How to profit without taxing your brain
MOST of us have, or shortly will, receive our 1993 tax assessment from the Inland Revenue Department. And as usual there is nothing like the tax demand to focus the brain into planning how to pay the bill.
While some may use their bonus to pay their tax, others prefer to set aside 15 per cent of their salary each month to build up a capital sum.
This ensures there is enough money available to pay the bill rather than relying on the 13th month bonus. Moreover, not all of us are in the position of receiving a 13th month bonus.
Still, what is the most effective plan for paying the tax bill? Deposit accounts offer an obvious solution but the interest rate is around 11/2 to two per cent, which is not attractive. Can the returns be bettered - without increasing the risk? Tax Reserve Certificates These are available in Hong Kong, but they only pay a nominal rate of interest on the build-up of funds. The effect is like saving in deposit accounts but with significantly less flexibility.
Money Market Accounts Money market funds present a potential solution as they generally offer a more rewarding temporary home for your tax money than deposit accounts.
Jardine Fleming, for example, pays just over three per cent in Hong Kong dollars, which is as much as 100 per cent more than the average deposit account.
Money market funds can offer a higher yield because they invest as wholesalers, combining many clients' money in one pot, and so getting substantially better returns than an individual can achieve.
Money market accounts can be opened through various fund managers including Fidelity, Wardley's, Jardine Fleming, and Rothschild.
These funds are convenient as an auto-pay facility can be established with your bank so a percentage of your salary - say, 15 per cent - can be automatically drawn the day after you have been paid.
Once in the money market funds, you can either play it safe by leaving it in Hong Kong dollars, or you can try currency speculation by switching your money to other currencies in the hope they will appreciate against the Hong Kong dollar.
But beware! there is a risk the currencies you choose may depreciate against the Hong Kong dollar in the time scale you have allowed, that is, when your tax bill arrives.
With money market funds, you can also avoid paying the high charges during currency transactions most banks impose.
For example, when you want to change US dollars to deutschemark, most banks in Hong Kong go through the Hong Kong dollar.
This means the depositor ends up paying two sets of fees: one into Hong Kong dollars and one out again into deutschemark. Money market funds only charge once, which means more money for you.
They also have a wide range of currencies to choose from - ranging from the obvious (Hong Kong dollar, British pound, US dollar etc) to the more esoteric, such as Austrian shillings, Spanish Peseta, etc.
A final option for those who want minimal risk but significantly higher returns is to use Fidelity's new Income Plus Fund.
This fund invests in ''short term investment grade fixed income securities'', issued primarily by US banks or governmental issuers.
By investing in short-term bonds rather than money market funds, there is a slightly higher risk involved.
This is because even with short-term (less than three years) US Government bonds, bond prices can go down if, and when, interest rates go up.
However, short dated bonds such as the one Fidelity Income Plus Fund invests in are only marginally affected by changes in interest rates.
The search for a secure but rewarding income from investment has been, and will continue to be, a major market facet in the US.
But with inflation in Hong Kong hovering around the double digit figure, even a return of 5.27 per cent is not going to come close to meeting inflation - but it is still a lot better than the two per cent or so offered by deposit accounts.
Withdrawing your money from these funds is simple. Most investment houses will accept faxed instructions and they will transfer your money to any of your accounts almost anywhere in the world, within three business days.
A final option is to establish a Hong Kong service company. These can be set up relatively cheaply and quickly. As long as a bona fide relationship exists between the service company and yourself, your tax bill can be dramatically reduced.
Generally, because of the costs of running the service company - compliance, accounting, etc - and the relatively low rate of tax applicable in Hong Kong, these are only worthwhile if one is receiving a salary of over $40,000 a month.
The higher your salary, the more beneficial a service company will be.
If you have any queries or practices you wish to have answered or investigated, please contact me confidentially by facsimile on 565-1423.