Tax Series Part 4 - Hong Kong Housing Benefit

by Sanjna Melwani, international assignment (tax) expert in Articles

DatePosted on April 20, 2016 at 09:31 AM
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For Hong Kong salary tax purposes, the tax year runs over a fiscal year from April 1 to March 31 of the following year.  Salaries tax is charged on employment income 'arising in' or 'derived from' Hong Kong sources. A more detailed analysis is then applied to determine the extent of its taxability by looking at the type of employment (Hong Kong vs Overseas employment) and time spent in Hong Kong. 

Once income is determined to arise from Hong Kong sources, then it is subject to Hong Kong salaries tax.  This includes wages, salary, paid leave, commission, bonus, gratuity, perquisite and allowances whether derived from employer or other sources.  Certain benefits in kind are also taxable, such as rent-free or subsidized accommodation via a special treatment mentioned below, education benefits and share options as well as any other benefit that is convertible into cash or a payment to a third party to discharge the employee’s legal obligation on personal expenses or liabilities incurred by the employee.

Note that where an allowance is granted by an employer, who does not control how it is spent by the employee, then it is considered fully taxable in Hong Kong, such as housing allowance

However, where an employer provides rent-free or subsidized accommodation to the employee, or where the employer wholly or partly reimburses the rent paid by the employee under a lease entered by the employee, instead of taxing the employee on the actual amount of rent paid or reimbursed by the employer, the Inland Revenue Ordinance (“IRO”) specifies a calculation of rental value to be treated as taxable value of housing.  The method to arrive at the taxable value of housing is to sum up all remaining income, and to apply 10% on this amount to arrive at the taxable value of housing for flat/serviced flat/house, 8% for 2 room hotel and 4% for 1 room hotel.  A simple example is provided at the end.  This is a way that the Hong Kong government recognizes that Hong Kong is a high cost city when it comes to expending salary on housing. 

Per the explanatory leaflet prepared by the Hong Kong Inland Revenue Department (“IRD”), if an employer should prove they have established clear guidelines to control and have exercised proper supervision over the reimbursements of either the whole or a part of the rent paid by the employee, the Assessor will accept that it is as if the employer is directly providing a place of residence to the employee.

However, if the employer does not control how the employee would spend the money or has not exercised proper control over the expenditures, the Assessor will regard the reimbursements as cash allowance and include the full amount as income in the employee’s assessable income.

"Proper control" means –

  • a clearly defined system is in place, under which the ranks of those officers who are entitled to rental reimbursements and the limit of their respective entitlements are clearly laid down;
  • the mode of housing benefit entitled by the employee and the limit of rental reimbursement are clearly specified in the contract of employment; and
  • the employer will examine the tenancy agreement and rental receipts and verify the actual payment of rent against the tenancy agreement at regular intervals, and also retain the relevant documents for record purpose.   

As proof of control, the company should ensure that each employee provides documentary evidence of rental expenses incurred.  The documentary evidence should include:

  • Original stamped lease agreement
  • Monthly original receipts of payments to landlord

Simple illustration cash allowance:

In year of assessment from April 1 to following March 31:

Tony has a total salary of HKD3,000,000 and housing allowance HKD1,200,000 from his Hong Kong employer.

Since the employer has no control how Tony spends the allowance, his total income subject to Hong Kong salaries tax as follows: 

 

HKD

Salary

3,000,000

Housing Allowance

1,200,000

Total Assessable Income

4,200,000

 

Simple illustration rent-free accommodation:

In year of assessment from April 1 to following March 31:

  • Tony has a total salary of HKD3,000,000 from Hong Kong employer and employer pays for his housing at a flat leased under the employer name at a total cost of HKD1,200,000.
  • Since the employer is providing the accommodation,

Tony’s total income subject to Hong Kong salaries tax is:

 

HKD

Salary

3,000,000

Rental Value of Accommodation, 10% on all other income (in this case 3,000,000)

300,000

Total Assessable Income

3,300,000


As can be seen by comparing the two, although the net outlay by the employer is the same, being HKD4,200,000, the assessable income of the employee is significantly reduced when it is determined that the employer is providing accommodation to the employee.

Points to note:

  1. Where the taxpayer is a high income earner, then applying 10%, 8%, 4% would have a reverse effect as there would then be an excessively high amount calculated as accommodation provided/reimbursed by the employer (evidenced by comparing rental value with actual rent paid on the property).  In this case, a notional/rateable value is instead obtained and added as the rental value of the accommodation.  This notional/rateable value is found by looking at the assessable value of the property where the employee is residing (the rates notice).
  2. Where rents decrease during the year, payroll and accounting entries should be amended to reflect this amount as reimbursement should never exceed rents paid (converting the excess amount into a type of allowance, at which point the IRD may seek to tax the entire amount as cash allowance).  Where rent increases during the year, such issue will not arise.


Editor's note: the information in this article reflects the prevailing tax regime in Hong Kong as at March 2016. For an update and clarification on the information set out above, please contact Sanjna with the contact details on the side.


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About the Author

Sanjna Melwani, international assignment (tax) expert

After graduating from The Hong Kong Polytechnic, Sanjna commenced her international accounting career with Arthur Andersen, where she qualified for her ACCA. There then followed a tenure as an international tax advisor to globe-trotting Executives in the International Assignment Services (IAS) division of PricewaterhouseCoopers.  She has had a successful career which also covers expense management and HR advisory.

Sanjna now runs her own tax consultancy, Apex Tax Advisory, helping US citizens with their tax matters whilst working abroad, and assisting returnees to the United States.  She is based in Hong Kong.  

If you're an US executive looking to move to Hong Kong (or indeed already living in Hong Kong) and in need of understanding your tax affairs, you can contact Sanjna by email: sanjna@apex-tax.com

Sanjna Melwani, Director
Apex Tax Advisory Limited
E-mail: sanjna@apex-tax.com

Telephone: +852 5617 6573

Address: Room 2207-9, Tower Two, Lippo Centre,
89 Queensway, Admiralty, Hong Kong
www.apex-tax.com

Note: the views and beliefs expressed by our independent contributors are of their own and do not necessarily represent the views of Star Anise.  All tax matters of an individual are unique to that individual, and tax advice should be tailored to suit that individual's needs. 

 

 

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