Hong Kong: Is a Tax Deduction for Rental Payments Beneficial to Individual Taxpayers?

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Hong Kong: Is a tax deduction for rental payments beneficial to individual taxpayers?

April 6, 2018

In brief Financial Secretary Paul Chan recently stated that the government is looking into the option of allowing a tax deduction for rental payments, given the financial burden on Hong Kong residential tenants from rising rents. While it may take some time for the details to be announced, it may be worthwhile to consider the potential impact of a rental deduction on salaried income earners.

The tax benefit that would be derived from this proposed deduction may not be significant depending on whether there will be a limit on the amount of deduction that can be claimed. Under existing rules, rental reimbursements from employers are not taxable if proper arrangements are in place, while the taxable amount of the housing benefit generally is computed at 10% of other income. The current rules allow employers to provide tax-efficient rental reimbursement benefits to employees. As a result, the government also may consider encouraging more employers to implement such arrangements as well as providing greater clarity on the related requirements.

In detail The tax benefit to an individual employer, the Inland Revenue New tax deduction under taxpayer from this proposed Department (IRD) assesses a consideration deduction could depend upon rental value on the place of various factors, such as the level residence that is included in the Financial Secretary Paul Chan of income, amount of rental employee’s taxable income from delivered the 2018/19 Budget on expense, and whether there is a a Hong Kong salaries tax February 28, 2018. During his limit on the allowable amount of perspective. This occurs instead subsequent meeting with the deduction. If there is a low limit, of taxing the amount of the press, the Financial Secretary the resulting tax benefit may not actual rental expenses. mentioned that a tax deduction be significant to individual Similarly, when the employer on rental expense for individual taxpayers, especially when the reimburses the rental expense of taxpayers is under consideration rental costs in the market an employee by establishing by the government, in order to continue to rise. clear guidelines and exercising lessen the pressure many proper control over the tenants are now facing in Hong Existing provisions in reimbursement process, the IRD Kong due to rising rents. No Inland Revenue Ordinance accepts the arrangement as if further details have been Under current provisions, when the employer directly provided a announced. an employee is provided with a place of residence to the place of residence by the employee.

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The rental value is included in the schemes for their employees in order deduction for rental expense is in assessable income of the employee, to provide competitive remuneration place as compared to a rental whereas the amount of rental packages and enhance tax efficiency. reimbursement scheme implemented reimbursement is not treated as by an employer. The potential taxable income. Proposed tax deduction versus difference in salaries tax liability is reimbursement scheme summarized in the example below. Some employers in the market have The implications to an individual implemented rental reimbursement taxpayer can be different if a tax

Example Assume a single individual earns annual employment income of HK$500,000 and he/she incurs rental cost of HK$150,000 per year on a primary residence. The table below compares the differences in salaries tax liabilities under four scenarios based on the tax rates for the year of assessment 2018/19. In addition to the base case, the scenarios include: (i) limit on allowable rental expense deduction is HK$50,000 per tax year (ii) limit on allowable rental expense deduction is HK$100,000 per tax year (iii) employer of the individual properly structures HK$150,000 out of the individual’s income as rental reimbursement benefits. (HK$) Base case without any (i) Deduction capped (ii) Deduction (iii) Rental deduction at HK$50,000 capped at reimbursement HK$100,000

Tax liability 44,560 36,060 27,560 25,010

Decrease in tax 19% 38% 44% liability (%) as compared to the base case If the rental cost is increased to HK$180,000: Tax liability 44,560 36,060 27,560 19,400

Decrease in tax 19% 38% 56% liability (%) as compared to the base case

In the above example, if the tax amount of deduction or in the case of of HK$180,000 and annual income of deduction on rental expense is set at rental reimbursement, the amount of HK$500,000, the tax efficiency HK$50,000 or HK$100,000 per year, tax saving will be increased alongside achieved by a tax deduction can only the percent of tax saving is about 19% with the increase in rental cost. outweigh the savings achieved by or 38% respectively. However, when rental reimbursement if the maximum there is an increase in rent, the Using this example, the graph below amount of deduction allowed for amount of tax saving will remain the shows how the tax liability deviates rental expense is at or above same; in other words, the while the limit of tax deduction HK$148,000. attractiveness of such deduction will allowed for rental expense increases. be reduced. On the other hand, if the In general, with annual rental expense rental expense is within the allowable

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The takeaway While considering a rental payment  whether original tenancy deduction for salaries tax purposes, agreements and rental receipts are The details of a possible tax deduction the government also could encourage required to be submitted by for rental expense still are being more employers to deploy rental employees to employers for considered by the government. The reimbursement schemes for their verification potential tax benefit to taxpayers is employees. In addition, the IRD may uncertain, especially depending on want to provide more clarity on the  how often employers should review whether there will be a limit on the requirements for a proper rental the tenancy agreements and rental allowable amount of deduction. reimbursement scheme, including: receipts of employees, etc. The examples above illustrate the tax  the percentage of income that can Employers who have rental implications of a hypothetical rental be structured as rental reimbursement schemes already in deduction for tax purposes as reimbursement benefits place, or are interested in setting up compared to the rental such schemes, should understand the reimbursement schemes that can be  content to be covered in employers’ prevailing requirements, rules, and implemented by employers under rental reimbursement policies and IRD practices. As a final note, existing law. Rental reimbursement other required documentation employers and individual taxpayers schemes commonly have been are reminded that any incorrectly  the mode and timing of confirming implemented by employers in the reported rental reimbursement marketplace and have proven to an employee’s entitlement to rental benefits to the IRD may be subject to lighten the tax burden for employees, reimbursement benefits penalties. provided that such schemes are properly set up.

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Let’s talk For a deeper discussion of how this issue might affect your business, please contact your regular Global Mobility Services engagement team or one of the following team members:

Global Mobility Services – Hong Kong

James Clemence, Asia leader Bruce Lee Polly Chung +852 2289 1818 +852 2289 5510 + 852 2289 5515 [email protected] [email protected] [email protected]

Global Mobility Services – United States Peter Clarke, Global Leader +1 (646) 471-4743 [email protected]

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