Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Salaries Tax - What are taxable emoluments?

Section 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 benefits, share options, holiday benefits and children's education subsidies.

The 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 were taxable.

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 click here  to IRD's homepage > English > Publications > Departmental Interpretation & Practice Note No. 16. 

After the Glynn's case, Section 9 was amended so as to restore the old rules for taxing of employment benefits. In 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 benefits non-taxable, 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 benefits, share options, holiday benefits and children's education 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 Tips".

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.  

The taxable amount includes that paid by the employer and that paid by third parties (such as tips received by a restaurant from customers). 

Click here to read 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 harassment

  • legal settlement  / compensation for breach of employment contract

  • payment by a new employer for inducement of an employee to leave his existing employment

  • payment of employee's relocation expenses from a foreign country to Hong Kong on commencement of employment

  • payment of 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

  • severance payment

  • long-service payments

  • certain payments from retirement schemes

  • free medical services, free lunch, free training, free transportation, free house-keeping services etc.  

  • reimbursement of self-education expenses (not exceeding the statutory limit)


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