Can Personal Assessment Reduce Your Tax Liability

Personal assessment is not a levy of tax.  It is a form of relief if your income is chargeable to profits tax or property tax. Here you can learn about how and what deductions and allowances are allowed under personal assessment, and whether or not it will be advantageous to elect for personal assessment if you own a business or receive rental income. 

Personal Assessment, Deductions and Allowances

Sole proprietors and business partners are assessed to profits tax, and property owners who receive rental income are assessed to property tax, both at the standard rate. Under personal assessment, your income chargeable to salaries tax, profits tax and property tax is aggregated. From this total, the following may be deducted:

Interest payable on money borrowed to acquire a property used for letting

Interest you paid during the year on loans borrowed is deductible if the loans were used to produce income chargeable to property tax. However the deduction cannot exceed the net assessable value of each individual property let. Interest payments relating to periods when the property is not let (such as when it is vacant or your family occupies it as a residence) are not deductible.

Approved charitable donations

Donations of money you made to approved charities or to the Government for charitable purposes are deductible.  You may also claim approved charitable donations made but not claimed by your spouse.

More on approved charitable donations

Elderly residential care expenses

Expenses you paid to a licensed or registered residential care home situated in Hong Kong for the care of an elderly parent or grandparent.

More on deductions for elderly residential care expenses

Home loan interest

Interest paid on a home loan is deductible from your aggregate income under certain conditions.

More on deductions for home loan interest

Mandatory employee contributions to Mandatory Provident Fund schemes

Mandatory contributions up to the maximum amount prescribed in the Inland Revenue Ordinance can be deducted.

Contributions to recognised occupational retirement schemes

Contributions to recognised occupational retirement schemes are deductible up to the maximum amount prescribed in the Inland Revenue Ordinance.

More on the deductibility of contributions for mandatory provident fund schemes and recognised occupational retirement schemes

Business losses incurred in the year of assessment

Losses brought forward from previous years under personal assessment 

Personal allowances

If you are assessed to salaries tax or have elected for personal assessment, you are entitled to basic allowance for the relevant year of assessment.  You are also eligible to claim other allowances applicable under salaries tax provided the prescribed conditions are satisfied.

More on basic and other allowances

Tax Rate

The balance after deducting personal allowances and deductions, if any, will then be taxed at the same rates as those applicable under salaries tax.  Credit will be given for any tax already paid on the income included in the assessment.  If you have paid more tax than is chargeable under personal assessment, you will be given a refund of the difference.

More on the tax rates of salaries tax and personal assessment

Yearly Assessment

Your income and deduction position may differ from one year to another. Election for personal assessment will thus be advantageous in one year but may be disadvantageous in the next. However, you need not worry about this because if election for any year will not result in a tax benefit, the Inland Revenue Department will automatically issue tax demand notes as though you have not elected for personal assessment.

Benefit of Election for Personal Assessment

Whether you may pay less tax through electing personal assessment for a particular year of assessment depends on the amounts of your income and deductions for that year.  The following examples show how personal assessment is computed.

Example 1 – Taxpayer subject to property tax

Miss C is single. She received monthly rental of $40,000 from the letting of a property under mortgage during the year of assessment 2015/16. Interest of $42,000 was paid during the year.

Personal Assessment Not Elected

 

$

Net assessable value ($40,000 x 12 x 80%) 384,000 
Property tax payable (at standard rate of 15%) 57,600 

Personal Assessment Elected

  $ $
Net assessable value   384,000
Less:  Mortgage interest 42,000   
  Basic allowance 120,000  162,000
Net chargeable income   222,000
Tax thereon (at progressive rates)   25,740
Less: 75% tax reduction (capped at $20,000) (Note)   19,305
Tax payable   6,435

There is a saving of $51,165 (i.e. $57,600 – $6,435) if Miss C elects for personal assessment which enables her to claim deductions for mortgage interest and personal allowance.

(Note) For 2015/16, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

Example 2 – Taxpayer subject to profits tax but has a business loss

Mr L incurred a business loss of $100,000 for the year of assessment 2015/16. He received salary income of $400,000 from employment during the same year.

Personal Assessment Not Elected

 

$

Salaries income 400,000 
Less: Basic allowance 120,000 
Net chargeable income 280,000 
Tax thereon 35,600 
Less: 75% tax reduction (capped at $20,000) (Note) 20,000 
Salaries tax payable 15,600 
   
 

$

Business profits (loss) (100,000)
Profits tax payable 0 

Personal Assessment Elected

 

$

Salaries income 400,000 
Business loss (100,000)
Total income 300,000 
Less: Basic allowance 120,000 
Net chargeable income 180,000 
Tax thereon (at progressive rates) 18,600 
Less: 75% tax reduction (capped at $20,000) (Note) 13,950 
Tax payable 4,650 

By electing personal assessment, the tax liability of Mr L is reduced by $10,950 (i.e. $15,600 $4,650) because his business loss can be utilised to set off against his other assessable income in the year.

(Note) For 2015/16, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

Example 3 – Taxpayer subject to profits tax and has business profit

Mr P is single. His assessable profits from his sole proprietorship business for the year of assessment 2015/16 were $280,000. During the year, Mr P acquired a property that he used as his dwelling. The interest he paid up to 31 March 2016 on a bank loan secured over a mortgage of that dwelling amounted to $60,000.

Personal Assessment Not Elected

 

$

Assessable profits 280,000
Profits tax payable (at standard rate of 15%) 42,000
Less: 75% tax reduction (capped at $20,000) (Note) 20,000
Tax payable 22,000

Personal Assessment Elected

  $ $
Assessable profits   280,000
Less:  Home loan interest 60,000  
  Basic allowance 120,000 180,000
Net chargeable income   100,000
Tax thereon (at progressive rates)    6,000
Less: 75% tax reduction (Note)   4,500
Tax Payable   1,500

If Mr P elects for personal assessment, he may claim deductions for home loan interest and personal allowance and get total tax savings of $20,500 (i.e. $22,000 $1,500).

(Note) For 2015/16, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

When Will Election for Personal Assessment Not Be Advantageous?

Under personal assessment, tax is calculated at progressive rates on the aggregated income from all sources. As the marginal scale of the progressive rates is higher than the standard rate, it may not be advantageous for larger income taxpayers to elect for personal assessment.

Example 4 – Taxpayer subject to salaries tax and property tax

Continued from Example 1, in addition to income from letting of property Miss C derived income of $500,000 from employment during the year.

Personal Assessment Not Elected

 

$

Salaries income 500,000
Less: Basic allowance 120,000
Net chargeable income 380,000
Tax thereon (at progressive rates) 52,600
Less: 75% tax reduction (capped at $20,000) (Note) 20,000
Salaries tax payable 32,600
   
 

$

Property tax payable (see Example 1) 57,600
Salaries tax payable 32,600
Total tax payable 90,200

Personal Assessment Elected

  $ $
Salaries income   500,000
Net assessable value (see Example 1)   384,000
Total income   884,000
Less: Mortgage interest 42,000  
  Basic allowance 120,000 162,000
Net chargeable income   722,000
Tax thereon (at progressive rates)   110,740
Less: 75% tax reduction (capped at $20,000) (Note)    20,000
Tax payable   90,740

As Miss C’s income is chargeable to salaries tax at the marginal rate of 17%, any property income required to be aggregated under personal assessment will also be charged at 17%. Hence, it is not advantageous for her to elect for personal assessment. If she has elected for personal assessment, the Inland Revenue Department will issue a salaries tax assessment and property tax assessment separately and will, by way of an Assessor’s note in the respective notices of assessment, advise that it is not advantageous for her to elect personal assessment for the relevant year of assessment.

(Note) For 2015/16, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

Example 5 – Taxpayer Subject to Salaries Tax and Profits Tax

Mr J is single. The assessable profits from his sole proprietorship business for the year of assessment 2015/16 were $280,000. For that year, he also received a salary of $360,000 from employment. 

Personal Assessment Not Elected

 

$

Assessable profits 280,000
Profits tax payable (at standard rate of 15%) 42,000
Less: 75% tax reduction (capped at $20,000) (Note) 20,000
Tax payable 22,000
   
Salaries income 360,000
Less: Basic allowance       120,000
Net chargeable income 240,000
Tax thereon (at progressive rates) 28,800
Less: 75% tax reduction (capped at $20,000) (Note) 20,000
Salaries tax payable 8,800
   
Total Tax Payable ($22,000 + $8,800) 30,800

Personal Assessment Elected

 

$

Assessable profits 280,000
Salaries income 360,000
Total income 640,000
Less: Basic allowance 120,000
Net chargeable income 520,000
Tax thereon (at progressive rates) 76,400
Less: 75% tax reduction (capped at $20,000) (Note) 20,000
Tax payable 56,400

Mr J has to pay $25,600 more ($56,400 – $30,800) if he elects for personal assessment because his tax is calculated at progressive rates on income from all sources. As the marginal tax rate is 17%, which is higher than the standard rate of 15%, it is not advantageous to elect for personal assessment.

(Note) For 2015/16, 75% of the final tax payable under profits tax, salaries tax and tax under personal assessment would be waived, subject to a ceiling of $20,000 per case.

Last revision date: May 2016