In this blog we will explore that which of expenses or outgoings of an employee that are either private or domestic in nature are allowable and which are not allowable for deduction by the taxation department of Hong Kong and why some specific types of expenses are treated differently from other expenses.
Salaries Tax Calculation
As long as computation of salaries tax is concerned it is computed at the lower of:
Expenses and Outgoings under Tax
In the production of assessable income AI, all expenses and outgoings are included naturally, solely and entirely. These expenses and outgoings are allowed to deducted from the AI as under Section 12(1) (a) of Hong Kong tax law. Expenses of Capital, private and domestic nature are not included in these expenses.
Expenses that are Private and Domestic in Nature
The expenses that are subjected to the personal or domestic situation of a taxpayer are not allowable. Lets’ consider an example. If an amah is hired to look after her child by a woman that is not a house wife but working in a company or so. Then fee that is given by her as a reward to amah is not taxable from her AI as this payment is domestic and private in nature.
If there is a person who is suffering from renal disease and medical expenses of him are deducted for the systematic dialysis treatment. Then these of his/her expenses are not allowed for assessment are these are considered as private in nature, in D 33/94.
In D 61/99 it was observed that, as expenses of a person in term of maintenance payment to her ex-wife by him were of private and domestic nature. So he denied these expenses to be taxable. In the same case D 82/03 the maintenance payment that is paid by him in to his ex-wife or children that was withheld from his salary were not allowable.
Entirely and Solely of Income
In order to produce the AI, it is mandatory to spend the entire amount of expenditure for this purpose solely. The common practice to subject an expenditure to tax is to divide such taxes that are incurred for more than one purpose. This is due to the reason that if a portion will satisfy the requirements that specified under Section 12 (1) (a) can be deducted.
The whole item would not be allowable in the case if expenses are served for more than purpose and it is difficult or somehow impossible to distinguish that which portion of expenses is allowable and which is exempted. For example, if an expensive suite is sold by a salesman than cost of this suit would not be allowable wholly due to it service for dual purposes.
Important to include all Expenses
In order to produce the AI, the expenses are necessary. As long as case of expenditures is concerned it is not necessary for these to facilitate or to be related to the production of income from either Hong Kong company setup service or from any other employment. Rather the basic test is that if without experiencing the particular outlay the duties can be performed or not. As discussed in case Bullock 1961.
In D 89/89 that an international overseas conference was attended by some senior lecturers of a university in Hong Kong. The expenditure that were experienced by them in attending this conference were held as not being experienced necessarily. Although their work was facilitated by attending this conference.
In another D 8/99 it was observed that a university lecturer was not allowed to deduct that loss from the sale of some books or text books. This was due to the reason that as his duty was to teach not to sale the sale or purchase of books or notebooks.
Assessable Income Calculation
Expenses can be experienced in both cases, during production of AI or enabling a person to produce AI. A distinction or discrimination is required to be made between two of these expenses. The expenses of enabling a person to produce AI are experienced at the stage of actual production of income of that person.
In a case Humphrey 1970 the expenses incurred due to traveling between office and home were not held allowable. And this was due to the reason that such traveling of taxpayer was only to enable him to perform his/her duties.
In Robert Burns 1980 it was observed that the license of a horse trainer was suspended by Jokey club of Hong Kong. While he appealed against this suspension he was experienced by legal expenses. These of his legal expenses were rejected by the court of appeal: the only purpose to experience such expenses was to observe that trainer was not prevented for earning his AI and also were not experienced in its production.
The items given below are not allowable based on the decisions that were given above.
In D 91/03, as the sum was paid by lawyer in the form of professional security insurance and experienced by him to put her in the position to earn money so it was held not taxable. In the course of earning of income this sum was not experienced by her. In the same manner in the case D 102/03 it was observed that the security insurance was disallowed that was paid by an employed doctor. It was stance of the board of revenue department that if doctor was just practicing for starting a business in Hong Kong on her own behalf then that sum could be deductible probably under profits tax.
As discuss in D 35/04 it was also observed that as a result of being bad debt of his clients, it was demanded by a taxpayer to repay the part of his commission to the employer. As the taxpayer was failed to observe the credit policy of employer so this repayment of commission was required by him. The board of revenue was agreed to not allow the sum as it was due to deviation of an employee of Hong Kong company incorporation from his/her duties not for the performance of his/her duties.
In Frano Tong Sui Lun 2006, a dealer employed a taxpayer as a representative of a stockbroker company. Under the contract of his employment with the employer it was his duty that if his clients failed to settle their accounts then to refund the commission to his employer. The deduction for this of his refund was allowed by board of revenue. The decision of board of revenue was held as it is by court of first instance and it was its’ instance that in the production of income the refund was not experienced. In the case that is described above the deduction rule under profit tax and under salaries tax was compared by the court of first instance. The profit tax also uses the word in the construction of. Expenses are allowed by salaries ax to produce the income that is chargeable while expenses that are allowed by profits tax are for the production of chargeable profits. It was deduced by the court for first instance that deduction that is made under the salaries tax are much more narrow and strict. It was also doubted incidentally by the court for first instance that if taxpayer should be allowable to profits tax then salaries tax. But this had no much importance as this was not the question to be determined by court of first instance. So the appeal of taxpayer to court for appeal was not entertained but dismissed.
In the cases of Humphrey and Tong it was recognized that to qualify as being ‘experienced in the production of income that is chargeable’ for salaries tax purpose the expenses must be experienced in the course to perform the duties. For example, the very task that is to be done by employer in incorporate HK company. This is due to this reason that under salaries, tax is not easy to obtain deduction for expenses.
In a case D 14/13 it was observed that instead of giving notice (PILON) to his previous employer a payment was made by T. That payment mad by him or PILON was reimbursed to him by his new employer. It was argued by T that PILON was experienced by him due to performance made by him while performing the duties in the form of work required by his new employer. So this of his PILON should be an allowable deduction. This of his appeal was dismissed by the board of revenue. It was observed in the case of T that it was personal to him that PILON enabled him to take the new job by the specific time. And also it was not a part of performance of duty by T in doing the work for new employer. It was also not experienced necessarily in the production of income that was capital expenditure and also assessable in fact. The provisions of Section 12 (1) (a) of Hong Kong tax law were not satisfied for a deduction.
In the concerned year assessment, there must be an arising definite commitment and liability that is established. A predicted future outgoing or a contingent liability will not be taxable for starting a business in Hong Kong or on the account of previous business.
Treatment of Expenses of Specific Types
Expenses for Travelling
Travelling expenses are not allowable if these are between place of employment and home. As observed in the case of Humphrey. But the expenses of travelling would be allowable if these are due to travel form one place of employment to another and as seen in case of Robert Burns. However, it was also observed that a subscription that is for the professional body will be suitable as extra-statutory concession. By keeping in the view that alongside current development in that specific profession is in the benefit of employment and is of regular use provided that in the body the retention of membership is perquisite of the employment. But a person that is full member is only entitled to the concession. And according to DIPN 9 a member that is student is not so entitled.
Payments to Second-In-Command
As assistants are not experienced necessarily so such payments are not allowed generally. The facilitation of performance of duties by employments of assistants are not sufficient. However, it was seen in a case D 19/78 that, a person was employed by a firm of stockbrokers. He was employed as a runner. The commission was earned by him on the basis of sales that were practiced by him. In order to bring the business for the firm fees were being paid to assistants and it was held by him to claim the deduction of that fees, as taken from DIPN 9.
Examination Fees and Further Education of an Employee
An employee is not allowed to deduct the expenses that were experienced so even if he is allowed to undertake further studies as may require by his employer that have business in Hong Kong or incorporate HK company as discussed in the case of Mills. The expenses are not experienced in the production of AI as these are of domestic and private nature. And under Section 12 (1) (a) of Hong Kong tax law such expenses do not qualify for the sub-Section of general deduction. In the same way the examination fee that is paid by student to sit in the professional examination is not allowable as observed in the proceeding of case of Pots. The expenses that are described above are deductible if they fulfill the basic condition of being self-education expenses under Section 12 (1) e.