Chapter 4 Salaries Tax: Expenses and Deductions

1.       Learning Objectives

1.1       Understand when outgoings and expenses are deductible under salaries tax.
1.2       Understand when depreciation allowance is deductible under salaries tax.
1.3       Understand when self-education expenses are deductible under salaries tax.
1.4       Understand the differences between deductions under salaries tax and concessionary deductions.
1.5       Understand when charitable donations are deductible from assessable income.
1.6       Understand when elderly residential care expenses are deductible from assessable income.
1.7       Understand when home loan interest is deductible from assessable income.
1.8       Understand when contribution to recognized retirement scheme are deductible from assessable income.

2.       Introduction

2.1       There are two types of deductions available under salaries tax, namely those deductible under section 12 and concessionary (特許的) deductions under Part IVA. Deductions under section 12 are for the purpose of salaries tax only while concessionary deductions are available under both salaries tax and personal assessment.

3.       Outgoings (支出) and Expenses (開支) under Section 12(1)(a)

3.2       This section provides 8 hurdles (阻欄) for an expense to be deductible, and they are as follows:
(a)        not domestic,
(b)        not private,
(c)        not capital,
(d)        wholly,
(e)        exclusively,
(f)        necessarily,
(g)        incurred, and
(h)        in the production of assessable income.

3.4       Examples of expenses not regarded as deductible under section 12(1)(a) and DIPN 9 include the following.

(A)       Travelling expenses

3.5       Travelling expenses between home and the place of employment are not allowable (CIR v Humphrey HKTC 451).
3.6       However, expenses for traveling from one place of employment to another will be allowable (Taylor v Provan (1974) 49 TC 579).

(B)       Subscriptions to professional associations

3.7       In principle, subscriptions are not allowable in accordance with the strict interpretation of the deductibility of expenses because they are incurred in order to enable the taxpayer to produce income (CIR v Robert Burns).
3.8       However, by an extra-statutory concession, a subscription to a professional body will be allowable, provided that the retention of membership in the body is a prerequisite (先決條件) of the employment and the retention of membership and keeping abreast of current development in that particular profession is of regular use and benefit in the employment.
3.9       However, only a full member is entitled to the concession. A student member is not so entitled.

(C)       Further education and examination fees

3.10     An employee, even if required by his employer to undertake further studies, is not allowed to deduct the expenses so incurred (Blackwell v Mills (1945) 26 TC 468). The expense is private and domestic in nature and also not incurred in the production of assessable income.
3.11    Likewise, examination fees to sit for professional examinations are not allowable (Lupton v Potts (1969) 45 TC 643).

(D)       Expenses of self-education (個人進修開支)

3.12     Expenses of self-education paid by a salaries taxpayer in a year of assessment can be deducted from the assessable income of that person for that year of assessment as a concessionary deduction provided that the total amount that may be deducted in any year of assessment does not exceed the prescribed amount specified in Schedule 3A of the IRO (s 12(6)(a)). The prescribed amount for the year of assessment 2008/09 is HK$60,000.

3.14     If the self-education expenses are wholly or partly reimbursed by an employer or other party, the amount so reimbursed for the purpose of self-education expenses is not treated as the employee’s income and they are not assessable under salaries tax while the same amount cannot be claimed as a deduction under salaries tax by the employee.
3.15     With effect from 25 June 2004, qualifying self-education expenses are extended to include fees in respect of an examination set by an education provider of a trade, professional or a business organization, and undertaken by the taxpayer to gain or maintain qualification for use in any employment, e.g. examination fee for any professional accountancy bodies.
3.16     General interest class, e.g. a Tai Chi class, will not qualify as an employment-related course. In D 138/00, a police constable was unable to convince the BoR that a Chinese opera course was relevant for a prospective employment.

(E)       Entertainment

3.17     Mere social entertainment is not allowable. The entertainment must be wholly, exclusively and necessarily incurred in the production of assessable income. Records must be kept of details of costs, identify of persons entertained, and the nature of business.

(F)       Clothing

3.18     These are normally not allowable. Clothing fails to satisfy the “wholly and exclusively” test because clothing also serves the private purpose of providing cover and warmth to the body. Special clothing for use in employment may qualify.

(G)       Commission (including gifts)

3.19     Persons earning commission may in turns have to pay commission in order to secure contracts or sales (e.g. salesmen). The commission paid by them may be allowable provided that s 12(1)(a) is fulfilled and also that full particulars of recipients and amounts received by them are disclosed to the IRD. Documentary evidence of payment of the commission must be kept.

4.       Allowances

(A)       Expense allowances

4.1       Allowances from employer to cover expenses which qualify for deduction under s 12(1)(a) are exempt. Otherwise, the allowances are taxable (such as the reimbursement of traveling expenses in CIR v Humphrey HKTC 451).

(B)       Removal allowances

4.2       In D 11/88, a civil servant was required by his employer to move to a new residence. It was held that the removal expenses were not allowable and the removal allowance received was taxable.

(C)       Depreciation allowances

4.3       Depreciation allowances are granted in respect of plant and machinery, the use of which is essential to the production of assessable income (s 12(1)(b)).
4.4       The important word is essential. If the plant or machinery merely helps an employee to do his or her work more smoothly or efficiently, it does not satisfy the condition of “essential”.
4.5       Depreciation allowances can only be granted if the employer does not provide the equipment (D 51/99 and D 89/89).
4.6       Section 12(2) provides that where any machinery or plant is not used wholly and exclusively in the production of assessable income, the depreciation allowance may be apportioned and the portion for private use is not deductible from the assessable income.
4.7       The difference between sections 12(1)(a) and (b) is that the condition for granting deduction of expenses under section 12(1)(a) is very restrictive in that it must be wholly, exclusively and necessarily incurred in the production of assessable income. However, the condition for depreciation allowance is less restrictive in that as long as the machinery or plant is essential to the production of the assessable income, the depreciation allowance is granted for deduction.

5.       Concessionary Deductions

(A)       Approved charitable allowance (認可慈善捐款)

5.1       Section 26C provides that charitable donations actually paid out by an employee in a year of assessment may be deductible from his or her net assessable income before ascertaining his or her net chargeable income.
5.2       The donation must be made in cash. Donation made in kind, e.g. gift of books or equipment, or its cash equivalent is not deductible under salaries tax or personal assessment.
5.3       The donation must be made to a charitable institution approved by the CIR under section 88, and supported by evidence of payment. The aggregate of approved charitable donations must be not less than HK$100.
5.4       With effect from the year of assessment 2003/2004 to 2007/2008, the maximum amount of charitable donations deductible from assessable income is increased from 10% to 25% of the assessable income. For year of assessment 2008/2009 onwards, the maximum deduction is increased 35% of the assessable income.

(B)       Elderly residential care expenses (長者住宿照顧開支)

5.7      Section 26D was first enacted for the year of assessment 1998/1999 via the Inland Revenue (Amendment) Ordinance 1998 to allow the deduction of an expense paid for the nursing home of a parent or a grandparent who is over 60 years old or eligible for an allowance under the Government’s Disability Allowance Scheme (香港政府傷殘津貼計劃).

5.9       Conditions for the deduction:
(a)        Qualifying person and payment
Section 26D(1) provides that where a person or his or her spouse, not being a spouse living apart from the person, pays during any year of assessment any residential care expense in respect of a parent or a grandparent of the person who at any time in that year of assessment is
(i)         aged 60 or more, or
(ii)        being under the age of 60, is eligible to claim an allowance under the Government’s Disability Allowance Scheme.
(b)        Qualifying payment – the payment must be made to an approved elderly residential care home in HK.
(c)        Qualifying deduction – the amount deductible for each parent or grandparent is limited $60,000 for a year of assessment as provided in Schedule 3C of the IRO.
5.10     Section 26D(2) provides that a deduction of the elderly residential care expenses is allowed to a person in respect of each parent or grandparent of the person. If there are two parents living in a residential care home, the person may claim the elderly residential care expenses for both parents.
5.11     No double claim in respect of the same person
(a)        If more than one person claim the deduction in respect of the same parent or the same grandparent, the CIR will disallow the deduction until a compromise has been reached among the family members who claim for the deduction.
(b)        If a parent or a grandparent has been granted with the deduction of the elderly residential care expenses, no dependent parent allowance nor dependent grandparent allowance will be granted in respect of the same person and vice versa.

(C)       Home loan interest

5.13     Section 26E and 26F were first enacted for the year of assessment 1998/1999 via the Inland Revenue (Amendment) Ordinance 1998 to allow deduction of interest expenses incurred for the purchase of a home by a person.

(a)        Qualifying premises

5.14     Dwelling (住宅) – Section 26E(1) provides that where a person pays during any year of assessment any home loan interest for the purposes of a home loan obtained in respect of a dwelling which is used at any time in that year of assessment by the person exclusively or partly as his place of residence, a deduction in respect of the home loan interest shall be allowable to that person for the year of assessment.
5.15     The dwelling must be situated in HK.
5.16     Car-parking space – If the home loan includes a car parking space, such car parking space shall be deemed to be part and parcel of the dwelling provided that the car parking space is used in the same manner and to the same extent as the dwelling is used as his place of residence.

(b)        Qualifying institutions for claiming home loan interest

5.18     Home loan interest in relation to a person claiming a deduction in respect of a dwelling under salaries tax or personal assessment means interest paid to:
(a)        the Government;
(b)        a financial institution;
(c)        an employer of the person;
(d)        a registered credit union;
(e)        a licensed money lender;
(f)        the HK Housing Society; or
(g)        a recognized organization or association approved by the CIR.

(c)        Claiming amount

5.20     The maximum amount of home loan interest deductible may vary each year according to the amount specified in Schedule 3D of the IRO. The maximum amount for the year of assessment 2003/2004 onward is $100,000.

(d)        Apportionment of the home loan interest deduction

5.22     Joint tenant (共有業權) – If the dwelling is held by the person as a joint tenant, the amount of the home loan interest paid will be regarded as having been paid by the joint tenants each in proportion to the number of the joint tenant (s 26E(2)(b)(i)).

5.24     Tenant in common (共享權益) – If the dwelling is held by the person as a tenant in common, the amount of the home loan interest paid will be regarded as having been paid by the tenants in common each in proportion to his/her share in ownership in the dwelling (s 26E(2)(b)(ii)).

5.26     Partly use – Section 26E(3)(a) provides that if the home loan is not applied wholly for the acquisition of the dwelling, the deduction allowable is such part of the amount of the home loan interest paid as is reasonable in the circumstances of the case. For example, a loan is used to finance an immovable property which is partly used for business purpose and partly for the owner’s residential purpose.
5.27     No apportionment of part of a year – If a person purchases and lives in an immovable property for part of a year, it is not necessary to apportion the full amount of home loan interest entitled.
5.28     More than one dwelling concurrently – Section 26E(3)(b) provides that if a person has more than one dwelling, and financed by two different home loans, the amount of interest expenses of these two loans are deductible to the extent that is reasonable in the circumstances of the case.
5.29     One dwelling financed by more than one loan – If a person borrows two or more loans to finance his or her only dwelling, the interest expenses payable on all the loans borrowed for financing the acquisition of the dwelling are deductible subject to the limit of $100,000 each year.
5.20     Re-mortgage
(a)        Re-mortgage without addition of borrowing amount (轉按)
If a person arrange re-mortgage without any addition of borrowing amount, the interest expense payable on the new loan is deductible subject to the limit of $100,000 each year.
(b)        Re-mortgage without addition of borrowing amount (加按)
If a person arranges re-mortgage with an addition of borrowing amount, the interest expense payable in excess of the outstanding principle of the original redeemed loan is not deductible.

(e)        Period of deduction

5.21     When Section 26E(4) was first enacted in 1998, the deduction of home loan interest was restricted to 5 years. The duration was extended to 7 years in 2004. The period has been further extended to 10 years with effect from 2005/2006.
5.22     Each person is entitled to the deduction for 10 years for his or her whole life. It is not that each property is entitled to a 10-year claim.
5.23     It is not necessary that a person has to apply for the 10 years continuously. He or she may apply for one year, and then chooses to stop for one or more years before he or she applies for the home loan interest deduction again.

(D)       Contributions to recognized retirement schemes

5.24     Section 26G provides, with effect from the year of assessment 2000/2001 onwards, a deduction of contribution to recognized retirement schemes or mandatory provident fund schemes. The deduction is limited to $12,000 which is the amount currently specified in Schedule 3B of the IRO.
5.25     In the case of a recognized occupational scheme, it is the lesser of:
(a)        the amount of the contributions paid by an employee, or
(b)        the amount of the mandatory contributory contributions that the employee would have been required to pay in a mandatory provident fund scheme.