Act now to cushion tax rise
Last-minute tax planning could help employees reduce their tax payments despite the proposed increase of 1 per cent in the standard tax rate to be effective in the next financial year, according to tax experts.
As announced in the Budget earlier this month, it has been proposed that the standard tax rate will be increased from 15 per cent to 16 per cent, implemented in two phases in 2003/04 and 2004/05. Various tax exemptions are also under review.
The increases are the first since the 1997-98 financial year after concessions were given in previous years. The proposals need to come before the Legco finance committee but are expected to be finalised by April 1.
However, tax experts said taxpayers need not be subject to higher taxes immediately if they review their tax planning so as to make use of the existing lower rates before the end of this month.
'There are many things you can do to take advantage of the lower tax rate now, such as declaring your bonus before the end of March,' said Yvonne Law, senior tax partner with Deloitte Touche Tohmatsu.
By filing bonuses before the end of the month, taxpayers will avoid being subject to the higher tax rate next year, she said.
Exercising share options is another area employees should think about now before taxes rise. Share options are taxable only when they are exercised.
'Of course, you have to consider other aspects before you decide to claim the options or not, such as the share price and the cash involved in realising your rights,' Ms Law said.
'If the interest rate for savings is higher than what you would be able to reduce on your tax rate by exercising your share options now, you probably want to keep them for the moment.'
Guy Ellis, tax partner at PriceWaterhouseCoopers, said individuals could either accelerate expenditure or defer it to achieve lower tax payments.
Besides bonuses, taxpayers can speed up mortgage payments now to be able to claim more tax relief. At present, individuals can claim tax exemption for interest on home loans, but this may be reduced in future.
'Of course, you need to check with the bank if there are any stipulations in paying up your mortgage sooner,' Mr Ellis said.
Increasing self-education spending and charitable donations now would also reduce taxable income in the next financial year. At present, tuition fees and donations are tax exempt.
Housing allowances are another controversial area following a recent court case.
In November, an employee of Camp Dresser and McKee International was ordered to pay a hefty tax bill on a housing benefit of HK$410,000 for 1998-99 as he had not been required to submit rental receipts to his employer. The court ruled that the Commissioner of Inland Revenue had been correct to view the sum as a taxable cash allowance rather than a housing benefit as the company had not required documentary evidence of rental paid.
Reimbursement of rent is subject to only a 10 per cent tax instead of the standard rate of 15 per cent.
Tax experts said the Inland Revenue Department had tightened the rules for rent reimbursement since the court case.
The rules stipulate that the employment contract must indicate the employer's housing contribution in reimbursement form. A copy of the lease agreement and monthly records of rent payments must be produced and the amount of the reimbursement must not exceed the actual rent.
With holiday passage allowances likely to be slashed, companies may be able to contract travel agents directly so that employees continue to enjoy the tax benefits, the consultants said. But further details are awaited from the government on this proposed exemption.
Cars registered under a company's name are also tax-free, as are utilities bills at staff quarters. But expenses related to hiring a domestic helper, who cannot be employed for business purposes, are not exempt.
Ms Law also said that tax on education allowances for children was difficult to bypass.
'An education allowance for a child is fully taxable,' she said. 'Companies can set up an education trust and claim relief on their profits tax. But there is a lot of administrative work involved and it may take more than a handful of employees to make such a fund worthwhile.'
Tax specialists said they believed some major companies will be actively reviewing staff salary packages following the tax increases.
'Companies will be more than willing to restructure packages at a time when tax rates are going up and wages are going down,' Ms Law said. 'After all, everything employers do for their staff is tax deductible.'
Colin Farrell, tax partner with PriceWaterHouseCoopers and author of The Hong Kong Taxpayer's Guide, said: 'It boils down to dollar and cent if you can give a better package. Employers and employees are looking hard to restructure packages, especially in the current economic situation.'
Associate accountancy professor Daniel Cheung at the Polytechnic University said people should examine certain areas of tax relief that they may have previously overlooked to counter higher tax rates.
'People may forget to claim an allowance for their parents because they assume that their siblings have already done so,' he said. 'Also, some taxpayers may not be aware that they may be entitled to relief on home-loan interest for a flat which they are renting out rather than living in.'
'Instead of filing for income tax, you can opt for personal assessment so that rental income would become taxable and you will also be entitled to the relief,' Professor Cheung said. 'But of course, you need to do a comparison to see whichever results in a lower tax.'
Current low interest rates, however, might make the relief meaningless, he said.
Expenses derived from belonging to a professional body such as the Chartered Association for Certified Accountants were also tax deductible.