How tax policies are implemented on different aspects of taxpayer as self-education, general interest classes, commissions and donations or on a person doing business in Hong Kong?


In this following blog we will see the implementation of Hong Kong tax policy on different aspects of a tax person such as commissions (including gifts), clothing, interest classes, entertainment self-education and what are depreciation allowances and concessionary deductions? We will also go through some examples and case studies to understand the judgments of board of revenue and Inland Revenue department for that specific circumstances.  

Expenses incurred on Self Education

If a taxpayer pays the expenses of self-education in an assessment year then these can be deducted from the assessable income of the taxpayer for that assessment year. These are deducted from his assessable income as concessionary deduction given that total amount that is deducted from the assessable income of that person does not overreach the amount that is prescribed by Schedule 3A of Inland Revenue department under Section 12 (6) (a).

Understanding the meaning of ‘Self Education Expenses’

The basic meanings of ‘self-education’ is:

  • In respect of examination the examination fees that are applied by mentioned institutions to assessable income maintaining or gaining the qualification to implement it in any employment, which started from 25 June 2004).
  • If a prescribed course of education is taken by a person then payments that are related to the examination and tuition fees.

Such expenses are not included in the expenses of self-education for which a deduction is either allowable or allowed to the person that is taxpayer of Hong Kong. The expenses to a limit to which these are able to be reimbursed or have been already reimbursed by the employer doing business in Hong Kong or any other party for which employee renders services unless these reimbursements will be considered for the assessable income of taxpayer under Section 12 (6) b.

Course of Education that is prescribed

The basic definition of ‘prescribed course of education’ is a course in which an individual or multiple individuals are enrolled to a course in order to maintain or gain the essence of qualification at a specified institution for use of this qualification in future planned or current employment:

  • A development or training course undertaken by a student that is acknowledged or credited by an institution which is specified in Schedule 13 under Section 12 (6) (c).
  • The course that is for educational purpose and provided by a provider of education.
  • A course that is for development and training purposes and provided for its’ members by business or professional association and trade etc.

Among the 38 organizations of Hong Kong that are specified by the Schedule 13 most of these are professional bodies. These professional bodies that are also specified by Schedule 13 include the Hong Kong Institute of Certified Public accountants, the Hong Kong Institute of Surveyors and Law society of Hong Kong.

Provider of Education

The basic meaning of education provider is:

  • An institution that is approved by CIR under Section 12 (6) (d) in writing as a provider of education.
  • A university college, technical institute or university.
  • An institution that is approved for the purposes of Section16C by the CIR.
  • A place that is for educational purposes and to which Education Ordinance is not applicable by virtue of Section 2.
  • A school that is not subjected to assessment from registration under Section 9 (1) of Education Ordinance.
  • A school that is registered under Section 13 (a) of Education Ordinance.

In D 16/13 it was observed that, a private computer course was taken by an employee named as ‘T’ who was part of a company incorporation HK and self-education expenses were claimed by him in relation to that expenses. Given that, institution had organized some courses previously, jointly with some other organizations. These organizations were already accredited under Section 12 (6) (c) of Hong Kong tax law but that institution was not accredited this Section of Hong Kong tax law specifically. The courses that were taken by the employee ‘T’ were not jointly organized with some other organization but were in the procedure of private one to one tuition. As these courses were not suited with his duty time so he argued that it is difficult for him to take these course form an educational institute. The prescribed courses of education are specified under Section 12 (6) (c) of Hong Kong tax law so the appeal of employee ‘T’ was dismissed by board of revenue with the stance that courses that were undertaken by him were not as prescribed course of education. This was due to the reason that institution from which he was undertaking that course was not a trade, business or professional association nor an institute that was specified under Section Schedule 13 and nor a business provider as defined under Section 12 (6) d). And such statement that institution had already organized the joint courses with the institutions that are accredited education provider was totally non-relevant and had no use. Also the personal circumstances of employee ‘T’ were also non relevant.

General Interest in Classes

The classes that are for general interests for example, a Tai Chi class will not be able to qualify as a course that is related to the employment, if he would remain unqualified unless it is stated that employment as Tai Chi instructor is anticipated, as in DIPN 9. In a case D 138/00 it was observed that a police constable could not convince the board of revenue department that from the prescriptive of his employment a Chinese opera course was relevant.

As in D 82/06 it was observed that to complete the ‘Diploma of Acupuncture’, some courses were undertaken by a solicitor as a part of company incorporation HK. So it was his claim that deduction of tax for the expenses that were experienced by him in taking those courses was disallowed and this was due to the reason that board of revenue was not completely satisfied by him that these courses would take him to which qualification that will be used by him in some prospective employment. In order to satisfy the definition of prescribed courses of education, it is not sufficient to take the course that may enable someone to gain understanding or knowledge in some field which may help him to pursue his career in some unidentified field in future.

 

Clothing

Clothing are not allowable for tax assumption normally. As clothing serves some private purposes such as providing the cover and to warmth the body so these are unable to satisfy some tests of allowance such as ‘exclusively and wholly’. The clothing that is used specifically in employment may qualify.

Commissions (including gifts)

In order to secure his sales or contracts a person earning commission as salesman may have to pay the commission. This commission that is paid by him is may be allowed given that requirements under Section 12 (1) (a) is fulfilled and also items such as amount that is received by them and full particulars of recipients are revealed to the inland revenue department. It is mandatory to keep the evidence of payment of the commission documented such as receipts.

Allowances to cover Expenses

Allowances that are from the side of employer that has establish company setup in Hong Kong in order to cover the expenses which qualify under Section 12 (1) (a) of Hong Kong tax law for deduction are exempted. In any other case the allowances are taxable. These expenses also include reimbursement of expenses that are for travelling purposes as in case Humphrey.

 

Devaluation Allowances

In respect of items such machinery and plant depreciation allowance or devaluation allowance is granted and the use of these allowances is necessary to produce the assessable income as described under Section 12 (1) (b). If machinery and plant are used merely to facilitate the work of an employee and he is not dependent on these assets to perform his duties, then these does not qualify for the devaluation allowances. If equipment is not provided by the employer that has establish company setup in Hong Kong, then in that case only devaluation allowances can be granted to the employee as in D 89/89 and D 51/99. 

In another case D 7/04 it was observed that, a violin was purchased and used by a taxpayer who was also a concertmaster. The board of revenue in this case accepted that this purchasing and usage of violin by concertmaster was exclusively, wholly and necessarily used in the production of assessable income. The previous case was distinguished from this case by board of revenue department. The requirements of employment are keys to determine the standard of what is objectively necessary. As higher degree of mastery is required in case of musician to properly discharge the performance duties so the ‘objective necessity’ is also equally higher.

Lets’ consider a scenario, if in the production of assessable income, machinery or an item of plant is not used exclusively or wholly then a portion of depreciation should be allowed by the assessor. Any balancing charge shall be added to the assessable income upon the disposal of the asset. The computation of deprecation of allowances, is to be noted that depreciation value is similar to that under profit tax.

Losses incurred

Within the same assessment year, the surplus of aggregate deductions of either spouse over his/her assessable income can be deducted from the assessable income of other spouse as under Section 12 (3) of Hong Kong tax law.

If after setting off the assessment year of other spouse, there is still an excess then the amount that remained undelivered will be carried forward in the form of loss to initially depart the assessment income of that spouse whose deduction departed the assessment income of other spouse in the following assessment year and created the loss, as taken from Section 12A.

Deductions of a Donation

According to Section 26C (1) of Hong Kong tax law, the donation should be approved charitable donation in order to be deductible. The meanings of approved charitable donation are specifically a donation of money:

  • To the government.
  • To a trust of public character or a charitable institute that is approved, that under order of Chief executive in Council under Section 88 is exempted.

For the purposes of charity in accordance with Section 2 (1).

 Now see an example to understand it, Po Chai Hospital was an approved charitable donation. A donation of bed was given to that organization by Mr. Liu. The total cost of bed that was donated by him was $10,000. As this deduction for donation was not a money for donation so Mr. Liu cannot claim it deduction for donation. Under Section 26C (1), in an assessment year the aggregate amounts of donation should be less than $100 in that assessment year.  As per from assessment year 2008 to 09 (25% for the assessment years 2003 - 04 to 2007 - 08) the maximum allowable deduction of the assessment income of taxpayer after deduction of outgoings and devaluation allowances is 35%. But this deduction should be before deduction of self-education as described under Section 26C (2) (a). And according to Section, any charitable donations allowable are disallowable under salaries tax as a deduction under profit tax. In order to have Hong Kong employment or to create a company in Hong Kong an individual have to be aware of this tax policies of charitable donations.

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