According to Inland Revenue Departmental Interpretation and Practice Note No. 10, the Commissioner accepts that an employment is located outside Hong Kong if all of the following three conditions are satisfied.
a.The contract of employment is negotiated and entered into, and is enforceable outside Hong Kong. b.The employer is resident outside Hong Kong.
c.The employee’s remuneration is paid to him outside Hong Kong.
Mr. Pan is not a Hong Kong resident, and he was offered the job by an American company. It is very likely that his contract of employment was negotiated and entered into and enforceable outside Hong Kong. Mr. Pan’s employer is an American company, and his employer’s resident status is outside Hong Kong. Mr. Pan’s salary is paid to his bank account in America by his employer. Thus, all the three conditions for an employment located outside Hong Kong are satisfied, Mr. Pan’s employment is outside Hong Kong.
If Mr. Pan’s employment is outside Hong Kong, his salaries tax liability is determined by the number of days he stays in Hong Kong in the year of assessment concerned. Thus, Mr. Pan is not able to ascertain his Hong Kong salaries tax liability until the basis period for the year of assessment has
passed. The longer the time he stays in Hong Kong for a year of assessment, the more salaries tax he has to pay.
In order to avoid such uncertainty, Mr. Pan may negotiate with his employer to divide his duties into two parts, namely one for the Hong Kong office and the other for the head office. When Mr. Pan is present in Hong Kong, he works for the Hong Kong office, and while he is outside Hong Kong, he works for the head office. In this way, Mr. Pan can divide his salaries into two parts, and all the income derived from the employment with the head office is exempt from Hon Kong salaries tax under Section 8(1A) because he performs all services outside Hong Kong.
In addition to the dual employment, Mr. Pan may design an efficient remuneration package to take advantage of the preferential treatment on certain income, such as refund of rent by the employer, and provision of benefits, which are not Mr. Pan’s liability to pay.
a. Refund of rent
Mr. Pan can request his employer to refund the monthly rent of $20,000 to him instead of giving him the salary of $20,000. In Hong Kong, refund of rent is not treated as a cash allowance for the employee. It is taxed in the form of rental value which is calculated as 10% of the income of the employee. Thus, the effective taxable amount is greatly reduced. b. Provision of accommodation by the employer
Instead of renting the flat by himself, Me Pan may request his employer to rent the flat for him. The monthly rent paid by the employer to the landlord is not treated as assessable income of Mr. Pan, but the benefit is taxed in the form of rental value which is also calculated as 10% of the income of the employee. In other words, the tax effect is the same as that of a refund of rent. c. Education for employee’s children
It is provided in Sections 9(1)(a)(iv) and 9(2A)(b) that education allowance provided for employee’s children by an employer is fully taxable, and it will make no difference whether the school fee of Mr. Pan’s children is paid by the employer or Mr. Pan himself for Hong Kong salaries tax purpose. d. Contractual payments made by the employer for an employee It is provided in Section 9(1)(a)(iv) that if an employee can arrange with his employer in such a way that the employer is a contractual party to pay for the employee’s expenses, then such a payment made by the employer for the benefit of the employee is not taxable in Hong Kong. i. Medical benefit
The employer may arrange Mr. Pan to see designated doctors who have contractual relationship with the employer for the provision of medical services for the employees. As the liability for payment of the medical bill lies on the employer, Mr. Pan is not taxable on the medical benefit so provided. ii. Domestic servant
If the employer of Mr. Pan employs a domestic servant for Mr. Pan, and the employment contract is signed between the domestic servant and Mr. Pan’s employer, the domestic servant’s salary paid by the employer is not treated as Mr. Pan’s taxable remuneration. iii. Payment of utility bills
If the utility bills, e.g., electricity, telephone, or water, are addressed to the employer who has a primary liability to settle the bills, the expenses so paid by the employer for the benefits for the employee are not taxable. This is possible if the flat is owned or let by the employer. If Mr. Pan lives in the flat let by himself, then the utility bills will be addressed in his own name. Reimbursement of such expenses will be treated as a cash allowance to Mr. Pan and taxable.
e.Use of employer’s facilities
If the employer has recreational facilities such as recreational clubs, the facilities and benefits enjoyed by the staff are not taxable because they are not convertible into cash. Mr. Pan may provide him with a company car and such benefit is also not taxable in Hong Kong.
In order to have an efficient salaries tax planning, Mr. Pan may request his employer to divide his services into two separate employment contracts, one with the head office and the other with the Hong Kong office. He can also make use of the preferential treatment in taxing benefits in kind to reduce his Hong Kong salaries tax liability. In addition, he is supporting his wife and children, he can claim married person’s allowance and child allowance which will further reduce his Hong Kong salaries tax liability.
Salaries Tax Computation
Year of Assessment 2008/09
Mr. GaoMrs. Gao
Add: Rental value ($500,000 x 10%)50,000
Less: Rent suffered 12 x $(16,000 + 500 -15,000)18,00032,0000
Less: Donation (restricted to 35%)186,20013,800
Contribution to retirement scheme12,00012,000
Elderly residential care expenses60,000258,200025,800
Less: Basic allowance108,000108,000
Dependent parent allowance60,000168,0000158,000
Net chargeable income105,80066,200
Salaries tax thereon $40,000 @ 2%800800
$40,000 @ 7% and $26,200 @ 7%2,8001,834
$25,800 @ 12%3,0960
Standard rate ($273,800 x 15% and 224,200 x 15%)41,07033,630 [which are higher than the tax at progressive rates]
Therefore, the salaries tax payable by Mr. and Mrs. Gao are $6,696 and $2,634 respectively
Property Tax Computation
Year of Assessment 2008/09
Rent ($11,500 x 12)138,000
Less: Statutory deduction ($131,000 x 20%)26,200
Net assessable value104,800
Property tax ($104,800 x 15%)15,720
Total taxes payable by Mr. and Mrs. Gao
Salaries tax ($6,696 + $2,634)9,330
Mr. and Mrs. Gao
Personal Assessment Computation
Year of Assessment 2008/09
Mr Gao Mrs Gao
Net assessable value 104,800 0
Net assessable income 532,000 250,000
Less: Interest expenses (restricted to net assessable value) 104,800 0 532,000 250,000
Less: Business loss (50,000) 0
Less: Donation (186,200) (13,800)
Contribution to recognised retirement scheme (12,000) (12,000) Elderly residential care expenses (restricted to $60,000) (60,000) 0
Less: Married person’s allowance 216,000
Child allowance 50,000
Dependent parent allowance 60,000 326,000
Net chargeable income 122,000
Salaries tax thereon $40,000 @ 2% 800
$40,000 @ 7% 2,800
$40,000 @ 12% 4,800
$2,000 @ 17% 340
(Standard rate $448,000 x15% = $67,200 which is higher than $8,740.) Since personal assessment tax of $8,740 is lower than the total taxes payable by Mr. and Mrs. Gao in the amount of $25,050, it is advantageous to elect for personal assessment for the year of assessment 2008/09.
The liability of personal assessment tax is as follows:
Mr. Gao = $8,740 x 223,800/448,000 = $4,366
Mrs. Gao = $8,740 x 224,200 448,000 = $4374