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Everything about Property Tax

Introduction

Salaries Tax, Profits Tax and Property Tax are the only 3 income taxes imposed in Hong Kong. This section focus on only the Property Tax involved when an individual or a body incorporate owning a property, for the other fee and duty involved, we are going to talk about it here.

Brief of Assessment

Inland Revenue Department (IRD), the tax authority of Hong Kong, enacts Inland Revenue Ordinance (IRO), the tax law of Hong Kong, to collect Property Tax.

Property Tax is payable annually by the owner(s) of an immovable property (i.e. home flat, apartment, land and/or building) in Hong Kong at the standard rate 15% from 2008/09 onwards by the year of assessment (starts on 1 April and ends with 31 March in the following year. For example, the year of assessment 2014/15 runs from 1 April 2014 to 31 March 2015, which includes 12 months.) on the property’s “net assessable value” (NAV).

“Owner” is defined to describe a legal person who is holding from the Hong Kong government of, a beneficial owner of, a life tenant of, a mortgagor of, a mortgagee in possession of holds land or buildings subject to a ground rent to the this person.

NAV is calculated from “assessable value”(AV) which is computed from the rental income paid or payable to the owner as well as other income to owner in respect to giving the right of use of the property.

In brief, annual assessment of Property Tax is based on 100% of the annual rental income of this property less the following:

  • any rates paid;
  • any bad debts;
  • allowance which constituting a maximum of 20% of the rental income for expense on any repairs and outgoings of the property
  • and other allowed deductions.

“Rental income” is determined by the Inland Revenue Department, it includes any of property’s premiums, service charges, management fees, rates, repairs and outgoings paid by the tenant either to the owner or on behalf of the owner under the terms of the lease.

As a result, the owner is obliged to keep records for up to 7 years and inform IRD of the actual sums received.

Property Tax is imposed on a provisional assessment basis, a tax credit will be granted when the previous year’s rental income exceed the current year’s rental income. Moreover, relief is also given where part of the assessed rental income is a bad debt.

Property Tax adopts the territorial principle and is levied on properties located in Hong Kong. As a result, the fact that whether the owners’  residency and nationality of a foreign country is irrelevant to exemption from this tax.

Basis of Deductions

  • Maximum of 20% deduction on annual rental income
  • Rates if the owner is responsible for the payment of rates of the property
  • Consideration (legal value in respect of contract) chargeable to tax which has become irrecoverable during the year of assessment #1
    • Remark #1: When the sums amount deducted is irrecoverable rent and later recovered, it should be included in arriving at the assessable value in the year of recovery.

Important! No other expenses are allowable for Property Tax purposes, so the owners cannot receive any deduction for actual expenses, including government rent, decoration fees, rent-collection fees, building management fees, insurance and mortgage interests.

Property for Business Use

When a property’s owner utilize this property for business purpose or if the owner occupies the property (such as office or warehouse) for the owner’s business, the income from property chargeable to Property Tax of the owner is also included in profits for Profits Tax assessment of this business, the amount of Property Tax paid may be deducted from the amount of Profits Tax assessed. It is a common relief to property owner’s business use.

Alternatively, a registered business entity carrying on a trade, profession or business in Hong Kong, on application made in writing to the Commissioner, may be exempt from paying Property Tax which would otherwise be set off against their Profits Tax.

Neither depreciation cost nor financial costs for obtaining loan incurred by owning properties do not make allowances for Property Tax. However, such costs are deductible for Profits Tax of a Hong Kong incorporated body, it is a tax efficient approach to own a property by a business body with separate legal status such us private company limited by shares.

In brief, when the owner is a limited company carrying on a business in Hong Kong, the company can apply for an exemption of Property Tax because the income (e.g. rental income) will be assessed under Profits Tax. If this company paid property tax, the property tax paid can be utilized to set off profit tax liability, and the property tax paid is more than its profits tax liability, the excess will be refunded to the company.

Note to understand the Allowable Deduction under Property Tax, decoration fees, rent-collection fees, insurance and mortgage interests are not included since those expenses have been eased by the 20% flat-rate deduction.

As a tax relief, mortgage interest may be deductible under Personal Assessment if the owner elects to be personally assessed.

Personal owner is subject to disclose the rental income during completion and filing of Tax Return (Individual).

Property of Multi-owners

Every owner (whether he is a joint owner or an owner-in-common) is legally responsible to file his Property Tax Return to disclose the rental income and pay to Property Tax as if he were the sole owner. In practice, the return will be sent to the precedent owner (the owner as first named in the title deed) then this owner is required to file the tax return and pay the tax on behalf of the other owners.

Rates: other cost for property owner

Rates are imposted annually and are payable by the occupier of a premises. However, the owner retains ultimate legal responsibility for payment of the same when the occupier does not.

Tax Penalty

The owner is subject to penalty if offense is committed as follows:

  • failure to notify IRD within 4 months after the year of assessment; OR
  • failure to file the tax return within the specified deadline; OR
  • failure to provide the honest information to complete the tax return; OR
  • failure to keep sufficient rent record so as to compute the tax.

Every joint-owner(s) takes the same responsibility as the sole owner, they should be responsible for declaring the rental income on tax returns and paying the Property Tax.

“Unable to receive the tax return” is never an excuse to delay the submission of tax return since the owner are responsible by laws to complete the return on time.

Calculation of Property Tax Liability

As a recap, Property Tax is imposed to the owners of land and/or buildings in Hong Kong who earn income by giving the rights of using their properties to other in return for payment and/or charges (i.e. Rental Income). This tax is payable by the owner(s) at the standard rate 16% by the year of assessment of the net assessable value of the relevant property.

The net assessable value (NAV) is the assessable value (AV) (after deduction of rates if it is paid by the owner and other expanse), and less an allowance of 20% flat-rate deduction of that assessable value for repairs and outgoings.

Here is a list of general calculation of Property Tax in the following:

  1. Assessable Value (AV): Rental Income LESS Allowable Deductions (i.e. rates paid by the property owner and other expanses)
  2. Net Assessable Value (NAV): Assessable Value LESS 20% flat-rate deduction of Assessable Value for repairs and outgoings
  3. Property Tax: Net Assessable Value x 16%

Remark(s):

  • 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.
  • A year of assessment goes from 1 April to 31 March of the following year.
  • Rental Income includes but not limited to rent, payment for the right of use of premises under license (license fee), a lump sum premium, service charges, management fees paid to the owner, and rent receivable (due but not yet received).

Holding over of Provisional Property Tax

Taxpayer may apply in writing for holding over of the whole or part of the Provisional Property Tax on the grounds as specified in the Inland Revenue Ordinance.The time limit for application is no later than 28 days before the due date of the provisional tax.  methods and grounds for application for holding over of provisional tax.

The ground to apply for holding over of Provisional Property Tax is either of the following:

  • The provisional rental income for next year is possibly less than 90% of the amount assessed;
  • Taxpayer ceased to be the owner next year;
  • Taxpayer applied for Personal Assessment that may reduce his total tax payable;
  • Taxpayer has objected to the Property Tax assessment of current year.

Further details of items involve in Property Tax assessment

  1. Government Rates and Rent
    • The allowable deduction “rates paid by the owner” does not include government rent, so this is not deductible to Property Tax. Owners are should to keep all the bill advise as proof.
  2. Management Fees
    • When the management fee is paid by tenant through owner AND such payment is not included in ground rent, the payment is not assessable .
  3. Election for Personal Assessment
    • Tax liability may be reduced (i.e. tax relief) by “Election for Personal Assessment”. This brings all his income including property income, salaries income and business income into a single assessment with allowance for married person allowance, child allowance, dependent parent allowance, etc. from the chargeable income.
    • Taxpayer’s financial cost of mortgage (i.e. interest on loans for purchase of the property) assessed under Personal Assessment is put as deduction. Without it, such interest cost is not deductible under Property Tax.
    • If the owner has rental income as only income, it is always tax efficient to elect for Personal Assessment. However, the owner can forgive the election in the tax return when the owner has other income source and such election does not give advantage to the taxpayer.
  4. Lum-sum Premium Received
    • The lump-Sum premium received at the start of the lease contract period can be spread throughout the contract period up to a maximum of 36 months if the owner makes Election for Personal Assessment.

Best practice for Property Taxpayer

A to-do list of property tax:

  1. Utilizes “Election for Personal Assessment” as tax relief when the owner have to pay interest on its loan of property.
  2. Excludes security deposit which given by tenant from the assessable value.
  3. Spreads lum-sum premium over 36 months in assessment.
  4. Excludes tenant-paid management fee (which is not included in ground rent) from the assessable value.
  5. Seeks advice from tax consultant in Hong Kong

Working Example

Computation of Property Tax

Currency is HKD in the below calculation, year of assessment 1 April 2012 to 31 March 2013.

Given that:

  1. Rental income received between 1 July 2012 to 31 March 2013: $38,000 per month.
  2. Rates paid by owner for the 3 quarters ending on 31 March 2013: $12,000.
  3. Provisional Tax paid per last year tax bill (Year 2011/12): $35,000.

Rental Income:

  • $38,000 x 9mo (income by rent for 9 months): $342,000-

Assessable Value:

  • $342,000 –  $12,000 (Rental Income less rates paid by owner): $330,000-

Net Assessable Value:

  • $330,000 x 80% (less 20% allowance for repairs and outgoings of Assessable Value): $264,000-

Property Tax (expected):

  • $264,000 x 16% (Net Assessable Value x flat tax rate of property tax): $42,240-

LESS: Provisional Tax of last year (if available):

  • $42,240 – $35,000 (LESS the Tax is paid as Provisional Tax in year 20011/12): $7,240-

Balance payable for year 2012/2013: $7,240-

PLUS: Provisional Tax of next year:

  • $264,000 x (12mo / 9mo) x 16% (Based on the average monthly NAV of this year, annual amount of next year NAV is calculated): $56,320-

Tax payable of current year: $7,240 + $56,320 (Balance payable PLUS Provisional Property Tax): $63,560-

Installment of Property Tax payment:

  • The tax $63,560 is payable in two installments: the first payment is due in November 2013 and second is in April 2014.
  • Tax bill in Nov 2013 is $7,240 + (56,320 x 7 / 12): $40,093.
  • Tax bill in April 2014 is the outstanding amount  $56,320 x 5 / 12: $23,467.

Common Q and A

Tax Computation

  • Q: My property is rented on 1 August 2014 for $40000 per month. I have submitted rates for 3 quarters until 31 March 2015, accumulating a sum of $22000. How much Property Tax should I pay for the year of assessment 2014/15?
    • A: The property rate is 15% of the NAV from 2008/09 onwards. NAV is equal to the total rent $320000(i.e. $40000 X 8) minus the rate ($22000) and allowance of repairs and ongoings ($59600) which is 20% of the amount which total rent minus rate (i.e. 20% X($320000 -$22000)) . In this case, NAV is $238400, thus property rate is $35760 (i.e. 15% X $238400).
  • Q: In the above mentioned case, should Provisional Property Tax for 2014/15 be paid?
    • A: Yes, Property Tax Demand note will be sent to the taxpayer, notifying your total tax payable which is the amount of 2014/15 property tax plus 2015/16 provisional property tax. Provisional property tax is $53640, which is 15% of estimated NAV (i.e. 15% X ($238400 X 12/8)). The total tax payable is $89400.
  • Q: As a taxpayer of the above case, can you provide me with the way of getting personal relief and paying less tax?
    • A: Tax relief can be obtained if the taxpayers are qualified to be elected to personal assessment. Without any other income, your Property Tax liability will be fallen from $35760 to $8208. It is because the amount of assessable income is NAV minus basic allowance (i.e. $120000 in 2014), which is $118400 (i.e. $238400 -$120000). IRD charges progressive rate 2% of the first $40000 net chargeable income ($800), 7% of the next $40000 ($2800), 12% of the next $40000 ($38400 X 12%= $4608) and 17% for the remainder. The tax payable is $8208 ($800 + $2800 +$ 4608). Moreover, if you opt for the personal assessment for paying tax, Provisional Property Tax is most likely not required to be paid.
  • Q: If the Property Tax assessment I received consist of incorrect NAV and tax bill, what can I do?
    • A: You should apply for objection by a written feedback stating the reasons of objection to the IRD within a month after the date of issuing assessment. The reason of arising incorrect NAV should be stated. If your assessment is estimated under the section 59(3) of the IRO, a completed tax return and an objection letter should be submitted. Tax returns should be double checked if you want to and be qualified to elect for Personal Assessment. During the processing time, you should pay the tax by the amount of what assessor advice or on the demand note.
  • Q: If I am a sole owner, opt for Personal Assessment (PA) and have a total income (including NAV) more than the allowance by the date 31 March 2014, yet receiving no tax return, should I inform the IRD about the payment of tax?
    • A: Yes, if you still receive no tax return from the IRD, it is a must for you to notify the department in written form by 31 July of the year following that year of assessment. If there is still no tax return received before the beginning of July 2014, The Form “Notification of Letting of Properties” should be filled in, or writing to the IRD.
  • Q: If I have brought my tenancy contract to the IRD’s Stamp Office, would it be considered as I have informed the IRD of my chargeability?
    • A: No, because Stamp Duty and Property Tax are 2 separate legal obligations. It is required laws to stamp the tenancies under the Stamp Duty Ordinance. Thus, you have to fulfill your obligation to inform the IRD about your chargeability ability on your own.
  • Q: My son and I have lived in the house that we co-owned for 5 years. In June 2014, we reported to the IRD that we reported “Nil” in the Property tax return. However, since 1 September 2014, we have earned income from letting our house out. Is it necessary for me to inform the IRD about my rental income received?
    • A: Yes, you should inform the IRD by finishing the form “Notification of Letting of Properties” or writing a letter stating the supply particulars of your revenue. Property Tax Return for the year of assessment 2014/15 will send to you and your son. It is required for you to fill the Property Tax Return in, and submit it in time. B.I.R. 57 should be completed if PA is the choice you made to pay your tax. Afterwards, Tax return – Individuals (B.I.R. 60) for the year of assessment 2014/15 should be finished by your son and you respectively.
  • Q: My parents and I jointly owned a property, yet in late 2014, my mother passed away. Can you suggest me ways for reporting the rental income?
    • A: After the death of your mother, the share that your mother owned will transfer to you and your father. The number of owners will change from 3 to 2, hence, the assessor will open a new Property tax case using the name of the surviving owners. PAM 49(e) will give you a list of things needed to be done when a property owner died.
  • Q: Is it required to keep rental income’s record?
    • A: Yes. Your rental record should be kept for 7 years on the purpose of giving adequate source for checking the AV of your property. It is advised that you should reserve the lease agreements, correspondence related to adjustment of lease terms and recovery of rent in amount overdue.
  • Q: Mortgage is used when purchasing my sole owned property, how the interest payment can be deducted from my rental income? Can choosing Personal Assessment bring me the benefit of paying less tax?
    • A: Since property tax is charged at standard tax rate, the rates paid and the 20% allowance for repairs and outgoings will be deducted, rather than the interest rate. Only under Personal Assessment, the mortgage interest can be deducted. The maximum deductible should be smaller than the “NAV”. However, if you are not usually dwelt in Hong Kong, it is not likely for you to be qualified to apply for PA. To be able to elect PA, you should fulfill the qualification of being 18 years old or above, or under 18 years old but both of his/her parents are passed away, and being or having his/her spouse is a permanent or temporary resident in Hong Kong. For PA, after removing tax allowance for dependent family member, they will add up profits, salaries and rental income and find out the tax on the aggregated income at progressive rates.
  • Q: My wife and I jointly owned a property, but all the rent goes to my wife account directly from July 2014 onwards. As we both pay tax under the PA, is it possible to request the Assessor to tax the whole amount of NAV in her account?
    • A: No. Because the property is owned jointly by you and your wife, the NAV will only be divided equally by the number of owners according to the laws.

Holdover and Provisional Property Tax

  • Q: Originally, our property is leased out at monthly rental price of $40,000. However, the tenant left on the date of 31 May 2014. After 4 months of vacancy, my property was let out again, but at a lower price of $30,000 per month. Is it possible for me to pay less property tax?
    • A: Sure. Your rental income will be lower in this year of assessment 2014/15 than that of the year of assessment 2013/14 by over 10%. A partial holdover of the provisional tax can be applied with the reason of rent reduction. Your written application is required to send to the IRD. You should make sure your application will be received by the IRD before or on 28 days before the due date for payment of the provisional tax, or within 14 days after the issuance of the relevant demand note.
    • The amount of provisional tax charged is 15% of the estimated NAV per demand note ($384,000) which equals to the assessed assessable value ($40,000 X 12=$480,000) minus 20% allowance for repairs and outgoings ($96,000). The provisional tax charged is $57,600.
    • The revised 2014/15 provisional tax is 15% of the estimated NAV ($208,000) which equals to the estimated assessable value ($40,000 X 2 + $30,000 x 6=$260,000) minus 20% allowance for repairs and outgoings ($52,000). The revised 2014/15 provisional tax is $31,200.
    • The amount of provisional tax to be held over would be $26,400 (i.e. $57,600 – $31,200).
  • Q: Is there any other ways to apply for held over of provisional tax?
    • A: Yes. You can apply for held over of provisional tax with any of the following reasons within the period that before or on 28 days by the due date for payment of the provisional tax, or within 14 days after the issuance of the relevant demand note. The reasons include a drop (more than 10%) of provisional year’s estimated assessable value, not being the owner of the property, have elected for PA which probably reduces your overall tax bill, or an objection raised against the Property Tax assessment for the preceding year.

Mortgage Interest

  • Q: I use 10 year mortgage loan on purchasing my property, can the mortgage interest paid be used in tax relief?
    • A: It depends. If the usage of the property is let for rental income, you can claim your deductions on mortgage interests from NAV under PA, yet you can only reduce NAV to 0 as limitation. If the usage of the property is treated as the premise of your sole-proprietorship business, you can claim your deductions on mortgage interests from your assessable profits under Profits Tax. If the usage of the property is occupied as your dwelling, you can claim your deductions on home loan interest under Salaries Tax or PA. However, if the usage of the property is vacant or occupied as dwelling by relatives without any rent paying, there is no deduction for you.

Case Study

Property Tax Assessment

Choosing Personal Assessment (PA) may help paying less tax in conditions such as case A and B, yet case C shows you that not every case will help cutting tax.

Case 1

Mr. Wong let out his sole-owned property at $30,000 per month. The renter hided himself in February 2014, and did not pay the rents for the period of November 2013 to February 2014. Part of the unpaid rent is set off by the rental deposit which is the same amount as 2 months’ rent. Mr. Wong paid $20,000 mortgage interests and rates at $10,000 from April 2013 to March 2014.

In this case, if PA is not chosen, property tax payable is 15% of the NAV. NAV ($232,000) is the value that rental income ($30,000 X 12 =$ 360,000) minus irrecoverable rent (2 months’ rent =$60,000) minus rates ($10,000) minus 20% tax allowance for repairs and outgoings ($58,000). Property tax payable is $34,800.
If PA is chosen, property tax payable is 15% of the net chargeable income. Net chargeable income ($92,000) is the value that NAV ($232,000) minus mortgage interest ($20,000) minus basic allowance ($120,000 in 2014). The department charges 2% of the first $40,000 net chargeable income ($800), 7% of the next $40,000 ($2,800), 12% of the next $40,000 ($1440, i.e. 12000 X 12%) and 17% for the remainder. The tax payable is $ 5,040. In conclusion, choosing PA can pay less tax than not choosing PA.

Case 2

Case B shares the same scenario with Case A, but the ownership is shared equally by Mr. Wong and Mrs. Wong. Mr. Wong earned salaries of $400,000 during the year ended 31 March 2014. Mr. Wong is qualified and has chosen PA. Mrs. Wong lives in the USA.

Because of having two owners, NAV is divided by the number of owners ($116,000 each), and the Property tax payable for Mr. Wong and Mrs. Wong each is $17,400. The net chargeable income ($368,500) is the value that Mr. Wong‘s share of NAV transferred to PA ($116,000) plus the salaries ($400,000) minus MPF contribution ($17,500 in 2014/15) minus basic allowance ($120,000) minus share of mortgage interest ($10,000). PA tax payable is a progressive tax. The department charges 2% of the first $40000 net chargeable income ($800), 7% of the next $40000 ($2800), 12% of the next $40000 ($ 4800) and 17% for the remainder ($248,500 X17% = $42,245). The tax payable is $50,645.

Case 3

This case shares the same scenario with Case A, yet mortgage interest paid is $2,000, and the salary of Mr. Wong is $500,000.

For PA, net chargeable income ($592,500) is the value that 100% NAV ($232,000) plus the salaries ($500,000) minus MPF contribution ($17,500 in 2014/15) minus basic allowance ($120,000) minus share of mortgage interest ($2,000). PA tax payable is a progressive tax. The department charges 2% of the first $40000 net chargeable income ($800), 7% of the next $40000 ($2800), 12% of the next $40000 ($ 4800) and 17% for the remainder ($472,500 X17% = $80,325). The tax payable of electing PA is $88,725.

For non PA, net chargeable income ($362,500) is the value that salaries income ($500,000) minus MPF contribution ($17,500) minus basic allowance ($120,000). The department charges 2% of the first $40000 net chargeable income ($800), 7% of the next $40000 ($2800), 12% of the next $40000 ($4800) and 17% for the remainder ($242,500 X17% = $41,225). Salaries tax payable of electing PA is $49,625. Property tax payable for Mr. Wong is $34,800. Total tax payable without PA is $84,425.

Hence, Mr. Wong will be informed that making PA as her choice may not provide her benefit, and her case will be issued to the separate demand notes for Salaries Tax and Property Tax. You can refer to PAM 37(e) “A brief guide to Personal Assessment” for more details.