Everything about Salaries Tax
In Hong Kong, most of the personal taxpayers are charged by Salaries Tax. The Inland Revenue Department (IRD) enacts the Inland Revenue Ordinance (IRO) for salaries tax assessment and collection. This guide will explain the lowdown of salaries tax for employee, tell if your incomes are taxable to salaries tax and the details to do when reporting changes, paying tax and objection to the assessment.
Tax rate of Salaries Tax
Unlike Profits Tax and Property Tax, Salaries Tax is chargeable on either the taxpayer’s “Net Chargeable Income” at “Progressive Rates” or “Net Total Income” at “Standard Rate”, IRD charges the smallest amount of tax.
Net Total Income (NTI) = Total Income – Deductions
Net Chargeable Income (NCI) = Total Income – Deductions – Allowances
The computation of NTI is preceding than that of NCI in assessment procedure, so the taxpayers is advisable to take as much as Deductions into account for tax-advantage.
Comparison of Progressive and Standard tax rates (year of assessment 2014/15):
When tax is charged on NCI (i.e. Allowances are deducted from income):
- 2% on the first $40,000
- 7% on the next $40,000
- 12% on the next $40,000
- 17% on the remainder
When tax is charged on NTI (i.e. none of allowances are taken into account):
- Standard rate 15% on all of NTI
It is obvious that the taxpayer is advantageous to take NCI approach when the Allowances can offset against a considerable amount of income so it leaves a relatively small amount of remainder NCI to be charged on the flat rate.
We will take go through what Deductions and Allowances are available by IRO and practices.
Basis Period and Year of Assessment
Salaries Tax is charged on the assessable income received in a year of assessment that runs from 1 April to 31 March of the following year.
The final notice of assessment (from IRD as reply to tax return handled by taxpayer) will not be prepared before the end of the year of assessment, provisional assessment is adopted on the basis of the final assessment of previous year of assessment. The tax demanded by the provisional assessment is to be paid by two installments: 1st installment is 75% of the total to be paid within January to March of the year of assessment and 2nd installment is 25% of then to be paid in the coming April to June.
When the final assessment is raised, the provisional tax charged will be deducted from the tax payable for that year. Normally, in the year of assessment with a beginning of an employment, the initial tax payable will be a final assessment without a deduction for provisional tax plus a provisional tax for the following year of assessment.
Claim to revision of provisional assessment is available when the taxpayer’s actual income is 90% or less of the provisional income, the time limit for such application is 28 days before the pay day of the provisional tax.
Provisional Salaries Tax
Since all the chargeable income of the year of assessment cannot be determined within the year, the Inland Revenue Department would request taxpayers for paying Provisional Salaries Tax.Thus the authority would adjust the amount in the following year’s provisional tax liability.
For instance, if there was an excess on the amount he is required to pay this year, then he can apply for the excess against next year’s liability.
In another case, the estimated income of less than a year will be grossed up to the value of 12 months. In case of having more than 10% of his net chargeable income, the taxpayer can apply for holdover of provisional tax no later than 28 days before the due date of payment or 14 days after the issuance of the receipt of tax payment.
In addition, entitling a new allowance allows taxpayers to apply for holdover of provisional tax.
Personal Assessment (PA) – Tax Relief for individual taxpayer
Personal Assessment is not a tax levy. It is a method of tax computation which may lessen the tax burden of individual taxpayers who are subject to 3 direct tax either Profits Tax, Property Tax or Salaries Tax.
The tax computation of PA allows an individual taxpayer to claim the deductions on his combined tax liabilities generated from Profits Tax, Property Tax, and Salaries Tax and to apply the Progressive Rate of Salaries Tax on the combined income.
However, if a taxpayer is solely subjected to tax liability of salaries tax, PA does not help to reduce tax burden. Moreover, PA is not advantageous to taxpayer when the marginal scale of this progressive rate is higher than that of standard rates by separate assessment.
Application must be made on a year by year basis and taxpayer must apply in writing within time limit.
Joint Assessment – Tax relief for married couples
Married couples can choose from either separated taxation (each is treated as separate individual), Joint Assessment, or Personal Assessment for married couple.
In brief, joint assessment allows the couples to be assessed on their aggregated salaries income for reduction on Salaries Tax burden.
For joint assessment, both of them need to complete a tax return, declare income, and claim expense (and deductions). When the chargeable amount of income for tax liability under separate assessment, they couples should opt for joint assessment, only the overall tax bill for the couple (i.e. only one notice) will be issued based on their aggregated income, usually the taxpayer of higher income are demanded to pay tax.
Joint Assessment is usually advantageous when an individual has unused individual basic allowance so that it can offset the salaries of his married spouse.
Only an individual who has chargeable income of salaries tax will be granted basic allowance, so a married couple is eligible for selecting joint assessment.
Application by both of a couple must be made on a year by year basis and taxpayer must apply in writing within time limit.
Personal Assessment for married couple
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 the spouse to arrive at the joint total income of the couple for assessment purposes.
The couple will respectively receive notice of assessment and demand for payment of their respective burden proportionate to their incomes.
Salaries Tax on Employees
Are you an Employee or Employer?
An employee and his employer are bound by “master and servant relationship”
The work of an employee is within the control of his employer (i.e. what to do, how to do and when to do).
In practice, a person may be an employee of an employment agreement and a employer of other employment agreement with somebody at the same time.
Are you a Employee or “Office Holder”?
By laws or covenants, an office is created on “paper” and it is a statutory obligation of an organization or company to appoint a person to act as an “Office Holder” of this office. This person may be appointed and may receive payment for this service. Although the source of the payment may be from overseas, IRD generally treats the income of office holder as “Hong Kong sourced” and thus taxable when this company is incorporated in Hong Kong.
A office holder may take other role in a Hong Kong company, a common example is the director begin employed to provide management services and acting as office holder is the same time.
In case of non-Hong Kong employment, a person is holding both the functions of director and office holder but the service rendered as a director does not take place in Hong Kong. IRD would treat the whole income of this director as taxable income if the income for acting as office holder and employed as director are not clearly defined in the employment agreement.
Tax Obligations of an Employee
Regardless of the “source of employment” whether it is from Hong Kong of non-Hong Kong employer, an individual who receive income from an office, employment or pension are charged salaries tax (exemption and tax relief are available) when the income is arose in or is derived from Hong Kong.
When an individual received a tax return from the Inland Revenue Department, he is required by law to complete and submit it by the due date for filing no matter he has received income which chargeable to salaries tax in the year of assessment. If the tax return is not received, the taxpayers should notify the Inland Revenue Department that income received could be chargeable to tax.
After the return of of completed tax return, taxpayer will receive the notice of assessment within a specific time and proceed to procedure of tax paying.
Is a Self-Employed person chargeable to salaries tax?
No, the income received from self-employed is chargeable to Profits Tax.
A self-employed person may be a sole proprietor or a partner of a partnership business, he works for yourself and thus are not employed as an employee. When a person receive income derived from the buying and selling of goods, or from providing professional or personal services, he is considered as carrying on a trade, business or profession and a self-employed person.
However, a person can engage into employment for income (be a employee), income from office, income from pension and work for himself (be a self-employed person) at the same moment, this person has to complete individual tax return to file his income for both salaries tax and profits tax purpose, keep the respective records and pay tax.
Assessable Income of Salaries Tax
The territorial concept is the the basic concept of salaries tax assessment to impose tax on ALL income from an employment, an office, and pension which are arising in or derived from Hong Kong. Income earned outside Hong Kong may also be taxed if the income are deemed as “Hong Kong sourced”, exemptions or tax relief may be claimed.
Source of Employment (Hong Kong Employment or Non-Hong Kong Employment)
Tax liability concerning employment is determined by the place where the employment is located, three general rules are adopted by IRD to determine the source of employment as well as the income:
- whether the employment contract was made, negotiated, entered, and enforceable in Hong Kong
- whether the employer has a residence in Hong Kong, and
- whether the employee’s remuneration was paid in Hong Kong.
In practice, if all three factors take place outside Hong Kong, the employment is regarded as “Non-Hong Kong Employment”. On the contrast, all the income are received from “Hong Kong Employment” if all of the them are located in Hong Kong or even partly of the employment duty are performed outside Hong Kong, claim of exemptions or tax relief is available under certain circumstances on a year-by-year basis.
However, the judgment of how the income is taxable from “Non-Hong Kong Employment” when partial income is derived from or arose in Hong Kong. The judgment laid down to court case and an extension of charge is imposed by IRO to assess all the income weather the services are rendered in Hong Kong.
For example: an individual is assigned to work in Hong Kong for a few years by a employer who is not located in Hong Kong, the employment duty requires this person to perform part of services in other countries. This person is engaged into an “Non-Hong Kong Employment”, but its income attributable to the services rendered in Hong Kong are taxable to Hong Kong salaries tax. To determine that potion of taxable income from Hong Kong in a year of assessment, the “time-apportionment” approach is generally taken by multiplying the total income from the employment by a fraction of day:
Number of days in Hong Kong / Number of days of a employment period in the year of assessment.
Remark(s): All of the days in staying in Hong Kong irrespective of whether these days are related to services or not are counted as Number of days in Hong Kong
In additional, Leave Pay attributable to such employment in Hong Kong also is calculated multiply the Total leave days in the year of assessment by a fraction of day:
Business days in Hong Kong / Total Business Days
Remark(s): Business days in Hong + Business days outside Hong Kong + Leave Days = 365 / 366.
Full or Partial Exemption of Income or Relief
An “non-Hong Kong employment” may requires regular traveling between Hong Kong and outside Hong Kong, only part of the Employment Income were sourced in Hong Kong.
For example: an individual who resides in Hong Kong and is employed under “non-Hong Kong Employment” leaves Hong Kong frequently to work at an office location in Shenzhen at 9:00 a.m. and return to Hong Kong on the same day at 7:00 p.m.
On the ground that his stay in Hong Kong on those days when he works in Shenzhen office was purely for residential purpose, he hopes to claim to have that day in Hong Kong to be completely excluded from the “number of days in Hong Kong” for the time apportionment. However, the day he work in Shenzhen and stays in Hong Kong is counted as 0.5 day in Hong Kong.
On the other hand, an employment (regardless of Hong Kong Employment or Non-Hong Kong Employment) required short-period of stay in Hong Kong for business.
For example: an individual who renders his services including either attending training, meetings or reporting during his “visit” in Hong Kong for not more than a total of 60 days during the year of assessment.
Although these activities are regarded as services rendered in Hong Kong, he will be exempt from Salaries Tax on the ground that these services are performed during his visit.
The days of visit in Hong Kong are counted irrespective of whether these day are in relation to services or not, Therefore, part of a day is counted as one whole day.
Double Taxation Agreement between Hong Kong & Mainland China
Claim of relief is available to exempt the income attributable to services outside Hong Kong if non-Hong Kong income tax (e.g. mainland China’s Individual Income Tax) has been paid on that income.
Moreover, an individual who is Hong Kong resident and has paid mainland China’s Individual Income Tax on an income from employment taxed in Hong Kong, tax credit to set off his Hong Kong’s salaries tax is available to claim. Furthermore, full exemption of the China’s tax is available to claim for a Hong Kong resident works in Mainland China for not less than in total 183 days in China.
List of Taxable Emoluments
By definition of IRO, taxable emoluments includes:
- leave pay
- allowance whether or not they are derived from employer
All kinds of cash allowances arising from an employment are wholly taxable, common examples:
- housing allowance
- living-cost allowance
- transportation allowance
- medical allowance
- clothing allowances
In general, only emoluments for the services rendered by employee are taxable. For benefits, when the received benefits are either convertible into cash or containing cash value, the benefits are also liable to salaries tax. If the payment to employee is offered as a gift on a special occasion (e.g. marriage, etc.), this payment is non-taxable.
Moreover, special provisions of the IRO for specific employee’s benefits subject to tax, these benefits include the following:
- subsidized accommodation
- retirement benefits
- share options
- holiday benefits
- children’s education subsidies
Therefore, the above benefits are required to be assessed for tax purpose because of the present of the special provisions of IRO.
Besides, the following receipts are non-taxable for salaries tax purpose:
- compensation for work injuries
- compensation for loss of employment
- compensation for loss / damages in legal disputes
- compensation on redundancy
- compensation for wrongful dismissal of an employee
- legal settlement / compensation
- reimbursement of self-education expenses within statutory limit
In short, pension is a periodical payment to a person in consideration of his past services.
Like employment income, only the pension arising in or derived from Hong Kong is assessable. Normally, this is situated at the place of the business that employed the pensioner. All the pension based on total length of service is chargeable to salaries tax, even though part of which is attributable to services done outside Hong Kong.
Taxable Gain from Share Option
Share option is the right to acquire shares at a prescribed price, it is different form the share issued to employee at a discounted price. Share options are non-taxable until it is exercised or sold by the employee, on the contrary, shares issued at a discount are assessable at the time of issue (When the shares issued are subjected to restrictions such as withholding period of 2 years, then the taxpayer can claim for discount during tax computation).
Any employee’s gain realized during exercising or selling the share options granted by the employer is taxable.
The assessable gain on exercising the share option is calculated by “the market value as at the date of the exercise less the price paid by the employee”. After the exercise of the option, gain or loss on sale of this shares is out of the scope of salaries tax (Hong Kong does not impose Caption Gain Tax).
On the other hand, the assessable gain on selling the share option is calculated by “net sales proceeds less the price paid by the employee for the options”. Therefore, no tax is generated until the option is sold.
The tax liability of the share options is irrespective of:
- The body who issues the share options, or
- Where the shares option are issued, or
- Whether the shares acquired by exercising the options are unsold and held by the employee as capital investment.
The crucial criteria to determine if the the gain is taxable are as follows:
- whether the share options are granted in respect of taxable services in Hong Kong, and
- whether they are exercised or sold.
IRD Measures against
for tax-avoidance intention
To combat avoidance arrangements involving the use of service companies to disguise what are in substance master-and-servant employment relationships, IRO provides that when a “relevant person” pays remuneration for services rendered by a “relevant individual” to a company controlled by that individual, the remuneration is deemed to be income of employment and thus that individual are liable to salaries tax.
The above measures can be applied if the conditions exist as follows:
- The “relevant person” carries on a trade, a profession or a business, or a prescribed activity;
- The “relevant person” enters into an agreement with the relevant individual for the services carried out by the relevant individual. The agreement may be in writing or implied; and
- Under the agreement, remuneration for such services is paid to a “service company”.
Since this measure may affects many business arrangements which are not intended for a tax-avoidance purpose, when a business arrangement satisfies ALL the following conditions, this arrange falls outside of this scope.
- the agreement does not provides for remuneration to include annual leave, passage allowance, sick leave, pension entitlements, medical payments or accommodation, etc;
- in the case of the agreement requiring any services to be carried out personally by the relevant individual, that individual also carries out similar services for other persons;
- the performance of the relevant individual is not subject to “employer-type” control or supervision by the relevant person;
- the remuneration is not paid on a basis commonly used under a contract of employment;
- the relevant person does not have the right to terminate the services in a manner commonly provided for under a contract of employment; and
- the relevant individual is not held out to the public to be an officer or employee of the relevant person.
If a business arrangement cannot satisfy all of the above conditions, IRD may exclude this arrangement from tax-avoidance measure if this arrangement is satisfied that the carrying out of the services under the employment agreement is not substantially in the nature of an office or employment.
Deductions of Salaries Tax
There are 2 types of deductions to claim to deduction from assessable income:
Outgoings and expense (including expenses of self-education)
Outgoings and expenses
These must be strictly relevant, highly necessary and exclusively incurred during the production of the assessable income.
- Deduction for uniform laundry expenses if your employment requires you to work in the uniform
- Deduction for annual member subscription to a (one) professional association if your employment requires holding of a professional qualification.
Depreciation allowances on plant & machinery
The use of these machinery or plant is strictly relevant, highly necessary and exclusively related to the production of income.
Expenses of self-education (ESE)
The expense paid for prescribed course of education provided by organizations specified in IRO to gain or maintain qualifications for use in either current or a planned employment.
- Examination fees paid by an accountant for part of the qualification of a Certified Public Accountant.
- Tuition fee for a management course taken by a business executive.
- Admission fee for a continuing professional development seminar attended by an accountant.
From year of assessment 2013/14 onwards, amount of allowable deduction applies the ceiling of $80,000.
Approved charitable donations
Only direct cash donations to tax-exempt charities under IRO section 88 or to Government for charitable purposes and respective donation receipts could be produced to prove the amount of donation can be claimed for deduction. Non-cash, non-recorded or indirect payment to the tax-exempt charities with the intention of donation are not deductible.
Practical example of non-deductibles:
- Payments for lottery tickets (e.g. Mark Six Lottery tickets)
- Payments for admission charity shows
- Purchase of goods in charity bazaars
- Any donation receipts could be produced to prove the amount of donation made by the claimant.
The minimum amount allowable for deduction is $100. The maximum amount of approved charitable donations to be deducted for each year of assessment is capped at 35% of your assessable income less the deductions of outgoings and expenses and depreciation allowances.
Employee’s mandatory contributions to Mandatory Provident Fund Schemes (MPFS) or contributions to Recognised Occupational Retirement (ROR) Scheme
To claim for deduction of employee’s contributions to a mandatory provident fund scheme (generally 5% of monthly income from each employment – employed and self-employed), all amount of contributions other than mandatory contributions are voluntary contributions and voluntary contributions cannot be claimed as deductions.
If a taxpayer has more than one sources of contribution the year of assessment, the maximum deduction for each year is capped at $18,000 (2015/16 onward).
To claim for deduction of employee’s opted-in contribution to MPF-exempted Recognised Occupational Retirement Schemes offered by employer, the maximum allowable amount of deduction is capped at $18,000 (2015/16 onwards).
Additionally, if an employee takes part in only one ROR (i.e. has one employment), his max deduction is also capped at “the calculated amount of employee’s mandatory contribution to MPF Scheme”; if an employee takes part in both ROR and MPF, only his contribution to MFP can be claimed for deduction.
Home loan interest (HLI) – applicable to PA as well
When a taxpayer has paid interest for the acquisition of a dwelling situated in Hong Kong and car parking space in the same development of the dwelling in a year of assessment, the can be applied for deduction if the condition are met as follows:
- taxpayer is the owner of the dwelling (either as a sole owner, a joint tenant or a tenant in common) with reference to the record on Land Registry;
- the dwelling is a separate rateable unit under the Rating Ordinance;
- the dwelling is used as taxpayer’s place of residence (for partly used, the amount of interest deductible will be restricted);
- the acquired home loan is secured by a mortgage / charge over the dwelling / over any other property in Hong Kong;
- the lender is an prescribed organization under the Inland Revenue Ordinance (IRO)
Unlike other deductions, even he is charged tax at the standard rate (i.e. Net Total Income), he is also allowed to claim to this deduction stated above.
From the 2012/13 onwards, deductions of HLI paid on the mortgage of taxpayer dwelling for maximum of 15 years of assessment (consecutive years or otherwise) may be obtained.
The maximum amount of deduction for each year is $100,000.
Elderly residential care expenses (ERCE) – applicable to PA as well
When a taxpayer or his spouse have paid to a licensed residential care home which is suited in Hong Kong for the care of their parent or grandparent who is 60 years old or older.
Only one person of the couple can claim the deduction for the same parent or grandparent for a year.
The annual amount of deduction ceiling of each parent or grandparent is capped at $80,000 (2014/15 onwards).
Unlike other deductions, even a person who is chargeable to tax at the standard rate is also entitled to the deduction.
Allowances of Salaries Tax and Personal Assessment
Those deductible allowances stated below can apply to calculation of salaries tax on Progress Rate (i.e. Net Chargeable Income) or Personal Assessment.
These allowances are usually advantageous to most of the taxpayers (except those high-net-worth individual) and attractive to them to be assessed on Progress Rate instead of Standard Rate on their chargeable income.
Every individual taxpayer is entitled to a fixed amount of basic allowance and can claim other allowances that may lessen his total assessable income.
Unless the taxpayer are married, the basic allowance must be granted to each individual taxpayer.
The fixed amount of basic allowance is $120,000 per individual in year of assessment 2014/15 onward.
Married Person’s Allowance
For a married person, he can claim for Married Person’s Allowance in the year when the taxpayer and his spouse are not living apart (or living apart but are supporting financially to his spouse) AND the couple both have selected Joint Assessment / the couple both have elected Personal Assessment / his spouse does not receive any chargeable income for salaries tax.
The fixed amount of Married Person’s Allowance is $240,000 per a married couple in year of assessment 2014/15 onward.
Child Allowance (For each dependant)
When a taxpayer is maintaining and supporting unmarried children (includes own child, adopted child or step child of a taxpayer or his current / former spouse) who was is aged under 18 / under 25 and receiving full time education / unable to work due to physical and mental disability.
Amount of Child Allowance is $70,000 per each dependant child in year of assessment 2014/15 onward.
An additional one-off child allowance will be granted in the year the child was born, this additional amount is $70,000 per each child.
The child allowance of each dependant child (including the one-off) are allowed to be claimed by either the husband or wife who are not living apart.
For a tax efficient approach, they should agree to each other that these allowances are claimed by the person who has chargeable income / higher chargeable income / is assessed on Progress Rate.
Dependent Brother or Sister Allowance (For each dependant)
When a taxpayer is maintaining and supporting unmarried brothers or sisters (includes nature / adopted / stepped brother or sister of a taxpayer or his spouse / deceased spouse) who is aged under 18 / under 25 and receiving full time education / unable to work due to physical and mental disability.
Same as the claim of Child Allowance, only the taxpayer or his spouse are allowed to claim allowance of each brother or sister in a year.
Amount of Dependent Brother or Sister Allowance is $33,000 per each of the dependant in year of assessment 2014/15 onward.
Dependent Parent and Dependent Grandparent Allowance (For each dependant)
Note to taxpayer who has claimed deduction of “elderly residential care expenses” for a parent or grandparent, the same parent or grandparent would not be grant this allowance in year.
When a taxpayer is maintaining and supporting Hong Kong ordinarily residing parent / grandparent (includes nature / legally adopted the taxpayer or his spouse / stepped parent or grandparent of a taxpayer or his spouse / deceased spouse) who is aged 55 or more and sharing the same home for more than 6 month continuously / receiving more than $12,000 in a year toward the maintenance of them.
Same as the claim of Child Allowance, only the taxpayer or his spouse are allowed to claim allowance of each parent or grandparent in a year.
Amount of Dependent Parent and Dependent Grandparent Allowance is $40,000 ($20,000 if the dependent parent or grandparent is aged 55 or above but below 60) per depandent in a year (2014/15 onward)
Single Parent Allowance
This allowance is NOT granted to each child of the taxpayer supporting. Hence, no allowance can be granted for any second or subsequent child.
When a taxpayer who is unmarried and have already granted a Child Allowance in the same year undertook the ongoing responsibility for the care and supervision to his child, this allowance is ground on the ground of time spent on care and supervision the dependant child but merely supporting the education and maintenance of the child (burden of eduction and maintenance on a dependant child is the ground to claim Child Allowance).
Amount of Single Parent Allowance is $120,000 in a year.
Disabled Dependant Allowance (For each dependant)
In addition to the grant of married person’s allowance, child allowance, dependent parent and grandparent allowance or elderly residential care expenses, or dependent brother or dependent sister allowance to a taxpayer, a taxpayer or his spouse is supporting dependants who is eligible to claim an allowance under the Government’s Disability Allowance Scheme.
Amount of Disabled Dependant Allowance per each dependant is $66,000 in a year (2014/15 onward).
Provision of a place of residence to employee
If the department believes the employer provides a place of residence for the employee, then the “Rental Value” (RV) would arise and be subject to tax deduction. Otherwise, the benefits would be considered as rent allowance or refunds of mortgage payments or subsidies on mortgage interest payments.
Calculation of Rental Value (RV)
The “Rental Value” (RV) will be equivalent to the different percentage of the income from the employer after deduction of outgoings and expenses (but not Self-Education Expenses). Serviced apartments are fully furnished with domestic facilities available. Usually a restriction on the minimum period of stay is imposed.
- If the employer offers a flat or a serviced apartment, 10% of the “rental value” is taxable.
- If the flat provided is shared by more than one employee, then only 8% of the “rental value” is taxable.
- For a hotel, hostel or a boarding house with occupying no more than 2 rooms, 8% of the “rental value” is taxable.
- For those occupying no more than one room, 4% of “rental value” is taxable.
Case of Rent paid by the employee
In the cases which the employee does not pay any rent, then his or her 4% or 8% or 10% of income is the rental value. For example, if the employer earns $500,000 in a year, and lives in a serviced apartment provided by his employer, then his or her rental value would be $50,000 ($500,000 x 10%).
On the other hand, if the employee has to pay rent, then he or she has to deduct the net rent paid from rental value. For example, if the employer earns $500000 in a year, and lives in a serviced apartment provided by his employer, but is required to pay $2000 a month as rent, then his or her rental value would be $ 26,000 ($500,000 x 10%) – ($2000 x 12).
Case of all or part of the rent refund from the employer
If the employer refunds all or part of the rent to the employee, only if the employer has strict control over the refunds of the rent paid by the employee, will it be treated as providing a residence to them.
As a result, rental value would be computed and not be treated as income. Otherwise, the reimbursements would be regarded as cash allowance and be fully included in the assessable income.
Strict control refers to the presence of a well-defined system of entitling the reimbursements, specified information of mode of housing benefits and ceiling of reimbursements in the employment contract, and a regular check on the tenancy agreement and rental bills for verification.
In the following cases, the employee is not eligible for claiming the rental value.
First, the employee is not allowed to let his or her own apartment to himself or herself or rents the property from people with connections like spouse and then claims the reimbursements.
Moreover, the employee is not permitted to let his or her own or the connected person’s apartment to his or her employer and then the employer provides that apartment for the employee’s use as his or her place of residence.
The department will consider three factors to decide whether the contracting parties are truly in a landlord and tenant relationship.
Salaries Tax for expat working in Hong Kong
Tax Liability on Expat
Charge of salaries tax depends on the amount of income arising from Hong Kong. Whether you are a director in a Hong Kong office or an employee under “Hong Kong employment” or “Non-Hong Kong employment”.
If you hold a Hong Kong office or be under Hong Kong employment, your earnings would be assessable income for salaries tax in Hong Kong. On the contrary, if you have directorship under non Hong Kong office, your earnings would be exempt from salaries tax.
However, if you are under a non Hong Kong employment, the Assessor of IRD would take your number of days spent in Hong Kong during the year of assessment into consideration to assess your tax liability. In most cases, working in Hong Kong would be considered as engaging in Hong Kong employment.
Thus, you are liable to pay salaries tax in Hong Kong. If you work in a dual capacity, you are advised to indicate your situation in your tax return and provide relevant information.
Partial Exemption to Chargeable Income
Expat working in Hong Kong may seek for complete or partial exemption of salaries tax if you spend most of the time undergoing the following conditions:
- You perform all service outside Hong Kong.
- You take on a job which is supervised outside Hong Kong and your trip to Hong Kong is treated as a visit to Hong Kong which is within 60 days.
- You pay tax which is similar to salaries tax in Hong Kong to foreign authority.
- You would like apply for double taxation relief regards to PRC tax in Mainland China.
Receiving training, attending conference or reporting work progress are considered as rending service in Hong Kong.
The term visit refers to a short and temporary stay in Hong Kong. The days spent in Hong Kong includes the day of arrival and departure.
For instance, if you arrive in Hong Kong at 11:50pm on 12 September and leave Hong Kong at 9:05am on 14 September, you are considered as spending 3 days of visit in Hong Kong.
The law provides heavy penalties for taxpayer if he or she fails to inform chargeability to tax in time when he or she is liable to tax but has not been issued with a tax return for completion, or fails to file a tax return, or files a tax return late, or files an incorrect tax return.
Importance of Filing Correct Tax Return
Taxpayer or executor will be liable to heavy penalties in case of understatement of the tax liability. None of the following reasons would be accepted by Inland Revenue Department as excuses for under reporting income.
- First, taxpayers claim to oversee, ignore and be unable to comprehend his or her obligation.
- Second, they try to shrink their responsibility to the existing or former employer by saying the employer should have reported their income to the department with the employer’s return. Thus, they do not have to amend the understated amount of their own tax return.
- Third, they allege the assessment by the authority has included the under-reported income. Besides, taxpayers assert the income at irregular intervals and different labels are hard to be kept track of, thereby not including the relevant income.
Some may declare their income with reference to their monthly salary statement, yet the statement fails to reveal all of the income of the taxpayer.
Moreover, some may report their income according to the employer’s tax return which records the incorrect amount of the taxpayer’s income.
Some of the taxpayers excuse the under reporting by claiming not knowing the excluded portion of income is taxable.
Taxpayer leaving Hong Kong
If the taxpayer is subject to salaries tax, and he or she is going to leave Hong Kong for a month or above, then the employee must notify the Inland Revenue Department (IRD) in writing a month before departure.
Upon writing, the employer ought to keep all the payments to the employee until the department issues the “letter of release”. The department will also determine whether the taxpayer needs to clear up the tax liabilities before he or she leaves Hong Kong.
Besides, if his or her property is sold and he or she opts for personal assessment, the taxpayer shall notify the department no later than a month before departure. If the taxpayer has ceased the operation of his or her business, the taxpayer shall notify the department no later than a month before departure. If necessary, the taxpayer shall make known of their new correspondence address to the authority.
In case of migrating to other countries, studying or working overseas, he or she must pay all the tax before leaving. In addition, employer of the taxpayer is required to inform the authority if his or her employee is leaving Hong Kong for more than one month.
However, for the employees who leave Hong Kong frequently for business purpose, they do not need to inform the department. Failure of notifying the authority in accordance with the rules prescribed above may get the employer and the taxpayer into a financial penalty at level 3.