TAXATION

12. Apart from those allowable deductions mentioned in the above Q&A, are there any other allowances available under Profits Tax assessments?

The taxpayers may also enjoy "depreciation allowances" as follows: 

a) Industrial Building Allowances on capital expenditure incurred on the construction of industrial buildings and structures used in certain trades:

• Initial allowance: 20% on the cost of construction of the premises.
• Annual allowance: 4% on the cost of construction of the premises.
• Balancing allowance or charge will be due upon disposal of the premises.

b) Commercial Building Allowances on capital expenditure on construction of such building or structure which is not an industrial building:

• Annual allowance: 4% on the cost of construction of the premises.
• Balancing allowance or charge will be due upon disposal of the premises.

c) Plant and Machinery Allowance on capital expenditure incurred on the provision of plant and machinery for the purpose of producing chargeable profits:

• Initial allowance: 60% on the cost.
• Annual allowance: at rates of 10%, 20% or 30% as prescribed by the Board of Inland Revenue in the Inland Revenue Rules, on the reducing value of the asset. Items qualifying for the same rate of annual allowance are grouped under one "pool".
• A balancing allowance is available only on cessation of a business to which there is no successor. A balancing charge can, however, arise whenever the disposal proceeds of one or more assets exceed the reducing value of the whole "pool" of assets to which the disposed items belong.

13. What is the effect on my liability for Profits Tax if I did not make any profit, but incurred a loss in my business?

The loss can be carried forward for setting off against the future profits of your business. A corporation carrying on more than one trade may have losses in one trade offset against profits of the other.

Alternatively, if you have other income (e.g. salary income) for the same year of assessment, you can select the Personal Assessment option on your tax return. This will enable you to set off the business loss against your other taxable income. Any unutilized loss can be carried forward for setting off against your taxable income in future years.

In allocating losses between partners of a partnership, any salary or interest on loan or capital invested which has been paid to a partner or his/her spouse will be taken into account. Such a payment is treated as if it were a distribution of profits to the partner and the balance of the loss is apportioned on the basis of the agreed profit sharing ratio.

You are warned not to falsify your accounts to show a loss in order to evade tax liability. The Inland Revenue Ordinance contains anti-avoidance provisions to punish people who evade tax.

B. Deductions relating to taxable profits

1. What should be included under the section of Employee and/or Director's remuneration in the tax return?

The "employee" referred to here includes all employees whose remuneration has been charged in the Profit and Loss accounts of the company, irrespective of whether the employees perform their duties in Hong Kong or elsewhere. Remuneration paid by you, as an employer, to overseas employees or staff working in the Mainland should also be included. "Employee" also includes a director of a corporation. However, "employee" does not include a proprietor or partners or their spouses of an unincorporated business.

It is the sum of all salaries, bonuses, wages, cash allowances etc. paid to employees and includes director's fees.

Fringe benefits such as reimbursement of rent for living quarters, reimbursement of travelling expenses, share options granted, passages, medical expenses etc. need not be added unless these have already been grouped under "employee remuneration" in the Profit and Loss account of the company.

You have to maintain payroll records of your employees and keep these records for at least 7 years.

2. Is there any limit on deductions for MPF contributions made by employers for their employees?

Regular/monthly contributions (whether mandatory or voluntary) made to a MPF scheme by persons as employers for their employees are allowable for deduction. The deduction, however, is limited to 15% of the total remuneration of employees for the period to which the payments relate.

Costs spent by the employer in establishing the MPF scheme (see special treatment to initial or special lump sum contributions to the scheme), amending the rules of or winding up the Recognized Occupational Retirement Scheme are generally deductible under Profits Tax. 

Initial or special contributions made by employer to the MPF scheme are deductible under Profits Tax at an even rate over 5 years starting from the year of payment of such contributions.

3. I made mandatory contributions of $18,000 in the year of assessment 2022/23 as a self-employed person. I also employed my wife in running the business and she joined the MPFS. My MPF contribution for her during the same year was $10,000. Can I claim a further deduction for profits tax purposes from her part of contributions?

As the Inland Revenue Ordinance does not permit deduction for MPF contributions in respect of the spouse of a proprietor (or partner), only the mandatory contribution of $18,000 made by you as a self-employed person will be allowed as a deduction in calculating the assessable profits of your business.

4. After the commencement of the MPF scheme, are there any changes to the employer's responsibilities in filing the Employer's Return?

Besides the reporting of employees' emoluments, the employer is also required to report the taxable portion of the accrued benefit that the employees received under the recognized occupational retirement scheme or the MPF schemes. 

5. An employer may occasionally receive a Recovery Notice issued under Section 76(1) of the Inland Revenue Ordinance requiring him/her to deduct the employee's salary for tax payments. Should the employer fulfill this obligation under the Recovery Notice before or after making the income deduction required under the Mandatory Provident Fund Schemes Ordinance?

The Inland Revenue Department is prepared to accept, in the absence of legal precedent to the contrary, the priority of the income deduction for making mandatory contributions to a registered MPF scheme over the income deduction for paying default tax. Mandatory contributions refer to those contributions which an employer has a statutory responsibility to make under section 7A(1)(b) and section 7A(2)(b) of the Mandatory Provident Fund Schemes Ordinance (Cap. 485 of the Laws of Hong Kong). They do not cover other contributions including the employee's voluntary contributions made through the employer under section 11 of that ordinance.

For enquiries about a recovery notice issued by the Inland Revenue Department, please call the telephone number printed on the recovery notice.

C. Allowances relating to Profits Tax

1. I am the sole-proprietor and a partner of 2 companies who is liable to pay Profits Tax. Am I entitled to the basic or other tax allowances (such as child, single parent, dependent parent, dependent grandparent or dependent brother/sister allowances), and Home Loan Interest deduction?

Profits from sole-proprietorship or partnership businesses are taxed at the two-tiered rate  (7.5% on assessable profits up to $2,000,000 and 15% on any part of assessable profits over $2,000,000% for year of assessment 2018/19 onwards) under "Profits Tax". However, if you are eligible to choose "Personal Assessment", you may also claim the following deductions and the tax on your income will be computed at the progressive rates applicable to "Salaries Tax":

1. interest incurred on money borrowed for the purpose of producing property income (the amount deductible should not exceed the net assessable value of the individual property let);
2. approved charitable donations;
3. elderly residential care expenses (from year of assessment 1998/99 onwards);
4. home loan interest (from year of assessment 1998/99 onwards);
5. business losses incurred in the year of assessment;
6. losses brought forward from previous years under "Personal Assessment"; and
7. Personal allowances (include but not limited to basic allowance, child allowance, dependent parent allowance, etc.).

If you are married and your spouse has assessable income, the option of Personal Assessment must be chosen by both of you in the Tax Returns (so that you and your spouse can enjoy the above allowances and deductions).