Hong Kong Property Tax

Chapter 1 Hong Kong Property Tax

1. Learning Outcomes

1.1       Describe what constitutes an “owner” of a property.
1.2       Identify the assessable value of a property.
1.3       Identify allowable deductions under property tax.
1.4       Compute property tax payable.

2. Introduction

2.1 Pursuant to Section 5 of the IRO, property tax (物業稅) is charged for each year of assessment on the owners of any land or buildings or land and buildings situated in Hong Kong, at the standard rate on the net assessable value (應評稅淨值)of such land or buildings or land and buildings.

2.2	DEFINITION
	Land or buildings or land and buildings is defined in Section 7A to include piers (碼頭), wharves and other structure.

2.3       In other words, under territorial principle (屬地原則), only income derived from an immovable property situated in Hong Kong is taxable under property tax. It does not matter whether the owner is a Hong Kong resident or a foreigner.
2.4       If a Hong Kong resident earns income from an immovable property situated outside HK, the income is exempt from HK property tax even though the income is received in HK.
2.5       The standard rate is as follows:

Year of Assessment	2003/04	2004/05 to 2007/08	2008/09
Standard rate	15.5%	16%	15%

2.6 In February 2008, the Financial Secretary proposed in the 2008/09 Budget to reduce the standard rate to 15% as from the year of assessment 2008/2009.

2.7

DEFINITION

Owner in respect of land or buildings or land and buildings, is defined in Section 2 of the IRO to include the following persons:
(a)       a person holding directly from the Government (直接從政府名下持有的人) (i.e. the Government lessee);
(b)       a beneficial owner (實益擁有人);
(c)       a tenant for life (終身租客);
(d)       a mortgagor (按揭人);
(e)       a mortgagee in possession (管有承按人);
(f)        a person with adverse title to land who is receiving rent from buildings or other structures erected on the land (擁有相逆土地業權並就該土地上的建築物或其他構築物收取租金的人);
(g)       a person who is making payments to a cooperative society (合作社) registered under the Cooperative Societies Ordinance for the purpose of the purchase thereof;
(h)       a person who holds land or buildings or land and buildings subject to a ground rent (地租) or other annual charge; and
(i)        an executor of the estate of an owner (遺產的遺囑執行人).

2.8

SCOPE OF CHARGE

(a)       Property tax is charged for each year of assessment on every person being the owner of any land or buildings situated in HK.
(b)       A person includes:
(i)        a corporation;
(ii)       a partnership;
(iii)      a trustee, whether incorporated or unincorporated; or
(iv)      a body of persons.
(c)       With effect from 1 July 2007, the bank is subject to property tax in respect of the rental income payable for the period after it had taken possession. If the bank is a corporation, it may claim exemption under s. 5(2)(a).
(d)       The following owners of property are exempt from property tax:
(i)         government;
(ii)        consular (領事) (for property used for consular purposes or residence of consular employee);
(iii)       charitable bodies;
(iv)       corporations carrying on business in Hong Kong (with rental income chargeable to profits tax);
(v)       those with exemptions granted by the Chief Executive in Council.

3. Assessable Value (應評稅淨值)

(A) Types of income chargeable under property tax

3.1

DEFINITION

Pursuant to Section 5B(2) of the IRO, the assessable value of land or buildings or land and buildings for each year of assessment shall be the consideration, in money or money’s worth, payable in that year to, to the order of, or for the benefit of, the owner in respect of the right of use of that land or buildings or land and buildings.

“Consideration” (代價) includes any consideration payable in respect of the provision of any services or benefits connected with or related to the right of use (e.g. management or service fees payable to the owner).

Consideration for the use of an immovable property includes the following:
(a)       lump sum premiums (整筆使用權費);
(b)       rent;
(c)       payments for the right of use of premises under licence;
(d)       service charges or management fee paid to the owner (not the management fee paid to a person other than the owner, and under that situation, the income is subject to profits tax); and
(e)       payments made on behalf of the landlord by the tenant, such as repairs and improvement to the immovable property.

A deposit with the landlord that is provided for any possible damages to the premises and refundable upon the termination of a lease is not a consideration chargeable to property tax.

3.2       Any consideration previously deducted as irrecoverable and recovered during any year of assessment (i.e. bad debt recovery) shall be treated as consideration payable in that year of assessment (i.e. taxable in the year of recovery).
3.3       Premium refers to the consideration payable in respect of a period of the right of use that is not contained within any one year of assessment.
3.4       For property tax purposes, the “premium” shall be deemed to be payable in equal monthly instalments, either:
(a)        during the period of the right of use, or
(b)        during a period of three years commencing at the start of the period of the right of use to which the consideration relates,
whichever is the shorter.

3.5

EXAMPLE 1

Mr Lau owns a flat and lets the flat to a person for a period of 2 years commencing on 1 June 2008 at a premium of $600,000. Compute the premium to be spread over and assessable in each relevant year of assessment.

The premium is spread over 24 months (i.e. from 1 June 2008 to 31 May 2010) and assessable in the following years of assessment:

Year of assessment 2008/09
Period spread over is 1 June 2008 – 31 March 2009
$600,000 × 10/24 = $250,000

Year of assessment 2009/10
Period spread over is 1 April 2009 – 31 March 2010
$600,000 × 12/24 = $300,000

Year of assessment 2010/11
Period spread over is 1 April 2010 – 31 May 2010
$600,000 × 2/24 = $50,000

3.6

EXERCISE 1

Mr Hui owns a flat and lets the flat to a person for a period of 5 years at a premium of $720,000 commencing on 1 January 2008.

Required:

Compute the premium to be spread over and assessable in each relevant year of assessment.

3.7 Section 5B(2) provides that the assessable value of an immovable property is the consideration payable in the year of assessment. The consideration is taxable on an accrual basis, not on a cash basis. Thus, bad debts may arise from rents not paid by the tenant.

(B) Taxation of income from sub-letting (分租)

3.8 Property tax is a tax charged on the owners of immovable properties. If a person who is not the owner of an immovable property, but sub-lets the whole or part of the property to another person, and receives rental income from the property, the income so derived is not subject to property tax, but profits tax.

(C) Taxation of rental income received by unincorporated business and corporation

3.9

DEFINITION

(a) It is defined in Section 2 that the letting or sub-letting by any corporation is treated as a business, and the income is included in the gross income of the company and subject to profits tax.
(b) Business is defined in Section 2 as agricultural undertaking, poultry (家禽) and pig rearing and the letting or sub-letting by any corporation to any person of any premises or portion thereof, and the sub-letting by any other person of any premises or portion of any premises held by him or her under a lease or tenancy other than from the Government. (Please note that a person holding a lease or tenancy from the Government is defined as owner of an immovable property under Section 2.)

3.10     If the owner of any land or buildings or land and buildings (“the property”) is a corporation, it should apply to the Commissioner in writing for an exemption from property tax under Section 5(2)(a) of the IRO if its rental income is chargeable to profits tax or the property is used or occupied for the purpose of producing chargeable profits.
3.11     Once the exemption is granted, the corporation is obliged to inform the Commissioner of any change in ownership or use of the property within thirty days after the change pursuant to Section 5(2)(c) of the IRO.
3.12     Under Section 25, if a person (including sole proprietorship, partnership and corporation) carries on a trade, a profession or a business, he or she may apply the paid property tax to set off against its profit tax liability.
3.13     If a partnership uses its own immovable property for business purposes, but the property is not fully utilized, and part of its is let to a third person, the income so derived may be assessed under profits tax, instead of property tax.

4. Property Tax Computation

4.1	DEFINITION
	Property tax is charged on the net assessable value of an immovable property tax. Net assessable value is defined in Section 5(1A) as the assessable value of land or buildings or land and buildings less the rates paid by him and a statutory deduction of 20%.

4.2 The following deductions are allowable under property tax:

Allowable deduction	Conditions
Rates	If the owner agrees to pay the rates in respect of the land or buildings or land and buildings, the rates paid by him are deductible from the assessable value.
Bad debts	Any consideration proved to the satisfaction of an assessor to have become irrecoverable during the year of assessment is deductible in ascertaining the assessable value. If there is no or insufficient assessable value for the deduction of the bad debts, the amount of unrelieved bad debts in that year can be carried backward and deducted from the assessable value in the latest year of assessment.
Statutory outgoings	There is a notional deduction for repairs and outgoings of 20% of the assessable value after deduction of any rates agreed to be borne and paid by an owner. Actual expenses incurred on repairs and maintenance are ignored for tax purposes.

4.3 No deduction is allowed for interest paid on a loan to purchase the property unless an election is made for personal assessment.
4.4 The following is a general format of a property tax computation:

Property Tax Computation
Year of Assessment

	HK$
Consideration receivable (e.g. rent)	A
Services fee	B
Repairs paid by tenant on landlord’s behalf	C
Premium (related to that year of assessment)	D
Bad debt recovery	E
	F
Less:
Bad debts	G
Unrelieved bad debts (brought from subsequent year(s) of assessment	H
Assessable value	I
Less:
Rates pay by the owner	J
	K
Less:
Statutory outgoings (20% of K)	L
Net assessable value	M

Tax thereon at standard rate (M x tax rate)	N

4.5

EXAMPLE 2

Mr. X let a flat to Ms. Y at a monthly rent of HK$20,000 from 1 April 2006 to 30 September 2007. Mr. X would like to know his liability for property tax.

Required:

Compute the property tax payable by Mr. X. (Assume there is no bad debt and ignore provisional tax).

Solution:

The property tax payable by Mr. X is computed as follows:

	2006/07	2007/08
	HK$	HK$
Rent	240,000	120,000
Less: Statutory outgoings (20%)	48,000	24,000
Net assessable value	192,000	96,000

Tax thereon @16%	30,720	15,360*

* The Financial Secretary proposed in the 2008/09 Budget to waive 75% of the tax payable for the year of assessment 2007/08, subject to a maximum of $25,000.

4.6       As mentioned in Example 2, a one-off rebate (一次過稅務寬減) of 75% property tax is made to all owners of properties in HK for the year of assessment 2007/08. The maximum amount of rebate for each property let is $25,000.
4.7       If a person owns two properties for rental income, he is entitled to a tax rebate for each property. In other words, he may be entitled to a total tax rebate of $50,000.
4.8       The tax rebate applies to the 2007/08 final tax only, but not to the provisional tax of the same year (2007/08) nor to the provisional tax of the following year (2008/09).

4.9

EXAMPLE 3

Mr Gap owned a house in Sai Kung, and he let it to Mr Lau for a three-year lease from 1 January 2006 to 31 December 2008 at a monthly rent of $30,000, and a premium of $180,000 payable on 1 January 2006. Mr Gap paid the following expenses in connection with the property for the year ended 31 March 2008:

Government rent	$10,800
Interest	$110,000
Rates	$18,000
Repairs and improvement	$20,000

You are required to compute the property tax payable for the year of assessment 2007/08.

Solution:

Mr Gap
Property Tax Computation
Year of Assessment 2007/08

	$
Rent ($30,000 x 12)	360,000
Premium ($180,000 x 12/36)	60,000
Assessable value	420,000
Less: Rates (paid by owner)	18,000
	402,000
Less: Statutory deduction ($402,000 x 20%)	80,400
Net assessable value	321,600

Property tax ($321,600 x 16%)	51,456
Less: Tax rebate	(25,000)
Property tax payable	26,456

(Note: The Government rent, interest and repairs and improvement are not deductible under property tax.)

4.10

EXERCISE 2

Based on the background information provided in Example 2 and assuming that, Ms. Y failed to pay the rent to Mr. X from 1 February 2007 and was subsequently declared bankrupt on 1 October 2007, Mr. X would have a bad debt of HK$160,000 (HK$20,000 × 8 months = HK$160,000) in 2007/08 while the assessable value of 2007/08 only amounts to HK$120,000 (HK$20,000 × 6 months).

Required:

(a) Advise Mr. X on the treatment of the bad debts.
(b) Compute the property tax payable by Mr. X. (Ignore provisional tax).

4.11

EXERCISE 3

Mr Bing owned a flat in Wanchai, and he let it to Mr Quit for a two-year lease from 1 April 2006 to 31 March 2008 at a monthly rent of $40,000. Mr Quit occupied the flat up to 30 April 2007, and disappeared. He did not pay the rent for the six months of November 2006 to April 2007. Mr Bing took back the flat on 1 May 2007, and let it to Mr Lo on 1 September 2007 at a monthly rent of $15,000. Mr Bing paid rates of $2,500 each quarter.

Required:

Compute the property tax payable for the years of assessment of 2006/07 and 2007/08.

5. Provisional Property Tax (暫繳物業稅)

(A) Calculation of provisional property tax

5.1 The amount of provisional tax payable for a year of assessment is usually computed at the standard rate on the net assessable value of the land and/or buildings for the preceding year (s. 63M(1)).

5.2

EXAMPLE 4

Winnie owns property S and let it to Diskson on 1 April 2007 for a term of three years at a monthly rent of $10,000 per month payable at the beginning of each month. Dickson is responsible to pay all the rates under tenancy agreement. The property tax liability of Winnie for the year of assessment 2007/08 (final) and the year of assessment 2008/09 (provisional) is calculated as follows:
Winnie
Property tax computation – Property S

2007/08 (final)	HK$	HK$
Rent ($10,000 x 12)		120,000
Less: Statutory deduction at 20%		(24,000)
Net assessable value		96,000

Property tax thereon at 16%		15,360
Less: 75% tax rebate		(11,520)
Property tax payable		3,840

2008/09 (provisional)
Estimated net assessable value (based on the value preceding year)	96,000
Provisional property tax thereon at 15%		14,400
Total property tax payable		18,240

However, if a person is newly chargeable or the preceding year is not a full year, an estimation can be made by an assessor based on the best information available to him (s. 63M(2) and 63M(3)). Normally the assessor will assess or estimate the amount of provisional property tax which an owner is liable to pay after the time limit for furnishing the return as expired.

5.3

EXERCISE 4

Edwin owns Property T and let it to Mary on July 2007 for a term of two years for a monthly rent of $20,000 payable at the beginning of each month. Mary is responsible to pay all the rates under the tenancy agreement.

Required:

Calculate the property tax liability of Edwin for the year of assessment 2007/08 (final) and the year of assessment 2008/09 (provisional).

(B) Holding over (緩繳暫繳稅) of payment of property tax

5.4       If a chargeable person considers that the provisional property tax is excessive, he can lodge a written application for holding over the payment of provisional property tax with the CIR. The application must be lodged not later than:
(a)        28 days before the due date of payment of provisional property tax; or
(b)        14 days after the date of the notice for payment of provisional property tax,
whichever is the later (s. 63O(1)).
5.5       The four specified grounds for holding over of payment for provisional property tax are:
(a)        The assessable value is, or is likely to be, less than 90% of
(i)         the assessable value for the preceding year of assessment, or
(ii)        the estimated assessable value (s. 63O(2)(a)).
For example, if you are assessed to provisional property tax based on an assessable value of $300,000, you may apply for holding over of payment of provisional tax if the assessable value for the relevant year is, or is likely to be, less than $270,000.

This may occur in case of a reduction in rent or where the property is vacant for a certain period.
(b)        The person has ceased, or will before the end of the year of assessment ceases, to be the owner of the land and/or buildings concerned and the assessable value for the year of assessment is, or is likely to be less than:
(i)         the assessable value for the preceding year of assessment, or
(ii)        the estimated assessable value (s. 63O(b)).
(c)        The person chargeable has ceased personal assessment for that year of assessment and such personal assessment (個人入息課稅) is likely to reduce his property tax liability (s. 63O(c)).
(d)        The person has lodged a valid objection to his assessment to property tax for the preceding year of assessment (s. 63O(d)).

6. Specific Obligations of Property Owners

(A) Keeping of sufficient rental records

6.1       Section 51D of the Inland Revenue Ordinance provides that any person who is the owner of land and/or buildings situated in Hong Kong is required:
(a)        to keep sufficient records in English or Chinese of the rental income to enable the assessable value of that land and/or buildings to be readily ascertained, and
(b)        to retain such records for a period of not less than seven years after the completion of the transactions, acts or operations to which they relate.
6.2       The preservation of the above records is not required if:
(a)       the Commissioner of Inland Revenue has specified that such rental records need not be preserved, or
(b)        the corporation that was the owner of the property has been dissolved.
6.3       If a person fails to comply with the preservation requirement without reasonable excuse, he is guilty of an offence punishable by a maximum fine of $10,000 (s. 80(1)(c)).

(B) Notification of changes in exemption status

6.4 Where the owner is a corporation exempted from property tax under s. 5(2)(a), the owner should notify the CIR in writing within 30 days of any change in the ownership or use of the property or any other circumstances affecting the exemption previously granted (s. 5(2)(c)).

(C) Responsibility of joint owners or co-owners

6.5       Where two or more persons are joint owners or owners in common of any property, each and every owner will have full responsibility for doing all such acts required to be done under the IRO as if he is the sole owner, including the filing of tax returns and paying the tax (s. 56A(a)).
6.6       Furthermore, this obligation does not relieve or affect any right or obligation of the joint owners or owners in common as between themselves (s. 56A(s)).
6.7       If any person has paid property tax for which he would not have been liable except for the provisions of s. 56A(1), he may recover such tax from the person who is liable (s. 56A(3)).

6.8

EXERCISE 5

Mr Tai owns the following properties:
Property A
The property is located in mainland China. It has been let to Mr Lee, a Hong Kong resident, at a monthly rent of $2,000 since 2004. The tenancy agreement was signed in Hong Kong. The monthly management fee of $200 and other charges were paid by Mr Lee.

Property B
The property is located in Wanchai and has been occupied by Mr Tai’s son since Mr Tai purchased the property in 2006. His son contributed $12,000 to Mr Tai for his living expenses for the years of assessment 2006/07 and 2007/08.

Property C
The property is located at Tai Koo Shing and it had been let to Mr Yiu for many years under the following terms:
(a)       Monthly rent: $25,000 payable at the beginning of each month.
(b)       Rates: $2,250 per quarter payable by the landlord.
(c)       Management fee: $1,200 per month payable by the tenant.

After losing his job, Mr Yiu was only able to pay the following rent to Mr Tai starting from 1 February 2007:
February 2007 to July 2007 $5,000 per month
August 2007 to September 2007 $1,000 per month

Mr Yiu moved out of the property on 1 October 2007 and was then untraceable. On 1 February 2008, Mr Yiu was declared bankrupt.

The property was then let to Mr Yung on 1 March 2008 under the following terms:
(a)       Monthly rent: $20,000 payable on the first day of each month.
(b)       Refundable rent deposit: $60,000 payable on 1 March 2008.
(c)       Rates: $2,250 per quarter payable by the landlord.
(d)       Management fee: $1,200 per month payable by the tenant.

After Mr Yiu had moved out of the property, Mr Tai paid the outstanding management fees of $7,200 owed by Mr Yiu on 15 October 2007. Mr Tai also incurred repairs and decoration expenses of $30,000 in the year of assessment 2007/08.

You are advised that Mr Tai has not elected for personal assessment for any year of assessment.

Required:

(a) Compute Mr Tai’s property tax liabilities for each of the above properties for the years of assessment 2006/07 and 2007/08. Ignore provisional property tax. You are required to specify the reason(s) if Mr Tai is not subject to property tax in respect of a particular property.
(14 marks)
(b) Advise Mr Tai on the treatment of the irrecoverable rent as provided under the Inland Revenue Ordinance. (4 marks)
(Total 18 marks)
(Adapted HKIAAT Paper 5 Hong Kong Taxation December 2004)

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Hong Kong Property Tax

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