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Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department * Service charge $500/hr

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Property Tax Tips

Section 5 of Inland Revenue Ordinance levies property tax on the property owner in respect of the rental income of his land and building in Hong Kong. In general, the tax is equal to: Standard rate (from 2008/09  onward) 15% * 80% * (rental income – rates paid by the owner).

Rental Income includes license fee, lump sum premium or management fee paid or payable to the owner.

The owner's expenses (e.g. maintenance and property tax) borne by the tenant is regarded as taxable income.

No deduction for decoration fees, rent-collection fees, insurance and mortgage interests under Property Tax. In theory, such expenses have been covered by the 20% flat-rate deduction. No more allowance is granted even though the owner actually incurs more expenditure. Nevertheless, mortgage interest may be deductible under Personal Assessment if the owner elects to be personally assessed.

An example of property tax computation

Rental income for 1 July 2007 to 31 March 2008: $38,000 per month. Rates paid by owner for the 3 quarters ending on 31 March 2008: $12,000. Provisional Tax paid per last tax bill for 2007/2008: $35,000.

Rent for 9 months ($38,000 x 9): $342,000 less rates paid by owner of $12,000 equal to $330,000 (assessable value). Then, less 20% allowance for repairs and outgoings of $66,000, gives $264,000 (Net assessable value).

Property Tax for 2007/2008: $264,000 *16% = $42,240.
Less: Provisional Tax paid for 20007/2008: $35,000.
Balance payable for 2007/2008: $7,240.
Add: Provisional Tax for 2008/2009: $264,000 * 12 / 9 * 16% = $56,320.
Total tax payable to be shown in the tax bill: $7,240 plus $56,320 equal to $63,560.

The tax $63,560 is payable in two installments: the first one in November 2008 and second in April 2009. The November tax payable is 7,240 plus 7 / 12 of $56,320 totaled $40,093. The April tax payable is 5/12 of $56,320 equal to $23,467.

A checklist for reduction of property tax

  1. Are you a low-income person? If yes, you should elect for personal assessment to remove or to reduce the tax.

  2. Have you borrowed money to purchase the property and paid interest? If yes, you should elect for personal assessment to claim deduction of interest.

  3. Have you claimed deduction of rates?

  4. Have you claimed deduction of irrecoverable rents?

  5. Do you include rent deposits in your rental income? If yes, you should exclude them from the assessable value.

  6. Have you received lump-sum premium? If yes, the premium can be spread over 36 months in order to reduce tax.

  7. Do you pay management fee as an agent of the tenant? If yes, such fee received from the tenant is not assessable.

  8. Do you know what property incomes are assessable and what are non-assessable? If no, please read my tax tips below.

  9. You do not agree to the income assessed or the deduction or relief or allowances granted. In that case, you should read "What can you do if you disagree with an assessment" under Basic Tax Tips.

  10. Have you read “How to reduce property tax” under “Common topics of tax reduction”?

The checklist is for general guidance only. Indeed the above guidelines are subject to the various conditions laid down in the Inland Revenue Ordinance as well as the judgments made in court and Board of Review cases. Besides, there are exceptions to which the above guidelines do not apply. For details, please refer to my electronic books.

Taxable income

Rent deposit returnable to the tenant is not taxable.

The lump-sum premium received at the start of the lease period can be spread throughout the lease period up to a maximum of 36 months if the owner makes such an election.

Irrecoverable rent (i.e. bad debt) is deductible from the rental income.

The “rates paid by the owner” does not include government rent. In other words, the government rent levied in the rates bill is not deductible. To claim the rates deduction, it is advisable for the property owner to keep all the rates bills.

Where the tenant pays management fee through the landlord and such fee is not included as rent under the lease, the fee is not assessable. If the lease makes no provision for payment of management fee and the rent payable to the landlord includes the management fee, then the rent comprising the management fee will be assessable in full, and the management fee paid by the landlord will not be deductible. So, it is advisable for the landlord to have the lease stipulating the rent only and the management fee to be borne by the tenant.

Where the landlord dies, his executor will be liable to pay the tax for the rental income until the grant of probate or letters of administration. Thereafter, the beneficial owner will be liable to pay the tax.

The landlord may reduce his tax liability by electing for Personal Assessment which brings all his income including property income, salaries income and business income into a single assessment with deductions for married person allowance, child allowance, dependent parent allowance, etc. from the chargeable incomes. Besides, he can claim mortgage interest on loans for purchase of the property under Personal Assessment --- such interest is not deductible under Property Tax.

If the landlord has property income only, it is always advisable for him to elect for Personal Assessment. If he has other incomes, he can also make the election in the tax return because such election will not take effect if it is not to his advantage.

Where the landlord is a limited company, the rental income will normally be included in the company's assessable profits. If the company pays interest on a loan for buying the property, the interest is a deductible expense under Profits Tax.

Property held by more than one owner: strictly in law, every owner (whether he is a joint owner or an owner-in-common) is legally obliged to file a Property Tax Return (BIR 57) to disclose the rental income and pay Property Tax as if he were the sole owner. But in practice, the tax return will be sent to the precedent owner (the owner as first named in the title deed) --- then the precedent owner will be required to file the tax return and pay the tax on behalf of the other owners.

The property owner is required by Stamp Duty Ordinance to have the lease duly stamped within 30 days of the execution of the lease. Failure to do so may render the owner liable to penalty and make the lease agreement inadmissible in civil proceedings.

Hold over of Provisional Property Tax

The taxpayer can apply for hold over of Provisional Property Tax on the following grounds:

1. The provisional rental income is likely less than 90% of the amount assessed.
2. He ceased to be the owner.
3. He applied for Personal Assessment that could reduce his total tax payable.
4. He has objected to an assessment forming the basis of the provisional tax.

The application for holding over of Provisional Tax must be in writing, setting out the grounds for the hold-over and proposing a suggested provisional income if applicable. It should be sent to the Revenue not later than 28 days before the due date of the provisional tax.

Property tax versus profits tax

Corporation cases

According to section 2, the letting and sub-letting of properties by a corporation is a business liable to Profits Tax. So, a corporation is normally not liable to Property Tax because its property income is assessed under Profits Tax. But in the following cases, property tax assessment can still be charged on the corporation:

  1. the corporation holds the property as trustee or agent for other individual owners

  2. the corporation is an association or a club deemed under Section 24 of the IRO as not carrying on a business

  3. mortgagee-in-possession cases

  4. the corporation is a foreign corporation

  5. the corporation is joint owner or co-owner with other persons

A corporation wishing to exempt from Property Tax on the grounds of Profits Tax assessment should lodge a claim in Part 5 of the Property Tax Return (B.I.R.57). If the corporation has paid property tax, the property tax paid will be used to set off its profits tax liability under Section 25.

Other cases

As for a person other than a corporation, the sub-letting of properties is liable to profits tax whereas the letting income is generally liable to Property Tax.

In special cases, letting of property by an individual can constitute a business liable to Profits Tax. Of course, this is a question of facts. In general, the Revenue does not accept a claim for Profits Tax unless there is a large number of letting properties and the owner has hired staff to handle the tenancies and deal with the tenants. Where the properties concerned are ballrooms, cinemas or restaurants, the letting of such are likely to be accepted as a business. Nevertheless, income from letting by an individual will be chargeable to Profits Tax in the following cases: (a) letting by a property dealer: the rental income is regarded as part of the income of the property dealing business, and (b) where a property is used for a trade or a business of the owner and no rent has been charged in the Profits and Loss account or the rent charged is added back in the Profits Tax computation, and (c) the property is partly used for a trade or a business and partly let out.

Besides, furnished letting can also be accepted as carrying on a business. But for administrative reasons, the Revenue is not inclined to assess it under Profits Tax, particularly where a single-property case is concerned. Therefore, Property Tax returns are issued to assess the whole rental income, including any hire charge for the use of furniture or equipment. But if the owner claims for a Profits Tax assessment instead of a Property Tax assessment, either before the issue of a Property Tax assessment or upon objection to the Property Tax assessment, the hiring income for the use of furniture or equipment will be assessed under Profits Tax. The Revenue may require the taxpayer to supply the tenancy and hire agreements and the Business Registration number to substantiate his claim.

What is furnished letting?

In general, the Revenue accepts furnished letting if the landlord under the terms of the tenancy agreement provides furniture and domestic equipments so that the tenant needs only bring in his personal belongings. If only a few items of furniture and equipments are provided (e.g. a refrigerator and cooker in the kitchen, or a wardrobe and an air-conditioner in the bedroom), the Revenue will not normally accept the letting as furnished.

 

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