TAXATION

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 – Individuals by entering the total amount in item (1). You should also fill in Box no. 29, 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. 32.

Example

How to complete/fill in the data on your Tax Return –Individuals

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 Profits] 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.

4. 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 accrued on or after 1 April 2012, if paid under the Employment Ordinance (“EO”) or the employment contract, is taxable. For more information about the statutory calculations of payment in lieu of notice, severance payment and long service payment, please click here.

Severance and/or long service payment, if computed in accordance with the formula laid down in the EO, is 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.

The amount not assessable to Salaries Tax should be computed after deduction of:

1. contract gratuities based on length of service;
2. benefits paid under an occupational retirement plan that are due to employer contributions and linked investment return; and
3. accrued benefits related to employer contributions and investment return that are either held in an MPF plan or have already been paid.

Example 1 - No contract gratuity, or scheme benefit or MPF scheme benefit to offset statutory entitlement

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:

Non-assessable amount = Statutory entitlement calculated under EO

Example 2 - Contract gratuities based on length of service and no severance package

An employee was entitled to severance payment of $80,000 under EO but at the same time was also entitled to contract gratuities of $100,000 based on length of service. EO provides that the severance payment can be reduced by the amount of contract gratuities, and since his contract gratuities were greater than his statutory right under EO (i.e., $80,000), the company strictly was under no obligation to provide him with a severance package. The employee would be in the following tax position:

To lower the tax responsibility, the employee may request relating back with regard to the gratuity. For more information in relation to relating back of contract gratuities, please click here.

5. 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. 

Any amount obtained upon retirement by the commutation of a pension under a recognized occupational retirement scheme ("RORS") is not subject to taxation. 

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.)

6. 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:

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.

7. 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:

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

8. 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 –Individuals. Please include the amount of the contract gratuity in the "Total amount" under item (1), Part 4.1 of the Tax Return –Individuals. However, you may apply to have the lump sum related back to the service period in respect of which the payment was made.

If the length of service is more than 3 years, the sum will be related back over a 36-month period ending on the date of entitlement to the payment or the last day of employment, whichever is earlier.

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.

9. 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 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:

RV = 4% , 8% or 10% x (Income from employer – outgoings and expenses and depreciation allowance)

Serviced apartments, which are typically fully furnished units or apartments with domestic facilities, such as cooking and laundry available, and which typically require a minimum period of stay, will generally attract the rate of 10% in computing the RV, subject to examination in detail on a case-by-case basis by the Inland Revenue Department.

To compute the RV, the following adjustments may apply depending on the scenarios:

Example 1

Mr. C earned $600,000 in a year and was provided by his employer with a flat as his place of residence. He claimed deductions for his annual subscription to the Institute of Engineers $2,000 (i.e. outgoing & expenses), contributions to MPF $18,000 and expenses of $27,500 for self-education in that year. Mr. C's Assessable Income would be computed as follows:

Example 2

Mr. L came to work in Hong Kong on 1 April 2022. He was remunerated at salaries of $50,000 per month, plus a place of residence. During his first month in Hong Kong, he occupied one room in a hotel. The monthly rental was $8,000. On 1 May 2022, his wife and children arrived, and the family moved into a 2-bedroom suite in the hotel. The rent was $16,000 per month. On 1 July 2022, he and his family moved into a flat provided by the employer.

The RV should be computed as follows:

10. 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 employer is required to monitor the employee's spending or exert control over the expenditures, which includes putting in place a system with clearly defined ranks of those officers who are entitled to rental reimbursements and the limit of their respective entitlements; defining in the employment contract the mode of housing benefit that the employee is entitled to and the limit of rental reimbursement; and assessing the tenancy of the employee (including cases of reimbursements of rent paid by employees directly to their landlords). 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:

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:

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.

11. 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 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 the Inland Revenue Ordinance. In this case you will be assessed for tax in the year you are awarded the shares.

Any profit or loss from your subsequent sale of the shares is typically not taxed or deductible.

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

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

If you are allowed to buy shares at $5 when the market price is $5, there is no benefit and therefore there is no tax implication.

Such grant of stock or share awards constitute taxable perquisites. The terms regulating the awards and the circumstances under which the awards are awarded will often determine when the benefit is derived and when it is valued for tax purposes. You should report benefits from share awards in Part 4.1 of your Tax Return – Individuals.

Benefits related to share options

The difference between the price paid and the market price at the time of exercise is, broadly speaking, the tax advantage of the share option. For example, if you exercise a right to buy shares at $3 when the market price is $5, you pay tax on $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. You should report benefits from share awards in Part 4.1 of your Tax Return – Individuals.

Example

Company X is a listed company in Hong Kong. On 25 March 2021, it granted Mr. C, its marketing manager, the following share option: A right to acquire 500 shares of Company X at a price of $100 per share within 3 years from 1 May 2021.

Mr. C exercised the option on 2 June 2022 and paid $50,000 to acquire 500 shares of Company X. On the exercise day, the market price of Company X's share was $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 2022/23 is computed as follows:

Mr. C's employer should report this "share option gain" in the Employer's Return.

For more information on the above issue, please click here.