Salaries Tax Computation

Salaries Tax Computation

Salaries Tax Computation

Chapter 6 Salaries Tax: Computation

1.       Learning Objectives

1.1       Understand the format of the salaries tax computation.
1.2       Understand how to prepare salaries tax computation.
1.3       Understand how to compute salaries tax payable.

2.       Salaries Tax Rates

2.1

KEY POINT

Salaries tax is charged:
(a)        at the progressive rates specified on page xvi on the net chargeable income (應課稅入息實額) of a person (s 13(1)); or
(b)        at the standard rate on the whole of the net assessable income (應評稅入息實額) as reduced by concessionary deductions (s 13(2)(a)),
whichever is lower.

2.2       For the year of assessment 2006/07, 50% of the tax payable under salaries tax and personal assessment will be waived, subject to a ceiling of \$15,000. For couples electing to be jointly assessed, the ceiling of \$15,000 (not \$30,000) is applied on each couple.
2.3       For the year of assessment 2007/08, 75% of the tax payable under salaries tax, property tax, profits tax and personal assessment will be waived, subject to a ceiling of \$25,000. Again, for couples electing to be jointly assessed, the ceiling of \$25,000 (not \$50,000) is applied on each couple.
2.4       If husband and wife are separately assessed under salaries tax, they will be entitled to a maximum tax rebate of \$25,000 each. If they elect for joint assessment, they are entitled to a total maximum tax rebate of \$25,000 only.
2.5       For the year of assessment 2008/09, 100% of the tax payable under salaries tax and personal assessment will be waived, subject to a ceiling of \$8,000.
2.6       Progressive tax rates

 Year of assessments 2004/05 and 2005/06 2006/07 2007/08 2008/09 onward First \$30,000 2% 2% First \$35,000 2% First \$40,000 2% Next \$30,000 8% 7% Next \$35,000 7% Next \$40,000 7% Next \$30,000 14% 13% Next \$35,000 12% Next \$40,000 12% Remainder 20% 19% Remainder 17% Remainder 17%

2.7       Standard tax rate

 2004/05 to 2007/08 2008/09 onward Standard rate 16% 15%

3.       Format of Salaries Tax Computation

3.1       There is no fixed format for a salaries tax computation, and students are free to put the taxable items in whatever order they like. The format suggested in this chapter is for the purpose of arriving at the correct rental value.
3.2       The following format is a typical format of a salaries tax computation for an individual taxpayer for the year of assessment 2007/08.

Mr Lui
Salaries Tax Computation
Year of Assessment 2007/08

\$

\$

Salaries

A

Bonus

B

Taxable allowances

C

Less: Allowable outgoings and expenses

D

Depreciation allowances

E

F

G

Add: Rental value (G x 10%)

H

Less: Rent suffered

I

J

K

Add: Income from other employment (e.g. part-time job)

L

Lump sum received at the termination of employment

M

Gain on share option

N

O

P

Less: Loss bought forward and set-off (if any)

Q

Self-education expenses

R

Net assessable income before concessionary deductions

S

Less: Concessionary deductions

Charitable donation (limited to 25% of P)

T

Elderly residential care expenses

U

Home loan interest

V

Contributions to recognized retirement schemes

W

X

Y

Less: Basic allowance/Married person’s allowance

Z

Child allowance

AA

Dependent parent allowance and/or other allowances

BB

CC

Net chargeable income

DD

Salaries tax thereon:

First \$35,000 @ 2%

700

Next \$35,000 @ 7%

2,450

Next \$35,000 @ 12%

4,200

Remainder @ 17%

a

b

The salaries tax is calculated once more by the following formula under Section 13(2):

Net assessable income before deducting personal allowance x 16%

i.e. Y x 16%

c

The lower of (b) or (c) is taken as the salaries tax liability.

3.3

EXAMPLE 1

Mr Wu was a marketing manager. He received an annual salary totaling \$630,000 and was provided with a rent-free flat by his employer during the year ended 31 March 2008. He paid an annual membership fee of \$1,200 to the Institute of Marketing in December 2007 and donated cash of \$1,000 to the Community Chest in March 2008. He contributed \$31,500 to an MPF scheme. His wife died three years ago. He has to maintain a son aged 15 and his two parents, both of whom are aged over 60. His parents resided with him throughout the year ended 31 March 2008. The salaries tax liability of Mr WU for the year of assessment 2007/08 is:

Mr Wu
Salaries tax computation
Year of assessment 2007/08
Basis period: 1 April 2007 to 31 March 2008

 \$ \$ Income from employment 630,000 Less: Allowable expenses 1,200 628,800 Add: Rental value (\$628,800 x 10%) 62,880 Net assessable income 691,680 Less: Approved charitable donation 1,000 Contributions to recognized retirement scheme 12,000 13,000 Net assessable income after concessionary deductions 678,680 Less: Basic allowance 100,000 Dependent parent allowance 60,000 Additional dependent parent allowance 60,000 Child allowance 50,000 Single parent allowance 100,000 370,000 Net chargeable income 308,680 Net chargeable income at progressive rates: 1st \$105,000 7,350 Balance of \$203,680 at 17% 34,625 41,975 Net assessable income after concessionary deductions at standard rate: \$678,680 x 16% 108,588 Lower of standard rate and progressive rate 41,975 Less: 75% waived, limited to 25,000 Salaries tax payable 16,975

3.4

EXERCISE 1

Fly-up Limited is a company incorporated in HK and carries on business in HK. In March 2007, the company set up a branch in Guangzhou to promote business there.

Mr Wong who is a HK resident is the sales controller of the company and he was seconded to Guangzhou to head the branch there. He stationed in Guangzhou and came back to HK twice a month. During his stay in HK, he went to the Head Office and reported to the managing director about the progress of business in Guangzhou branch, and visited his wife and children. During the year ended 31 March 2008, he stayed in HK for 50 days, and received the following remuneration:

 \$ Salaries 1,000,000 Holiday journey to France with the family 62,000

As he stayed in Mainland China for over 183 days, he paid Chinese individual income tax of HK\$250,000 on his income of HK\$600,000.

Mr Wong contributes 5% of his salaries for his provident fund.

Mr Wong’s wife is housewife and has no employment income. His elder son is 20 years old studying in a university in London, and his younger daughter is 15 years old studying Form 3 in a secondary school in HK.

Required:

Compute Mr Wong’s salaries tax liability for the year of assessment 2007/08.

3.5

EXERCISE 2

The details are the same as Exercise 1 except that Mr Wong is an employee of an overseas, and he stayed in HK for 50 days. He performed services both inside and outside HK. Mr Wong remains a HK resident.

Required:

Compute Mr Wong’s salaries tax liability for the year of assessment 2007/08.

3.6

EXERCISE 3

Mr Lee is a resident of Singapore. Starting from 1 April 2007, he was employed by CB Limited as general manager. CB Limited is a company incorporated and is carrying on business in Hong Kong. The employment contract was negotiated and signed in Singapore between Mr Lee and a director of the company. Mr Lee’s remuneration was paid to him in Hong Kong.

During the year ended 31 March 2008, Mr Lee received the following income:
(1)       Salaries: \$1,440,000
(2)       Bonus: \$90,000
(3)       CB Limited paid \$50,000 to purchase air tickets for Mr Lee and his family to relocate them from Singapore to Hong Kong. During the year, Mr Lee, together with his wife, went to Japan for ten days during the vacation leave and he received a holiday passage of \$25,000 from CB Limited. He spent the whole sum for joining a holiday tour and he submitted the receipts rent of \$24,000 to him.
(4)       During the period from 1 April 2007 to 30 April 2007, Mr Lee lived in a hotel suite with one bedroom and the bill of \$18,000 was issued for the account of CB Limited. Starting from 1 May 2007, he leased a flat at a monthly rent of \$25,000 and CB Limited reimbursed monthly rent of \$24,000 to him.
(5)       CB Limited paid electricity, gas and water bills on behalf of Mr Lee in the total sum of \$32,000.
(6)       For business purposes, Mr Lee joined a recreation club for an entrance fee of \$60,000 with an annual membership fee of \$48,000. He received a 50% reimbursement from CB Limited for both the entrance fee and annual membership fee.
(7)       CB Limited provided Mr Lee with a company car for personal use. The cost of the car was \$300,000 and its second hand value as at 31 March 2008 was \$210,000. Mr Lee received monthly petrol allowance of \$1,500 starting from 1 April 2007.
(8)       On 1 September 2007, he was granted the right to subscribe for 100,000 shares in CB Holding Limited, the parent company of CB Limited, at a price of \$3 each. On 1 February 2008, he exercised the option. On 15 March 2008, he sold 50,000 shares. The market values of the shares of CB Holding Limited at the above relevant dates were as follows:

 Date Market value per share 1 September 2007 \$5 1 February 2008 \$8 15 March 2008 12

During the year ended 31 March 2008, Mr Lee paid for the following expenses:
(1)       Membership fee to a professional management association in Singapore: \$2,500
(2)       Tuition fees for a Higher Diploma course in China Business organized by a university in Hong Kong: \$10,000
(3)       Cash donations to approved charitable institutions: \$200,000
(4)       Mandatory contributions to an MPF scheme: \$12,000

Mr Lee is married with two children. Mrs Lee is a housewife and she spent half of the year ended 31 March 2008 in Singapore. Their children are aged 27 and 22 and they are studying full-time in Singapore.

Required:

(a)       Explain to Mr Lee whether he has a Hong Kong employment.
(5 marks)
(b)       Compute Mr Lee’s chargeable share option gain for the year of assessment 2007/08.                                                                  (2 marks)
(c)       Compute Mr Lee’s salaries tax liability for the year of assessment 2007/08. (Show all your workings.)                                        (11 marks)
(Total: 18 marks)
(Adapted HKIAAT Paper 5 Hong Kong Taxation June 2008 C1)

4.       Separate Assessment and Joint Assessment (夫婦合併評稅)

4.1       Under salaries tax, each taxpayer is assessed on his or her own income, no matter whether they are single or married. For married couples, unless they elect for joint assessment under salaries tax, each of them will receive his or her own salaries tax assessment.

(A)       Basic allowance for separate assessment for married couples

4.2       When married couple does not elect for joint assessment, each of them is entitled to basic single allowance (not married person’s allowance).

(B)       Child allowance for separate assessment for married couples

4.3       If any one of them wishes to claim child allowance, the child allowance for all the children is to be claimed by one of them in block. The child allowance cannot be split.

(C)       Dependent parent allowance for separate assessment for married couples

4.4       However, dependent parent allowance and dependent grandparent allowance may be claimed by either one of them on individual parent or individual grandparent basis. For example, the husband may claim dependent parent allowance for his father while the wife may claim dependent parent allowance for her mother-in-law.

(D)       Charitable donation for separate assessment for married couples

4.5       If the charitable donation exceeds the deduction limit of 25% (for 2003/04 to 2007/08) or 35% (from 2008/09 onward), the unrelieved charitable donation may be transferred to the spouse for deduction from his or her assessable income.

(E)       Joint assessment

4.6       A joint assessment is only issued to a couple if both the husband and the wife signify in their individual salaries tax return that they apply for joint assessment. If there is no indication for joint assessment, separate salaries tax assessment is issued to the husband and the wife.

4.7

KEY POINT

An election for joint assessment may be made:
(a)       jointly by the husband and wife
(b)       in a specified form (s 11(1))
(c)       where both the husband and wife have assessable income, if either
(i)        the net assessable income of one spouse is less than his or her concessionary deductions and personal allowance; or
(ii)       the total tax payable by the husband and wife under separate taxation is greater than that under joint assessment (s 10(2)).

(F)       Time limit for election

4.8       The time limit for election is:
(a)        one year after the year of assessment in question, or
(b)      one month after the date on which the salaries tax assessment has become final and conclusive,
Whichever is later (s 70).
4.9       The CIR may grant an extension in time for lodging the election in circumstances which he considers to be reasonable (s 11(2)).

(G)       Income for joint assessment

4.10     All the assessable income of a couple is grouped under one salaries tax assessment, and married person’s allowance (not basic single allowance) is granted. All the other concessionary deductions and personal allowances are grouped together and they are deductible from their joint assessable income.

(H)       Payment of salaries tax for joint assessment

4.11     For joint assessment, all the incomes of husband and wife from employment, office and pension are grouped together, and all the deductions and allowances are subtracted from the total income. After that, the allowances available are also deducted from such net amount, and salaries tax is calculated on the joint net chargeable income.
4.12     The following spouse is liable to pay the tax on the joint assessment:
(a)        in the case of an election under which either spouse’s net assessable income is less than his/her personal allowance, the spouse who would have been chargeable to salaries tax in the absence of such an election.
(b)        In the case of an election under which the tax under joint assessment is less than the total tax under separate taxation, the spouse nominated by the husband and wife (s 10(3)).

(I)        When joint assessment is beneficial

4.13     Generally, separate assessment is beneficial if both the husband and the wife are chargeable to salaries tax, and each of their income exceeds the limit of basic allowance. On the other hand, if one of the spouses is not chargeable with salaries tax or the income of one spouse is below the basic personal allowance, it is beneficial for the couple to elect for joint assessment.

4.14

EXAMPLE 2

Mr Kam works for a HK company and received a monthly salary of \$40,000 for the year ended 31 March 2008.

His wife works as a part-time accountant for a small firm and received a monthly salary of \$8,000 for the year ended 31 March 2008. Mrs Kam paid charitable donation of \$30,000 to her church for the year ended 31 March 2008.

Mr and Mrs Kam have two children at the age of 10 and 15. Mr Kam’s mother, age 65, lives in a registered nursing home in HK, and he paid \$6,000 each month to support her nursing home fee.

Required:

Compute Mr and Mrs Kam’s salaries tax liability for the year of assessment 2007/08.

Solution:
Mr and Mrs Kam
Salaries Tax Computation
Year of Assessment 2007/08

 Mr Kam Mrs Kam \$ \$ Salary 480,000 96,000 Less: Charitable donation * (6,000) 24,000) Elderly residential care expenses (60,000) 0 Net assessable income after concessionary deductions 414,000 72,000 486,000 Less: Married person’s allowance 200,000 Child allowance 100,000 300,000 Net chargeable income 186,000 Salaries tax thereon 35,000 @ 2% 700 35,000 @ 7% 2,450 35,000 @ 12% 4,200 81,000 @ 17% 13,770 21,120 Net assessable income at standard rate: 486,000 × 16% 77,760 Lower of standard rate and progressive rates 21,120 Less: 75% waived 15,840 Salaries tax payable 5,280

(Salaries tax payable by the nominated spouse or the spouse who would have been liable to pay salaries tax under separate taxation.)

*       The maximum charitable donation that can be deducted from Mrs Kam’s income is 25% of \$96,000, and only \$24,000 is deductible. The unrelieved charitable donation of \$6,000 may be deductible from Mr Kam’s assessable income. The deduction is also subject to the maximum amount of 25% on Mr Kam’s income.

4.15

EXERCISE 4

Mr Chan is a news reporter employed by Hong Kong Daily News. During the year of assessment 2007/08, he has the following income/benefits.
1.      Monthly salary of \$40,000
2.      Bonus \$40,000
3.      A holiday passage allowance of \$50,000, 2/5 of which was used to purchase holiday warrants for himself and his wife whilst the balance was retained by him
4.      Free education benefits for his only son, aged 12, the tuition fee for the year was \$150,000.

Mr Chan is required to incur all local traveling expenses in the performance of his duties. The total traveling expenses incurred during the year amounted \$20,000.

During the year Mr Chan donated \$88,000 to the Community Chest and contributed 5% of his monthly salary to the company’s retirement scheme that is a MPF – exempted scheme.

Mrs Chan is a teacher and her salary for the year ending 31 March 2008 was \$360,000.

Required:

(a)    Compute the salaries tax liability of Mr and Mrs Chan for the year of assessment 2007/08 under separate taxation assuming that Mr Chan is nominated to claim the child allowance.
(b)    Compute the salaries tax liability of Mr and Mrs Chan for the year of assessment 2007/08 under joint assessment.
(c)    Advise if Mr and Mrs Chan should elect joint assessment.

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Salaries Tax Computation

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Salaries Tax Computation

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