Tax Policies for Different Allowances awarded to a Taxpayer from Employer having Establish Company in Hong Kong

In this blog we will discuss different implementation of tax policies for allowances given to employee at different stages.

In the case D 40/12 of employee husband wife collectively named as T, the issue which was faced by board of revenue department was, whether the withdrawals that were made by T subsequently for the consumption of loan meet the requirements of a loan for home. And furthermore the amount should be assessed as HLI deduction that was paid for the interest paid on the loan. By having the following point of views the appeal of T was dismissed by board of revenue department:

  • As soon as purchasing of a person from seller or vendor completes and in spite of mortgaging the dwelling to a bank he pays the price of full purchase then ‘acquisition of dwelling or residence’ takes place. Due to this reason, these amounts were not for the purchasing of the property, that was subsequent to the use up of the loan and withdrawn by bank from the HSAs. In the reality these amounts that were withdrawn from HSAs were for the purpose of re-borrowing for other non-qualifying reasons. And such reasons include payment of the interest for loans and honoring payments of various cheque.
  • If there were withdrawals for some other purposes once the deposits were sent into HSAs then the composed re-borrowing from the bank and balances for loans were increased as a result of withdrawals that were made subsequently.
  • Between taxpayer rendering Hong Kong company incorporation services, T and bank, it was expected intention that from time to time re-borrowing and repayments could be made to and from HSAs. And there was no specific indication that in respect of which repayment this re-borrowing or loan was made. Following a famous rule known as the Clayton’s rule, based on the first come first serve notion a repayment should be allocated to their earliest tally in HSAs from T. It was followed that by the total deposits that were made into HSAs there was no repayment of subsequent withdrawals.
  • The allocation or apportionment formula that is given below:
  • For those months the interest was disallowed in which withdrawals were more than the deposits into HSAs and the months for which cumulative withdrawals were more than cumulative deposits base on the allocation formula that is given above.  
  • An assumption was made for such computation that the amounts that were deposited into HSAs were used to reimburse the amounts in first place that were withdrawn therefrom.  And these amounts were other than the consumption of loans. It was followed for the month:
  • Where there was happening of reverse, the interest was disallowed that was paid on excess withdrawal and.
  • There were no disallowances of interest where cumulative deposits / deposits were exceeded the cumulative withdrawals / withdrawals.
  • The ratio of profusion withdrawal against the simple mean of opening and closing balance of the outstanding loan for the month was acquired to allocate the interest in order to compute the amount of refused interest for the month. As none of the deposits are evaluated as repayment of the loans so as a result of this the computation was favorable to T.

Contribution of Employee working in Establish Company in Hong Kong to Recognized Retirement Schemes

It is allowed to taxpayer to claim the deduction of tax for:

  • Contribution to a recognized scheme known as ORSO scheme.
  • Mandatory contributions to a recognized scheme known as MPF scheme under Section 26G.

Amount to be Deducted

The amount that is allowed to be deducted for an assessment year is least of:

  • The paramount amount of obligatory contributions that are payable under the recognized MPF scheme, being 5 % of the applicable income of employee.
  • The amount that is defined in Schedule 3B, was $12,000 annually for each of the assessment years 2000-01 to 2011-12, $14,500 annually for the assessment year 2012-13, $15,000 per annum for the assessment year 2013-14, $17,500 per annum for the assessment year 2014-15 and $18,000 annually for the assessment year 2015-16, as under Section 26G.
  • The actual amount that was contributed to the scheme by employee.

According to Section 26G, any sum that was allowed under profit tax as deduction to self-employed person under Section 16AA of tax law will be disallowed for deduction.

The contributions will not be deductible that are made by employees of a Hong Kong incorporation to a recognized scheme known as MPF scheme.

Personal Allowances to an Employee 

The different personal allotments under Section 27 of Hong Kong tax law that are available under personal statement or salaries tax are:

  • Dependent parent allotments, as in Section 30.
  • Basic allotments or allowance under Section (s 28).
  • Allowances for married persons, in Section (s 29).
  • Child allowances given under Section 31.
  • Allowance for disabled dependent, as per Section 31 A.
  • Allowance for dependent grandparent, in Section 30 A.
  • Allowance for single parent, Section 32.
  • Dependent sister or dependent brother allowance, as Section 30 B.

Under the Inland Revenue ordinance, the amount of allowances is approved and described.

Basic Allowance to Employee

Under Section 28 (1), the allowance that is permitted to an individual in an assessment year is chargeable to salaries tax in that assessment year. A married person’s allowance is not granted to a person that is granted with a basic allowance, as in Section 28 (2).

Allowance of Married Person

The person who is married at any time during that assessment year is granted with a married person’s allowance (MPA) in that assessment year and

  • Who has well founded elected personal evaluation under Section 29 (1) (c) for that assessment year.
  • Who has with his/her partner, well founded elected joint assessment under Section 29 (1) (b) for that assessment year?
  • Whose partner had no chargeable income to salaries tax under Section 29 (1) (a) of Hong Kong tax law for that assessment year.

In the year of marriage, if death of husband / wife, separation and divorce the full married personal’s allowance is granted to the applicant(s).

Discussing an example. On 1 January 2016, Mr. Wong and his wife were divorced. Mr. Wong was employed by a Hong Kong incorporation. During the assessment year 2013 to 14 the wife of Mr. Wong had no income that have to be chargeable to salaries tax. Although Mr. Wong was divorced in the assessment year 2015 to 16, he was allowed to claim the married person’s allowance for that year.

Under Section 29 (4), if there are husband and wife living apart from each other’s, a married person’s allowance will only be permitted where the partner that is asserting the allowance is supporting or maintaining the other partner. In a case of Sit Kwok Keung it was observed that two partners would not be husband and wife if these are divorced. So no married person’s allowance can be granted to a partner even though following the year of divorce he/she is still maintaining or supporting the other partner.

Allowance for Child

An individual who had appending his life in maintaining or supporting the life of an unmarried child at any time during the assessment year would be granted as a child allowance in that assessment year. And unmarried child should be who was during that assessment year:

  • If over 18 but under 25, should be receiving full time education under Section 31 (1) (B).
  • Was unable to perform a physical duty due to mental or physical illness in spite of being over 18, under Section (31) (1) (c).
  • Under Section (11) (1) (a), having age less than 18 years.

Under Section 31 (1A) of Hong Kong tax law, with effect from the assessment year 2007 to 08 it was decided that the amount of child allowance will be increased in the assessment year in which the child is born. The table ‘Summary of deduction, personal allowances and tax rates’ would be given in the subsequent articles.

The meanings of Child, a child of an individual that is a taxpayer or whose income is enough to be chargeable to salaries tax. This child can be adopted or step child or child of the taxpayer’s partner, or his / her former partner, whether or not born in the state of parents being married. The adoption or manner of an adopted child must be acknowledged by the laws of Hong Kong, as in Section 27 (3).

Under Section 31 (3) (a), the allowances of all child can only be claimed by one spouse for a wife or husband. And there is also a restriction for acquiring such allowances that these husband and wife should not live apart. And it is the right of husband and wife to nominate anyone among them to claim such allowance. If a consent on the nomination of a partner for claiming the child allowance is made it cannot be abrogated without the sanction of CIR, under Section 31 (3) (b)

In accordance with the Section 31 (2), if husband and wife are not living together but apart from each other than based on the contributions made by each of them on the maintenance, support and education of the child, the child allowance is divided.

Seeing an example to understand it. A taxpayer rendering Hong Kong company incorporation services named as Mr. Au and his wife were working on the maintenance and support of three children. During the assessment year ended 31 March 2016, the ages of these children were 2, 3 and 5 respectively. Only one them among Mr. Au and his wife can claim the child allowance in case if Mr. Au and his wife both do not elect for assessment jointly. For the assessment year 2015 to 16 the child allowance was (3 * $100,000) $300,000.

Allowance for Dependent Parent     

In an assessment year, the dependent parent allowance (DPA) is granted to an individual, if that individual, or partner of that individual, not as a partner that is living apart from him / her maintains his / her parent or parent of his / her partner for that assessment year. According to Section 30 (1) (a), the parent that are being maintained should be a resident in Hong Kong at any time in that assessment year normally:

  • Or if having age less than 60 years then would be eligible under Government’s disability Allowance scheme to claim in accordance with Section 30 (1) (c) of Hong Kong tax law.
  • Having age of 60 years or more Section 30 (1) (b).

A DPA was granted to a taxpayer who plans for starting a business in Hong Kong or works as an employee and maintaining a dependent parent who was aged 55 to 59 at any time during that assessment year with effect from 2005 to 06. Under the Government’s Disability Allowance Scheme, throughout the assessment year taxpayer was not eligible to claim an allowance. In respect of each parent maintained under Section 30 (2), a DPA was granted if:

  • In the assessment year under the Section 30 (4) (a) (i), the parent resided with his/her spouse and the claimant himself, not for a full valuable consideration, for at least six months’ continuous period or
  • In the assessment year under the Section 30 (4) (a) (ii) his spouse or claimant contributed at least $12,000 towards the maintenance of the parent.
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