9(1)(a) of Inland Revenue Ordinance (IRO) defines taxable emoluments to
include: salary, wages, leave pay, fee, commission, bonus, gratuity,
perquisite or allowance whether or not they are derived from employer.
Special provisions are laid down in the IRO to tax special perks such
as subsidized accommodation, retirement
share options, holiday benefits and
children's education subsidies.
leading Hong Kong court case in this respect is David Hardy Glynn v The
Commissioner of Inland Revenue 3 HKTC 245.
In this case, the employee
arranged so that his children's expenses were solely borne by his
employer. He argued that because such benefit could not be converted
into cash and only his employer had the liability to pay, the free
education benefit should not be taxable. On appeal, the Court of
Appeal ruled that the UK tax cases were irrelevant in taxing of
employment benefits for Hong Kong salaries tax and all
benefits, whether they were convertible into cash or not, derived from an employment
This ruling widened the scope of taxable benefits
too much. On further appeal, the
Privy Council ruled that the UK tax cases on taxation of perquisite
were still applicable to taxing of employment benefits in Hong Kong,
thus reversing the decision of Court of Appeal, and that all benefits
having cash value are taxable including the provision of free education
to an employee's children.
For details of the
Glynn's case and the Revenue's practice
on taxing employment benefits, please
to IRD's homepage > English > Publications > Departmental Interpretation &
Practice Note No. 16.
the Glynn's case, Section 9 was amended so as to restore the old
rules for taxing of employment benefits.
short, a benefit is taxable
if it is of money's worth. A benefit is regarded as of money worth if
it is convertible into money (e.g. by sale) or if it is involved in
the discharge of the employee's personal liability (e.g. payment of
the employee's credit card liabilities). Furthermore, the
provision of free education to an employee's children is taxable
in whatever arrangements.
Under Section 9, all
kinds of cash allowances arising from an employment are
wholly taxable. They
include housing allowance, living-cost allowance, transportation
allowance, baggage allowances,
medical allowance, clothing allowances, tips … etc. So, to make the
employer should be made solely liable to pay the benefits --- in that
case, these benefits will be inconvertible into cash or have no cash
value. Caution: Such arrangement does not work for subsidized accommodation, retirement
share options, holiday benefits and
subsidies because they are subject to special provisions of the IRO.
For details on how such arrangements reduce tax payable,
please read my book "Hong Kong Tax
The allowance paid to an employee to cover the employer's
expenses is not taxable because it is not income to the employee.
Moreover, the transportation allowance paid to enable the employee to
discharge his duties (for example the motor expenses from one work site to another) is
not taxable either.
amount includes that paid by the employer and that paid by third
parties (such as tips received by a restaurant from customers).
my summary of the leading tax case Hochstrasser v Mayes 38 TC 673 on
what is taxable emolument.
Only emoluments for the
services rendered by employee are taxable. If the payment is paid as a
gift on a special occasion (e.g. marriage, death, passing an examination, …
etc.), it is not taxable. Besides,
the following receipts are not taxable:
compensations for work injuries
compensation for loss of employment
compensation for damages in legal disputes
compensation on redundancy
compensation for wrongful dismissal of an employee
legal settlement / compensation for sexual
legal settlement / compensation for breach of
payment by a new employer for inducement of an
employee to leave his existing employment
employee's relocation expenses from a foreign country to Hong Kong
on commencement of employment
employee's relocation expenses from Hong Kong to a foreign country
on cessation of Hong Kong employment
payment for a leaving employee not to compete with
his employer within a certain period of time
certain payments from retirement
free medical services, free lunch,
free training, free transportation, free house-keeping services
self-education expenses (not exceeding the statutory limit)