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 2005/06.)
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 16%) |
61,440 |
Tax payable under Personal Assessment |
$ |
Net assessable value |
384,000 |
Less: Mortgage interest |
(42,000) |
Basic allowance |
(100,000) |
Net chargeable income |
242,000 |
Tax payable (at progressive rate): |
2% on first 30,000 |
600 |
|
8% on next 30,000 |
2,400 |
|
14% on next 30,000 |
4,200 |
|
20% on the remain 152,000 |
30,400 |
|
|
37,600 |
There is a saving of $23,840 if you elect Personal Assessment which enables you to claim deductions for mortgage interest and personal allowance.
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 (20%) is higher than the standard rate (16%), 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 |
(100,000) |
Net chargeable income |
400,000 |
Tax payable at progressive rate: |
First 90,000 x (2% - 14%) |
7,200 |
|
Balance 310,000 x 20% |
62,000 |
|
|
69,200 |
Total tax payable under separate assessments |
$ |
Property tax payable (see above) |
61,440 |
Salaries tax payable |
69,200 |
Total tax payable |
130,640 |
Tax payable under Personal Assessment |
$ |
Salaries income |
500,000 |
Net assessable value (see above) |
384,000 |
Chargeable income |
884,000 |
Less: Mortgage interest |
(42,000) |
Basic allowance |
(100,000) |
Net chargeable income |
742,000 |
Tax payable at progressive rate: |
First 90,000 x (2% - 14%) |
7,200 |
|
Balance 652,000 x 20% |
130,400 |
|
|
137,600 |
If you have elected Personal Assessment but the tax payable is higher than that under separate assessments, the Inland Revenue Department will issue you a Salaries Tax assessment and a Property Tax assessment separately, and will (by way of an Assessor's note in the respective tax demand notes) advise that it is not advantageous for you to elect Personal Assessment for the relevant year of assessment.
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