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Hong Kong Salaries Tax - 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


HK$


HK$


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


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


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


HK$


Details of income from Company A during the year 2004/05:

Salary


372,000


Contract gratuity (period : 1/7/2002 - 30/6/2004)


150,000


522,000


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


1/7/2002 - 31/3/2004


$150,000 / 24 months x 21 months = $131,250
-- as income related back evenly to the years of assessment 2002/03 and 2003/04 (i.e. your income in those years would be re-assessed together with any un-utilized allowances and deductions.)


1/4/2004 - 30/6/2004


$150,000 / 24 months x 3 months = $18,750
-- as income for the year of assessment 2004/05


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 HK$2,000 (i.e. outgoing & expenses), contributions to MPF HK$12,000 and expenses of HK$27,500 for self-education in that year. Mr. C's Assessable Income would be computed as follows :


 


HK$


Income


600,000


RV $(600,000 - 2,000) x 10%


59,800


Total income:


659,800


Less: Outgoings and expenses


(2,000)


MPF contributions


(12,000)


Expenses of self-education


(27,500)


Assessable Income


618,300


Example 2


Mr. L came to work in Hong Kong on 1 April 2004. He was remunerated at salaries of HK$50,000 per month, plus a place of residence. During his first month in Hong Kong , he occupied one room in a hotel. On 1 May 2004, his wife and children arrived and the family moved into a 2-bedroom suite in the hotel. On 1 July 2004, he and his family moved into a flat provided by the employer.


The RV should be computed as follows :


 


HK$


1/4/2004-30/4/2004 ($50,000 x 1 x 4%)


2,000


1/5/2004-30/6/2004 ($50,000 x 2 x 8%)


8,000


1/7/2004-31/3/2005 ($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?


Such 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:



HK$


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:



HK$


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 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 HK$5, then that HK$5 would be added to your assessable income.


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


If you are allowed to buy shares at $5 when the market price is HK$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 HK$3 when the market price is HK$5, you pay tax on HK$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 2003, it granted Mr. C, its marketing manager, the following share option: A right to acquire 500 shares of Company X at a price of HK$100 per share within 3 years from 1 May 2003.


Mr. C exercised the option on 2 June 2004 and paid HK$50,000 to acquire 500 shares of Company X. On the exercise day, the market price of Company X's share was HK$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 2004/05 is computed as follows:



HK$


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.



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