Five costly tax mistakes that people make
How to keep taxman happy but ensure you don't pay too much with your return
Someone told me the other day that taxes and interest rates are the pornography of a good financial newspaper.
If that's the case, then brace yourself for a whole lot of sex in the next few paragraphs.
Seriously folks, the tax season in Hong Kong is just starting and now is the time to think about the best ways to save on your taxes. I admit that taxes are on my list of least-favourite things to do, along with scrubbing a toilet and stuffing myself into a bus during rush hour on a Friday evening.
But it is one of life's necessities and a crucial part of your financial planning. It is also one of the few things in life that if you don't do - or do not do properly - you may land in jail. Or at the very least, paying a magnificent sum that otherwise could have been used for your retirement.
It's decidedly difficult to give advice on taxes in a city with so many different citizens, but there are some universal truths to tax planning that can be applied across borders. Hong Kong's Inland Revenue Department, which will issue about 1.9 million 2006/07 individual tax returns on May 2, has put together a fairly decent website that tries to answer every question imaginable. You can log on to www.ird.gov.hk for a look.
Below is some information you may not find on the internet. They are the five costliest tax mistakes people make.
Here's what you can do to avoid them:
1. Bad record keeping: by far the biggest way to increase your tax burden is to keep poor records or none at all. By records I mean your receipts for travel, equipment, job searches, donations, tuition and so forth. The obvious reason is that in various countries, these expenses can be deducted, thus lowering your tax obligation. The other is that if you are audited, you will have proof of these expenses. Remember that 'the burden of proof rests with the taxpayer', says Jennifer Wong, tax partner at KPMG. If you can't provide the evidence, then you can't escape the penalty.
The flipside is if you find you've overpaid on your taxes over the years, you can go back to the authority to reopen your case, provided you have records on hand. Hong Kong allows you to do this on returns of up to six years old.
2. Late payments: this is a particularly noticeable problem in the SAR where both Hong Kong residents and expatriates deal with different filing deadlines in various countries (for , Hongkongers who work frequently on the mainland and must pay taxes there, too). While it's easy to get filing extensions from various governments, you must still pay the taxes you owe on time. If not, you are charged interest, which is such an unnecessary cost you ought to easily avoid.
The other thing to remember is that chronic late payments tend to raise eyebrows within a tax agency, putting you on their radar. While it is always flattering to be noticed, you certainly do not want to be noticed by the IRD or any other tax authority for that matter.
3. Leaving out personal details: I tend to view going to see your tax accountant as the same as going to see your doctor. It's better to tell too much than too little. The reason is that there are circumstances about your life that can easily reduce your tax burden that you may not have considered.
Ms Wong and other tax partners I interviewed said it was incredible to handle the number of expatriates who still did not know that in certain circumstances, if they were employed by a foreign company, their salaries could partly be exempt from Hong Kong taxes. Others who were recently divorced did not know that the alimony received didn't have to be taxed. And on and on. Sometimes it pays to reveal too much.
4. Overpaying a tax accountant: this is tricky as I always say a good accountant is worth every cent paid. However, in this day and age where information is immensely accessible and tax authorities are making it ever easier for you to file returns online, an accountant may be a costly luxury. If your financial situation is rather complicated, by all means, a good and reputable tax accountant ought to be hired and, if you can afford it, one from the Big Four accountancy firms.
But if you're in rather simpler circumstances, you can easily input your data into a tax-planning software program and file the return online. This is also where keeping good records comes in handy.
The tax-filing process in Hong Kong is rather simple and you can calculate your liability online at www.gov.hk/etax. If you're unsure whether to go without professional help, do what one friend did. One year he did his taxes both with an accountant and by himself using tax-planning software. The result? He got a bigger refund using the software. Now he does all his taxes himself.
5. Overlooking donations: it always feels good to donate money to a charity or cause that is close to your heart. But you can also receive a tax benefit along with it. In many countries, including Hong Kong, you can deduct your donations.
The problem is many people tend to forget to get the receipt and thus, the donation never appears on a return, says Mona Mak, partner at Deloitte Touche. 'It's the biggest thing people here overlook.'
The same goes for membership fees and professional subscriptions. In many countries, those are also deductible, provided you request the receipt. Just remember: in Hong Kong, the donations must be made to organisations approved by the IRD and the amount cannot exceed 25 per cent of your income to get the deduction.
Betty Liu is the Hong Kong correspondent for CNBC Asia and author of Age Smart: Discovering the Fountain of Youth at Midlife and Beyond. E-mail firstname.lastname@example.org
Pushing the envelope
The number of individual 2006/07 tax returns to be issued on May 2: 1.9m