D. Deductions relating to income chargeable to Salaries Tax
D. Deductions relating to income chargeable to Salaries Tax
Your assessable income is salary for 11 months (i.e. 1 April 2014 to 28 February 2015). Although you had not received the salary for February 2015, 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.
With effect from 1 December 2000, 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 and Schedule 3B 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. 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.
*Note: Normally the profit derived from a partnership business is not reported on “Individual” Tax Return (B.I.R.60). But if the taxpayer switched from an “employee” to a “partner of a business” during the year of assessment, all of the relevant income/profit can be reported through an Individual Tax Return.
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.
If you opt to participate in an MPF-exempted RORS, contributions you make to that scheme are also deductible, subject to the following restrictions:
Year of assessment |
Maximum deduction ($) |
2009/10 to 2011/12 |
12,000 |
2012/13 |
14,500 |
2013/14 |
15,000 |
2014/15 |
17,500 |
2015/16 onwards |
18,000 |
Under sections 12(1) and 12(6) of the Inland Revenue Ordinance, self-education expenses are expenses paid 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 $80,000.
Doing self-study 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 or any other person cannot be deducted.
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 at a specified institution (or education provider) to gain or maintain qualifications for use in the current employment, or a planned new employment. 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:
Starting from the year of assessment 2004/05, a prescribed course of education also covers a training or development course not necessarily provided by, but recognized or accredited by the Vocational Training Council, the Construction Industry Training Council, and the major trade associations for the regulated professions as specified in Schedule 13 of the Inland Revenue Ordinance. Taxpayers applying for the deduction are required to provide a confirmation letter from one of those relevant institutions confirming that the course taken is recognized or accredited by them.
What are specified education providers?
In general, they include:
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.
With reference to Section 26D of the Inland Revenue Ordinance, persons may claim deductions for elderly residential care expenses 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.
The following conditions must be satisfied before the deduction is granted:
"Parent" means:
"Grandparent" means:
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 $80,000 for the year of assessment 2014/15 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 ERCE, but not both.
Under Section 26E(2) and Schedule 3D of the Inland Revenue Ordinance, if you are the sole owner of a dwelling, you can get deductions of HLI paid on the mortgage of your home. The maximum amount of deduction for each year is $100,000.
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.
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 2014/15. 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 2014/15, the total interest paid amounts to $180,000. Both Mr. A and Mr. B claim a deduction for home loan interest in 2014/15.
Result
The share of interest paid by Mr. A and Mr. B in 2014/15 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 IRO). 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 2014/15 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 IRO).
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:
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.
Home loan interest paid for the acquisition of a car parking space is deductible if: