainland.

On 11 February 1998 , Hong Kong and China signed the "Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation on Income" ( the Limited Arrangement ) to allocate the right to tax between the two jurisdictions on a reasonable basis to avoid double taxation of income.

On 21 August 2006 , both parties have signed a more comprehensive arrangement titled "Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income"( the Comprehensive Arrangement ). The Comprehensive Arrangement has broadened the coverage of income by adding income from immovable property, associated enterprises, dividends, interest, royalties, capital gains, pensions and government services, etc.

Tax liabilities in Hong Kong

If a Hong Kong resident provides services both in the Mainland and in Hong Kong,

  • the income derived from that person's Hong Kong employment will be wholly assessable irrespective of whether it has been paid by the Hong Kong employer or a Mainland enterprise. However, if that person has paid Mainland Individual Income Tax in respect of the income attributable to services rendered by him/her on the Mainland, he/she may apply for tax exemption for that part of income under the Inland Revenue Ordinance or for a tax credit under the Comprehensive Arrangement . In general, tax exemption provides greater tax relief than would be provided by tax credit; and


  • the income derived from that person's non-Hong Kong employment will be assessed according to the number of days in Hong Kong irrespective of whether it has been paid by the overseas employer or a Mainland enterprise, provided that his/her visits to Hong Kong exceed 60 days and during which he/she renders services.

Tax liabilities in Mainland China

If a Hong Kong resident under his/her employment renders services on the Mainland only (i.e. services are not rendered whilst in Hong Kong), all the income from that employment will be regarded as attributable to services rendered on the Mainland. Such income is wholly chargeable to Mainland tax, irrespective of whether it is paid by a Mainland enterprise or an overseas employer (including a Hong Kong employer) UNLESS that person satisfies the three conditions as follows:

  1. the Hong Kong resident stays in the Mainland for a period or periods not exceeding in the aggregate 183 days in the calendar year concerned; and
  2. the income is paid by, or on behalf of, an employer who is not a resident of the Mainland; and
  3. the income is not borne by a permanent establishment or a fixed base, which the employer has in the Mainland.

If a Hong Kong resident under an employment renders services both in the Mainland and in Hong Kong , his/her Mainland tax liabilities will be determined as follows:

Aggregated periods of stay in the Mainland not exceeding 183 days

Income paid or borne by the Mainland entity will be chargeable to Mainland Individual Income Tax. Tax will be calculated on the chargeable income and then apportioned on time basis. Income paid by an overseas employer (including a Hong Kong employer) is not chargeable.

Aggregated periods of stay in the Mainland exceeding 183 days

The total income received from the Mainland entity and the overseas employer (including Hong Kong employer) will be chargeable to Mainland Individual Income Tax. Tax will be calculated on the total income and then apportioned on time basis.

Further information

Some frequently asked questions can be found on the website of the Inland Revenue Department. You may also read the Departmental Interpretation and Practice Notes No.44 issued by the IRD for more details about the Comprehensive Arrangement.

Making appeals or enquiries

A Hong Kong resident who wishes to dispute a tax assessment in Hong Kong may, by notice in writing to the Commissioner of Inland Revenue, Hong Kong , object to the assessment within one month after the date of the notice of assessment.

Where a Hong Kong resident considers that the Mainland tax imposed is not in line with the Arrangement, he/she should raise the issue with the relevant Mainland tax authority within the specified period (Note: If you cannot find out the contact details of Mainland tax authority, check with the Hong Kong Inland Revenue Department). If the matter could not be resolved, he/she may seek assistance from the Hong Kong IRD by submitting relevant information for examination. The IRD will consult the Mainland tax authority concerned, with a view to resolving the problem.

For enquiries on matters relating to the Arrangement, you may send an email to the IRD at taxinfo@ird.gov.hk, or telephone: 187 8088.



VI. Stamp Duty

The Stamp Duty Ordinance (Cap. 117 of the Laws of Hong Kong) imposes duty/tax on certain types of documents. Although stamp duty bears the word “stamp”, it is totally irrelevant to postage stamps. In general, the payment of stamp duty enables some specified documents to be recognized and enforceable by the Hong Kong courts. Those specified documents include:

  1. Conveyance on sale of immovable property (i.e. a legal document (Assignment) which formally transferred the property ownership from one party to another);
  2. Agreement for sale of residential property;
  3. Lease of immovable property (i.e. Tenancy Agreement/Lease); and
  4. Transfer of Hong Kong stock.

In other words, you will be liable to pay stamp duty if you:

  • sell (or purchase) a flat/building/land;
  • let out (or lease) a flat/building/land; or
  • sell (or purchase) shares of listed or unlisted limited company.

Rates of Stamp Duty

Please go to Inland Revenue Department's webpage.

Profits Tax Liabilities on Property Dealing

Duty payers are reminded that despite the payment of stamp duty, there are also Profits Tax liabilities in respect of assessable profits from the buying and selling of landed properties in the course of a business in Hong Kong. For more information on Profits Tax, please go to another section- Profit Tax.

1. In what ways can I have a document stamped?

a) E-Stamping of property documents via the internet

With effect from 2 August 2004, you may use the 24 hours E-Stamping service to submit electronically stamping applications for:

  1. the Initial stamping of an Agreement for Sale , or an Assignment (including deferring the application) with not more than 4 Purchasers;
  2. payment of deferred stamp duty;
  3. a Subsequent Agreement or Assignment (after the signing of a preliminary or formal Agreement for Sale and Purchase);
  4. a Tenancy Agreement (or Lease) with not more than 4 landlords and 4 tenants.

b) Application for stamping property documents on paper

You may submit an application on paper for stamping, without presenting the original Agreements, Assignments and Tenancy Agreements/Leases (other than cases presented for adjudication or accompanied by an exemption, relief, remission or refund claim), at the Stamp Office Counter.

You may also submit an application on paper for stamping, without presenting the above-mentioned original documents (other than cases presented for adjudication or accompanied by an exemption, relief, remission or refund claim), by post.

c) Conventional stamping

For all types of legal documents chargeable with stamp duty including property documents and those relating to stock transactions, you may present the original document, together with a request for stamping and any other supporting documents required, at the Stamp Office Counter or by post.

Upon receipt of a stamping request with the required document(s) and payment of the required fee, the Stamp Office will either issue a stamp certificate in respect of the document or impress a stamp on the document itself.

To obtain a sample of a computer-issued Stamp Certificate, please go to the Inland Revenue Department's webpage. You may also go to the relevant webpage to get a sample of a manually issued Stamp Certificate.

Examples

For the calculation of stamp duty relating to sale and purchase of property, please click here.

For the calculation of stamp duty relating to a Tenancy Agreement or Lease, please click here.

2. Can I submit a license agreement for a property for stamping electronically?

If the license agreement is in the nature of a tenancy agreement with monthly rents, you may submit the stamping application electronically online which is the same as other tenancy agreements. However, if it contains special terms (e.g. a premium or the document has to be adjudicated), please present the original document to the Stamp Office for assessment or adjudication.

3. What is the time limit for stamping a document? Will penalties be imposed if I stamp the document late?

Regarding the time limit for stamping different kinds of documents, please visit the Inland Revenue Department's webpage.

For matters on late stamping and the relevant penalties, please click here.

4. Other than the penalties imposed for late stamping, what are the consequences if I fail to stamp a document on which stamp duty is charged?

No document chargeable with stamp duty shall be received in evidence in any legal proceedings except:

  1. criminal proceedings,
  2. civil proceedings by the Collector to recover stamp duty or any penalty payable under the Stamp Duty Ordinance,

or be available for any other purpose whatsoever, unless such instrument is duly stamped.

For example, if you entered into a Tenancy Agreement with somebody and you want to sue your tenant for rental arrears (or to enforce other obligations under the Agreement), the count may not accept such agreement as valid evidence if it is not duly stamped. The only situation under which an unstamped document will be accepted by the court is that the court orders the solicitor to personally undertake to cause:

  1. such document to be stamped in respect of the stamp duty chargeable thereon, and
  2. any penalty payable under section 9 of the Stamp Duty Ordinance (refer to the above Question 3) in respect thereof to be paid.

5. When will I have to pay an "adjudication fee"?

Subject to the payment of an adjudication fee (currently $50) , any person may request the Collector of Stamp Revenue to express his opinion on whether an executed contract or document is chargeable with stamp duty, and on the amount payable. If you wish to claim exemption of any document from stamp duty, you can request the Collector to adjudicate the document.

Some documents specifically provided for under the Stamp Duty Ordinance are however exempt from the payment of adjudication fees. Examples of these documents include contract notes in consideration of debt, and instruments operating as gifts, etc. You should check with the Stamp Office for further details.

Request for adjudication should be submitted at the Stamp Office Counter together with the original instrument and relevant supporting documents. Electronic submission is not applicable.



VII. Estate Duty

The Estate Duty has been abolished with effect from 11 February 2006. The estate duty chargeable in respect of estates of persons dying on or after 15 July 2005 and before 11 February 2006 ("transitional estates") with the principal value exceeding $7.5 million has been reduced to a nominal amount of $100.

To get some general information on how to handle the legal documents for a deceased's estate, please go to another topic – Probate.



VIII. Objection and Appeal against Tax Assessment

1. If I received a Salaries Tax/ Profits Tax/ Property Tax assessment, and found that the income assessed and the tax charged are too high, can I raise objection against this?

Yes. You must lodge a written notice of objection with the Inland Revenue Department within one month after the date of issue of the assessment, stating the grounds for your objection clearly. You may complete the relevant parts of the Form I.R.831 for objection / application for revision of assessment, and return it to the IRD either by post ( P.O. Box 28777 , Gloucester Road Post Office, Hong Kong ) or by fax (2877 1232).

If the income was estimated or you do not get the full entitlement to allowances, you should find out if the assessment was an estimated assessment raised under section 59(3) of the Inland Revenue Ordinance. If it is, you must submit a completed tax return together with your objection letter.

Pending the ultimate settlement of the objection, you should pay as indicated on the demand note, or follow the Assessor's advice regarding how much tax you should pay (whether you have to pay the full tax or, are allowed to pay a lesser amount of tax in the first instance). The Commissioner of the IRD may impose a surcharge on any tax not settled by the due date.

If you are still not satisfied with the determination of the Commissioner of the IRD, you may further lodge a n appeal against the determination with the Board of Review (Inland Revenue Ordinance) which is an independent tribunal. Your appeal should be made in writing to the Clerk to the Board of Review (Inland Revenue Ordinance) within one month of the date of the Commissioner's written determination.



IX. Advance Rulings (to obtain early decisions on uncertain tax matters)

A taxpayer may apply to the Commissioner of Inland Revenue, subject to the payment of a fee and certain regulations, for a ruling on how any provision of the Inland Revenue Ordinance applies to him/her or the arrangement specified in the application. A ruling will only be given for a seriously contemplated transaction with full particulars set out. The ruling is binding on the Commissioner and can be relied upon for the subsequent tax assessment. However, the ruling on any specific case should not be relied upon for other cases. Rulings are now published on the IRD's website for general reference.

According to Part I of Schedule 10 of the Inland Revenue Ordinance, however, advance ruling will NOT be provided in certain cases. For example, the matter on which a ruling is sought involves the imposition or remission of a penalty, whether a tax return or other information provided by a taxpayer is correct or not, etc.

1. How is the advance ruling procedure different from an objection against a tax assessment?

An objection can only be lodged after a taxpayer has submitted the tax return AND received the relevant tax assessment from the Inland Revenue Department.

An application to the IRD for advance ruling must be made before the submission deadline of the relevant tax return .

 

2. How much should I pay for an advance ruling?

The fees payable in respect of an application for a ruling as specified under Part II of Schedule 10 of the Inland Revenue Ordinance are as follows:

(i) for a ruling on whether profits are to be treated as chargeable to profits tax under section 14 of the IRO as arising in or derived from Hong Kong

$30,000

(ii) for a ruling on whether remuneration is to be treated as chargeable to salaries tax under section 9A of the IRO

$10,000

(iii) for any other ruling

$10,000

(Note: If the time spent by the IRD in respect of the ruling procedure is too long, additional fees may be imposed.)

As you can see from the above, the application fees for an advance ruling involve a considerable amount of money. It may not be cost-effective to get an advance ruling on a tax dispute that only involves a small sum of money.

For more information about advance ruling, please read the Department Interpretation and Practice Notes No.31 issued by the Inland Revenue Department.



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