Salaries Tax - Rent refund versus
Section 9(1)(a) of Inland
Revenue Ordinance (IRO): any allowance, including rent allowance, from
the employer is taxable in full (i.e. 100%).
Section 9(1)(b) of IRO: rental
value (normally computed at 10% on the relevant income) is assessed if
free accommodation is provided by employer. Relevant income means the
taxable income (excluding rent refund) in respect of the period of
If the free accommodation is a room at a hotel, the
rental-value rate will be 4% instead of 10%. If it consists of two
rooms, the rate will be 8% instead. In practice, a room means one
unit of residence (that is one room number) although there may be
more than one bedroom in that "room".
Contract gratuity paid on termination
of employment is not included in the relevant income for computation
of rental value. But if there is no termination of employment, the
gratuity will be added to the relevant income and so increase the
rental value. If the contract of employment is renewed upon expiry,
there will be no termination of employment. Therefore, in order to
avoid the inclusion of the contract gratuity in the relevant income,
it is advisable for the taxpayer to have a break, say 2 to 3 weeks,
after the expiry of the first employment contract before he signs a
new contract of employment with the same employer.
Section 9(1A)(b) of IRO: free
accommodation by employer is deemed in case of rent refund by the
employer. In general, the taxable amount under rent-refund is much
less than rent-allowance.
As established from Board of Review cases, the crucial
point in deciding the question of Rent Refund versus Rent Allowance is
whether the employer has, from time to time, exercised control over
the use of the rent. In this regard, the Revenue may ask: (a) whether
any control over the use of the rent payment is stipulated in the
employment contract, and (b) whether the employer does in fact
exercise that control, for example: requiring the employee to produce
the lease agreement for approval and sample check the rent receipts.
In the court case CIR versus Peter
Leslie Page, the judge commented on the question “Rent refund
versus rent allowance”. Press here for more.
If it is a rent allowance case,
the allowance should be reported by the employer in the Employer's
Return of Remuneration and Pensions (IR56B) under item: Any
other Rewards, Allowances or Perquisites.
If it is a rent refund case,
the rental benefit should be reported as free accommodation under item: Particulars of Place of Residence provided.
of Review case D46/87: A residence provided to an employee with restrictions on
its use was held not a taxable benefit.
A free accommodation
is not taxable if there are restrictions on the employee or his family to reside
In Board case D33/97, the taxpayer
claimed certain sums paid by his employer to him as rental refunds.
Click here for
Board of Review case No. D78/03 concerns the
distinction between rent allowance (wholly taxable) and rent refund
(taxable at 10% of relevant income).
Press here for details.