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Hong Kong Company Formation: Personal Assessment

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Personal Assessment

What is Personal Assessment and how it may work to reduce tax liability

The Inland Revenue Ordinance provides for the levying of three separate direct taxes for a year of assessment, viz, Profits Tax, Salaries Tax and Property Tax. Individuals ordinarily resided in Hong Kong may be able to reduce their tax liability by electing Personal Assessment. Under Personal Assessment, income from the above sources is aggregated and from this total, the following may be deducted:

1. interest payments on money borrowed for the acquisition of the letting properties on a property-by-property basis (i.e. the amount of interest deduction cannot exceed the net assessable value of each individual property let);
2. approved charitable donations (capped at 35% of the total income for computing tax under personal assessment as from the year of assessment 2008/09 and 25% from 2005/06 to 2007/08);
3. elderly residential care expenses;
4. home loan interest;
5. mandatory contributions paid to mandatory provident fund scheme as an employee;
6. contributions paid to a recognized occupational retirement scheme;
7. business losses incurred in the year of assessment;
8. losses brought forward from previous years under Personal Assessment; and
9. personal allowances (see ALLOWANCES).

Tax at progressive rates (same as those used for Salaries Tax) will then be imposed on the balance. Credit will be given for any tax already paid on the income included in the assessment. If tax already paid exceeds the tax chargeable under Personal Assessment, a refund will be made.

Who may elect for Personal Assessment

An individual may elect for Personal Assessment if:

1. he/she is 18 years of age or over, or under that age if both his/her parents are dead; and
2. the individual is or, if he/she is married, whose spouse is a permanent or temporary resident in Hong Kong.

For the purpose of Personal Assessment:

“permanent resident” means an individual who ordinarily resides in Hong Kong;

“temporary resident” means an individual who stays in Hong Kong for a period or a number of periods amounting to more than 180 days during the year of assessment in respect of which the election is made or for a period or periods amounting to more than 300 days in 2 consecutive years of assessment, one of which is the year of assessment in respect of which the election is made.

Where an eligible individual is married and not living apart from his or her spouse and both of them have income assessable under the Inland Revenue Ordinance, that individual may not elect for Personal Assessment unless his or her spouse also elects.

Time limit for electing Personal Assessment

Election for Personal Assessment must be made in writing not later than 2 years after the end of the year of assessment in respect of which the election is made or 1 month after an assessment of income or profits forming part of the individual’s total income for such year of assessment becomes final and conclusive under section 70, whichever is the later.

Treatment of a Married Couple under Personal Assessment

Unlike Salaries Tax, separate taxation for husband and wife is not applicable under Personal Assessment. A husband and wife are assessed jointly under Personal Assessment. The total income of an individual, as appropriately reduced, will be aggregated with that of his/her spouse to arrive at the joint total income of the couple for assessment purposes. Normally, the tax payable on the Joint Assessment is apportioned between the husband and the wife proportional to their respective reduced total income, and each will be issued with a Notice of Assessment. However, where an additional assessment is issued, the whole of the tax payable under this assessment shall be charged on the spouse assessed in respect of that income.