TAXATION

D. Deductions relating to income chargeable to Salaries Tax

1. I resigned (without advance notice) and left the company on 1 March 2023. As I was required to pay one month's salary in lieu of notice to my employer, my employer did not pay me the salary for February 2023. For the year of assessment 2022/23, should I pay tax on my salary for 10 months or 11 months?

Your assessable income is salary for 11 months (i.e. 1 April 2022 to 28 February 2023). Although you had not received the salary for February 2023, it was actually used to offset the money in lieu of notice that you ought to pay.

Section 12(1)(a) of the Inland Revenue Ordinance stipulates that “in ascertaining the net assessable income of a person for any year of assessment, there shall be deducted from the assessable income of that person all outgoings and expenses……. wholly, exclusively and necessarily incurred in the production of the assessable income .” There was also an Inland Revenue Appeal Case heard at the High Court (Commissioner of Inland Revenue v Sin Chun Wah) in which the Court held that the salary paid by the employee in lieu of notice of termination was not expenditure incurred in the production of emoluments, and hence it was not deductible from the employee's assessable income.

Therefore, you cannot claim a deduction of the salary in lieu of notice paid by you as an expense for producing income.

2. How are the contributions made to an MPF scheme (MPFS) deducted for tax purposes?

Employees (full-time or part-time) and self- employed persons, except persons exempt under the Mandatory Provident Fund Schemes Ordinance, are required to participate in MPFS.

Under Section 26G of the Inland Revenue Ordinance, mandatory contributions to MPFS are deductible in computing the assessable income/profits of an employee or a self-employed person, but the deduction does not include contributions made by a self-employed person in respect of his/her employees. The deduction cannot be greater than the annual maximum deductible amount. The maximum deduction is $18,000 from the year of assessment 2017/18 onwards.  All contributions other than mandatory contributions are voluntary contributions and are not deductible for tax purposes.

For the latest information on deduction for contributions to MPFS and Recognised Occupational Retirement Schemes, please click here.

3. I am a director of a company and receive director's remuneration. Can I claim deductions for tax purposes from my MPF contributions?

An executive director receiving salaries under a contract of employment is required to join a MPFS, and is entitled to a tax deduction for mandatory contributions each year. Any voluntary contributions to a MPFS are not deductible for tax purposes.

A director who receives director's fees in contrast is not considered an employee and is not required to take part in the MPFS.

4. If I contribute to a Recognized Occupational Retirement Scheme (“RORS”) rather than a MPF scheme, can I still claim deductions?

If you opt to participate in an MPF-exempted RORS, contributions you make to that scheme are also deductible, subject to the following restrictions:

• the amount deductible is the lesser of two amounts, that is, the amount you actually contributed to the RORS or the amount of mandatory contribution that you would have been required to pay had that scheme been an MPF scheme; and
• the maximum deduction for each year of assessment is $18,000 for the year of assessment 2018/19 onwards.

5. What are expenses of self-education? Can I claim a deduction for tax purposes if I undertake a course related to my employment?

Under sections 12(1) and 12(6) of the Inland Revenue Ordinance, self-education expenses are expenses paid by the taxpayer for fees (including tuition and examination fees) in connection with a prescribed course of education conducted by , or examination fees paid for examinations held by, a specified institution (or education provider) for the purpose of gaining or maintaining qualifications for use in any employment. The amount of deduction per year must not exceed $100,000 starting from the assessment year 2017/18 onwards. 

Self-studying is not undertaking “a prescribed course of education”. Hence, expenses incurred in connection with self-study, such as on the purchase of books, cannot be claimed. However, the scope of self-education expenses is extended to cover fees for qualified examinations set by professional bodies without requiring the taxpayers to undertake a prescribed course of education. Examples of these professions include certified public accountants, surveyors or architects, etc.

Fees that have been reimbursed or are reimbursable by an employer, the Government (such as under the Continuing Education Fund) or any other person cannot be deducted unless the reimbursement is taxable.

What is a “prescribed course of education”?

A “prescribed course of education” (as defined under section 12(6) of the Inland Revenue Ordinance,) is a course undertaken to gain or maintain qualifications for use in the current employment, or a planned new employment and being: 

• a course of education provided by an education provider; or
• a training or development course provided by a trade, professional or business association (e.g. Hong Kong Institute of Bankers, Hong Kong Management Association, The Association of Chartered Certified Accountants, Institution of Mechanical Engineers, Professional Insurance Brokers Association, Quality Tourism Services Association, etc.); or
• a training or development course accredited or recognized by an institution specified in Schedule 13 of the Inland Revenue Ordinance.

In other words, the course must be related either to the present job or a job in the future. For examples, course fees in the following situations may be qualified for deductions: 

• a management course taken by a business executive;
• a commercial or computer course taken by a secretary or clerk;
• a vocational training course taken by a technician;
• a continuing professional development seminar taken by an accountant or a lawyer. 

A prescribed course of education has to be a course undertaken by the taxpayer. The amount is not deductible if the taxpayer did not participate in any lessons.

Course of education provided by an education provider

In general, education providers include:

• any university, university college or technical college either in Hong Kong or overseas;
• any technical institute, industrial training centre, vocational training centre or skills centre in Hong Kong;
• any Government school or other school registered or exempted from registration under the Education Ordinance;
• any institution approved by the Commissioner of Inland Revenue;

Private tutoring fees are not deductible since they are not paid in connection with a prescribed course of education and are not provided by a specified education provider. 

6. If I did not undertake any prescribed course of education but just sat the professional examination set by a professional body (such as the Hong Kong Institute of Certified Public Accountants) for its members, can I claim the examination fee as a tax deduction?

If you sat for the examination for the purpose of gaining or maintaining a professional qualification for use in your employment, the examination fees are deductible (see section 12(6)(b)(ii) of the Inland Revenue Ordinance).

If the relevant examination fee is reimbursed or will be reimbursed by you employer, you cannot claim deduction under this item.

7. Who are eligible to claim deductions under “Elderly Residential Care Expenses”(ERCE)? What is the maximum deduction?

With reference to Section 26D of the Inland Revenue Ordinance, persons may claim deductions for ERCE paid by them (or their spouses) to residential care homes in respect of their parents or grandparents or (their spouses' parents or grandparents). The deduction may be allowed under Salaries Tax and Personal Assessment. A person subject to tax at the standard rate is also entitled to the deduction. You may claim the deduction for ERCE in Part 11.4 of your Tax Return – Individuals.

The following conditions must be satisfied before the deduction is granted: 

1. The parent/grandparent is a parent/grandparent of the taxpayer or his/her spouse.
2. The parent/grandparent is aged 60 or above at any time in the year of assessment, or under 60 but eligible to claim an allowance under the Government's Disability Allowance Scheme.
3. The parent/grandparent was receiving residential care in a residential care home in the year of assessment.
4. The expenses were paid to a residential care home or any person acting on its behalf.
5. The expenses were paid by the taxpayer or his/her spouse in the year of assessment (net of any reimbursement by any person or organisation). In other words, the husband may claim deduction for payments made by his wife, and vice versa.
6. The residential care home is situated in Hong Kong and is licensed or exempted from licensing under the Residential Care Homes (Elderly Persons) Ordinance or Residential Care Homes (Persons with Disabilities) Ordinance, or is a scheduled nursing home within the meaning of the Private Healthcare Facilities Ordinance (Chapter 633) for which an exemption granted under section 128 of that Ordinance is in force..
7. Only one person may be granted the deduction in respect of the same parent or grandparent for a year of assessment. Where more than one person, who is entitled to claim the deduction, contributes to the payment of the residential care expenses of a parent or grandparent, it is necessary for them to agree amongst themselves as to which of them will claim the deduction for the year of assessment. In short, there is no apportionment among the payers allowed. In the event that they are unable to agree, no deduction may be allowed.

"Parent" means:

1. A natural father or mother of the taxpayer or his/her spouse; or 
2. A parent by whom the taxpayer or his/her spouse was legally adopted; or 
3. A step-parent of the taxpayer or his/her spouse; or 
4. A parent of the taxpayer's deceased spouse.

"Grandparent" means: 

1. A natural grandfather or grandmother of the taxpayer or his/her spouse; or 
2. An adoptive grandparent of the taxpayer or his/her spouse; or 
3. A step-grandparent of the taxpayer or his/her spouse; or 
4. A grandparent of the taxpayer's deceased spouse.

Allowable deduction amounts

The deduction allowed is for expenses actually paid in the year of assessment to a residential care home in respect of the residential care received, subject to a maximum of $100,000 for the year of assessment 2018/19 and onwards for each parent or grandparent. 

The deduction covers only the cost of care provided to the parent or grandparent who is resident in a residential care home. Medical expenses, for example, paid to doctors and/or hospitals are not deductible.

In respect of the same dependant, you can claim Dependent Parent Allowance (or  Dependent Grandparent Allowance) or ERCE, but not both. However, if the same parent or grandparent qualifies for Disabled Dependent Allowance, it may still be claimed. 

8. What is the maximum amount of tax deduction under Home Loan Interest?

Under Section 26E(2)  of the Inland Revenue Ordinance, if you are the registered sole owner of a dwelling, you can get deductions of Home Loan Interest paid on the mortgage of your home. The maximum amount of deduction for each year is $100,000 from the year of assessment 2017/18 onwards.

With effect from the year of assessment 2012/13, the number of years of deduction for home loan interest is extended from 10 to 15 (not necessarily consecutive) years of assessment, while maintaining the current deduction ceiling of $100,000 a year.  The additional 5 years home loan interest deduction is not applicable to the year of assessment prior to the year of assessment 2012/13. However, it will not affect taxpayers’ entitlement (including those who had already got the deduction of home loan interest for 10 years of assessment) of the 5 additional years deduction from the year of assessment 2012/13 and onwards. 

With effect from the year of assessment 2017/18, the number of years that home loan interest can be deducted is further increased from 15 to 20 (not necessarily consecutive) years of assessment, with the annual deduction cap remaining at $100,000. 

If you are the joint tenant or the tenant in common of a dwelling, the home loan interest is regarded as having been paid by the joint tenants each in proportion to the number of joint tenants, or by the tenants in common each in proportion to his or her share of ownership in the dwelling. The amount of allowable deduction for each person is calculated accordingly, and the maximum deduction is also similarly reduced.

Example 1 - A dwelling owned by joint tenants

Mr. A and Mr. B are joint owners of a dwelling which they used exclusively as their place of residence throughout 2022/23. The dwelling was acquired 4 years ago with a mortgage loan, borrowed by them jointly from a bank, repayable by monthly installments over a 10-year period. During 2022/23, the total interest paid amounts to $180,000. Both Mr. A and Mr. B claim a deduction for home loan interest in 2022/23.

Result
The share of interest paid by Mr. A and Mr. B in 2022/23 is $90,000 each. A deduction limited to $50,000 is allowed to Mr. A and Mr. B each, which is the maximum allowable deduction in proportion to the number of the joint tenants (sections 26E(2)(b)(i) and 26E(2)(c)(i) of Inland Revenue Ordinance). Remember that the total available deduction in respect of the property is $100,000.

Example 2 – A dwelling owned by tenants in common

Same facts as in Example 1 except for that Mr. A and Mr. B are tenants in common with the proportion of shares being 1/4 and 3/4 respectively.

Result

The share of interest paid by Mr. A and Mr. B in 2022/23 is $45,000 and $135,000 respectively. A deduction of $25,000 and $75,000 is allowed to Mr. A and Mr. B respectively, which is the maximum allowable deduction in proportion to their respective share of ownership in the dwelling (sections 26E(2)(b)(ii) and 26E(2)(c)(ii) of Inland Revenue Ordinance).

For more scenarios, please click here.

Is the "penalty interest" paid to a bank for the early redemption of a mortgage on the dwelling deductible?

Not deductible. This is a penalty levied by the bank. It is not loan interest.

What are the requirements for the grant of deduction?

According to Section 26E of the Inland Revenue Ordinance, all the following conditions must be satisfied before the deduction is granted:

1. the person (taxpayer) claiming the deduction is the owner of the dwelling (either as a sole owner, a joint tenant or a tenant in common) as shown in the records of the Land Registry;
2. the dwelling is a separate rateable unit under the Rating Ordinance (i.e. it is situated in Hong Kong); 
3. the dwelling is wholly or partly used by the person as his place of residence in the year of assessment (if the dwelling is partly used as the place of residence, the amount of interest deductible will be restricted accordingly); 
4. home loan interest is paid by the taxpayer during the year of assessment on a loan for the acquisition of the dwelling;
5. the loan is secured by a mortgage or charge over the dwelling or over any other property in Hong Kong; and 
6. the lender is an organization prescribed under Section 26E(9) of the Inland Revenue Ordinance, i.e. 

• the Government,
• a financial institution,
• a registered credit union,
• a licensed money lender,
• the Hong Kong Housing Society,
• the person's employer, or
• any organization or association approved by the Commissioner of Inland Revenue.

How to claim home loan interest deductions for married persons?

The principal residence of a married couple who are not living apart should always be the same. The married couple is unable to claim that their two separate homes, each of which they concurrently own, serve as their principal residences. They are not eligible to deduct home loan interest for various homes they each own independently. The principal residence of a married couple will be determined by the facts of each instance, and the interest paid on that residence will be deductible to its owner(s). For the same time period, the other spouse will not be eligible for any house loan interest deductions. 

If the property is not used as the owner's dwelling but is let out with rental income, please refer to Personal Assessment for how to claim a deduction on loan interest.

9. Can mortgage interest paid for the acquisition of a car parking space be claimed for tax deduction?

Home loan interest paid for the acquisition of a car parking space is deductible if:

1. the car parking space is located in the same development as the dwelling in respect of which home loan interest is being claimed in the same year of assessment; and
2. the car parking space is for the use of the owner of the said dwelling.