Top 10 tips for tax returns

PUBLISHED : Monday, 24 December, 2012, 12:00am
UPDATED : Monday, 24 December, 2012, 4:07am

The Hong Kong tax rate is low and filling in returns is easy compared to labyrinth of rules and deductions in the US, Canada or Australia.

But for those who go into auto-pilot mode when filling in taxes, you should know you can cut your bill with a few simple steps.

Herewith, Money Post's top 10 guide to cutting your tax charge:

1. Claim home loan interest allowance up to 15 years. Until this year, taxpayers could claim HK$100,000 per year for 10 years but starting 2012/13, Inland Revenue will allow homeowners an extra five years.

2. Create a housing deduction. If you receive housing allowance from your employer, ask them to repackage it as a reimbursement. So you pay rent to your landlord, and your employer reimburses this amount to your pay packet, as if it were paying a housing allowance.

Why does this result in savings? Financial planner Lucy Zheng explains that employer-provided housing is not taxed on its real value but typically as 10 per cent of your income - often much less than you actually pay in rent.

Inland Revenue will then tax the housing benefit as income, but will ignore the actual sum you pay in rent, which will likely work out to much more money.

Zheng gives this example: a person earns HK$100,000 per month and pays HK$20,000 a month rent. If the rent is packaged as a reimbursement, they can subtract the actual rent from their income (HK$100,000 minus HK$20,000 which equals HK$80,000). Inland Revenue will calculate a housing benefit of 10 per cent of that income (HK$80,000 X 10 per cent, or HK$8,000). The person is taxed on HK$88,000 of their income, instead of HK$100,000.

It is beyond this article to explain why the tax department retains this colonial era loophole. But it exists and it can save you money.

3. Know your regimen. Hongkongers can chose to be taxed either at a flat tax of 15 per cent, or at a mildly progressive rate that rises to 17 per cent after various allowances and deductions. Generally, the people in the top income bracket do better with the flat tax, while low to medium income earners gain with the progressive system.

4. Deduct your charitable donations. Donations to recognised charitable organisations (which are listed on the Inland Revenue website) are tax-exempt as long as the total donation is not more than 35 per cent of assessable income.

5. Include your MPF. You can deduct your MPF contributions, to a maximum of HK$14,500. Assuming you pay taxes at 15 per cent, that translates into a saving of HK$2,175, just for ticking a few boxes.

6. Don't forget your children. You can claim a HK$126,000 for the year of birth of your child and HK$63,000 per year for all other years. Repeat for each child up to nine children. Only one parent can claim this.

Taxpayers can also claim allowances on other dependents including siblings, parents, and grandparents. If your dependent is more than 60 years old, you can claim a deduction of HK$38,000 if they don't reside with taxpayer and HK$76,000 if they do.

7. Apply to hold over provisional tax. If you're expecting a big drop in income (say, more than 10 per cent of this year's assessed income), you can apply for holding over all or part of your provisional tax. This is useful if you plan to retire the following year, or have any reason to expect lower income. Inland Revenue is very accommodating on this matter.

8. Consider a personal assessment. If you pay both profits and property tax, a personal assessment might be the way to go. Anyone can ask for personal assessment, which is a combined assessment of all the income chargeable to salaries, profits and property. This allows taxpayers to, for example, offset a business loss or claim a deduction of loan interest on rental properties. If you ask for a personal assessment but there is no benefit, Inland Revenue will tax you as though you hadn't chosen personal assessment.

9. Make sure you get a tax clearance before leaving Hong Kong. Any taxpayer leaving Hong Kong should notify Inland Revenue and settle all applicable taxes before departure. This is key because your employer will be obliged to hold back the last payment until they get clearance.

10. Automate your payments. Inland Revenue does not deduct salary tax each month. Most people see this as a positive. However, many are caught out by the large year-end charge. "It can come as a big shock to people," says Ken Deayton, a tax specialist with advisory firm Hong Kong Trust Company. Manage this through tax reserve certificates which are set against your tax bill. You can even automate payment through your bank account.