Employee contributions to recognized occupational retirement scheme ("ROR scheme")
The employer decided to retain the existing retirement scheme and has obtained exemption status from the MPF Authority. Are the employee's contributions to this scheme deductible?
An employee's contributions to an MPF-exempted Recognized Occupational Retirement Scheme ("MPF-exempted ROR scheme") are deductible under Salaries Tax. However, the maximum amount deductible in a Year of Assessment should be the least of the following 3 amounts:-
his contributions to the MPF-exempted ROR scheme in the year of assessment;
the amount of the mandatory contributions that he would have been required to pay if he had contributed as an employee to an MPF scheme; or
the maximum deductible amount (please see A1) for the relevant year of assessment.
Contributions larger than 5% of the monthly salary
My employer operates a ROR Scheme to provide employees with retirement benefit. I have an option to contribute to the Scheme at 0%, 5%, 7.5% or 10% of my salary. If my monthly salary is $10,000 and I have opted to contribute 10% of my salary, i.e., $1,000 per month, can I get the maximum tax deduction of $12,000?
At monthly salary of $10,000, if you make contributions to a MPF scheme, your mandatory contribution would amount to $500 per month. In this situation, you may claim deduction in the amount of $6,000 ($500 x 12 months). Any contributions exceeding 5% of your salary would be regarded as voluntary contributions to the MPF scheme and not deductible for tax purposes.
For ROR schemes, there is no mandatory contribution. Hence, you are allowed to opt to contribute from 0 to 10% of your monthly salary. The law allows ROR scheme participants to get the same tax deductions as MPF scheme participants.
So, you will get tax deductions of $6,000, namely, $500 per month for 12 months.
Contributions made by a self-employed person for himself
Are contributions made by a self-employed person for himself to an MPF scheme deductible under Profits Tax?
Self-employed person can claim mandatory contributions which he has made for himself to an MPF scheme as allowable business expenses under Profits Tax. The maximum deductible amount should not exceed the amount prescribed in the Inland Revenue Ordinance. Any voluntary contributions made by him are not tax deductible.
If a self-employed person employs his/her spouse to work for his/her business, whether the contributions made by that self-employed person for his/her spouse to an MPF scheme are deductible under Profits Tax?
No, contributions to an MPF scheme for the spouse of sole proprietor or partners are not deductible under the Profits Tax assessment of the sole proprietorship or the partnership.
A person is employed by two or more companies during the year of assessment 2014/15 and he has made annual mandatory contribution of $17,500 to the MPF scheme established by each of his employers. Can he claim the aggregate of his mandatory contributions made to each MPF scheme under Salaries Tax ?
Employee can claim deduction for the mandatory contributions which he makes to different MPF schemes. However, irrespective of the amount of mandatory contributions and the number of MPF schemes the employee has contributed to, the maximum amount of deduction that he can claim is restricted to $17,500 for year of assessment 2014/15. Any contributions exceeding this limit will not be deductible.
Employee's withdrawals from ROR scheme or MPF scheme
Are the employee's withdrawals from the ROR scheme or the MPF scheme taxable under Salaries Tax ?
Whether the employee's withdrawals from the ROR scheme or the MPF scheme are chargeable to Salaries Tax depends on the nature of the contributions and the circumstances in which the withdrawals are made. Please refer to paragraph 20 of DIPN No.23 (Revised) for a summary of the Salaries Tax position of the employees for the withdrawals in the various scenarios.(This document can be downloaded for viewing and printing by using the Adobe(R) Acrobat(R) Reader software which is available free at the Adobe Systems Incorporated website).
I am a pensionable civil servant. Upon retirement, I received a lump sum and commenced to receive a monthly pension. Are the lump sum and monthly pension taxable?
Any sum received by way of commutation of pension under the Pensions Ordinance, Pension Benefits Ordinance and Pension Benefits (Judicial Officers) Ordinance is not taxable. However, the exemption does not apply to monthly pension which is fully taxable.
The employer operates a ROR scheme. Will the interface arrangement with MPF scheme affect the tax liability of the employee?
It depends on which interface arrangement has been taken by the employer and, in appropriate cases, the employee's choice as to how his accrued benefits in that ROR scheme is dealt with. In short, the employer may maintain, freeze or wind up the existing ROR scheme and the various arrangements may have different tax consequences in the interface. Please refer to paragraph 38 of DIPN No.23 (Revised) for a summary of the Salaries Tax position of the employees in various scenarios. (This document can be downloaded for viewing and printing by using the Adobe(R) Acrobat(R) Reader software which is available free at the Adobe Systems Incorporated website).
Employee changes job or his employer becomes bankrupt
If an employee changes job or his employer becomes bankrupt, what is the tax position of his accrued benefits from the mandatory contributions and any voluntary contributions which his former employer has made to an MPF scheme ?
Mandatory contributions of the employee and the employer to the MPF scheme are immediately vested with the employee. Except under the special circumstances stipulated in the MPF Ordinance, the employee can only receive the accrued benefits attributable to the mandatory contributions when he attains the retirement age of 65. In any case, the withdrawal by employee from MPF schemes of his accrued benefits attributable to mandatory contributions is not assessable to tax.
However, if the employer had made voluntary contributions to the MPF scheme for this employee, the tax position for the accrued benefits from these voluntary contributions will be different. If the employee changes job, regardless whether the employee chooses to retain the accrued benefits attributable to the employer's voluntary contributions in the existing MPF scheme or transfer them to another scheme, the employee will be deemed to have received the said accrued benefits in accordance with the provisions of the Inland Revenue Ordinance. Therefore, that part of the accrued benefits attributable to employer's voluntary contributions, in so far as it exceeds the proportionate benefit calculated in accordance with the provisions of the Inland Revenue Ordinance, will be subject to Salaries Tax in the year of assessment when he ceases employment with an employer.
What is meant by proportionate benefit as mentioned in Question 11?
If an employee has worked for less than 10 years for an employer, the accrued benefits attributable to that employer's voluntary contributions withdrawn from the scheme on termination of service can only be exempt in the proportion of the number of completed months of service to 120. The proportionate benefit is that part of the accrued benefits which is exempt from Salaries Tax. For example :-
Amount of accrued benefits attributable to employer's voluntary contributions = $100,000
No. of complete months of service = 72
The amount of proportionate benefit (i.e. the part of accrued benefits in (1) being exempt)
=($100,000x 72/ 120)
Payments received by the employer upon winding up ROR scheme
In the interface to MPF regime, the employer has decided to wind up the existing ROR scheme. Will the payments which the employer receives back upon the winding up of ROR scheme be taxable ?
Refunds to the employer may consist of the employer's contributions to the ROR scheme and any excess recoupments which may represent the investment income attributable to the employer's contributions. If the employer's contributions to the ROR scheme had previously been allowed as deduction in its Profits Tax assessments, any employer's contributions that are repaid to the employer are taxable. However, the excess recoupments are not taxable.
Loss incurred by the employer upon winding up ROR scheme
In the course of interface to MPF scheme, the employer decides to wind up the existing ROR scheme. If the employer incurs loss on the disposal of investments held by the ROR scheme, will this loss be deductible by the employer under Profits Tax ?
No, the loss incurred is not deductible because the employer and the ROR scheme are two separate legal persons.
Costs incurred by the employer in establishing the MPF scheme, amending the rules of or winding up ROR scheme
In the course of interface to MPF scheme, whether the costs incurred by the employer in establishing the MPF scheme, amending the rules of or winding up the ROR scheme are deductible under Profits Tax?
Yes, the relevant costs are generally deductible. Such expenses are regarded as effecting a change in the basis in which a business remunerates its employees and not the structure of the business per se. However, please note that the cost in establishing an MPF scheme does not include the initial or special lump sum contributions to the scheme. There are special treatments in respect of such initial and special contributions. (see Question 16)
Regular and voluntary contributions made by the employer for its employees
The employer has made regular and voluntary contributions for its employees to the MPF scheme for each year of assessment. Are such contributions deductible expenses of the employer under Profits Tax ?
Yes, but the amount deductible is restricted to 15% of the total emoluments of the employee. However, if any contributions had been included as provisions in the prior years, and had been allowed for tax deductions, they cannot be deducted again in the year of payment to the MPF scheme.
Employers' responsibilities in filing the Employer's Return
After the commencement of the MPF scheme, are there any changes to the employer's responsibilities in filing the Employer's Return?
Besides the reporting of employees' emoluments, the employer is also required to report the taxable portion of the accrued benefit that the employees received under ROR schemes or MPF schemes. As to the circumstances in which the accrued benefits withdrawn by the employee are taxable under Salaries Tax, please refer to paragraphs 20 and 38 of DIPN No.23 (Revised) and "Question 11" above.
Obligation under the Recovery Notice Vs the Mandatory Provident Fund Schemes Ordinance
An employer may occasionally receive Recovery Notice issued under Section 76(1) of the Inland Revenue Ordinance requiring him to deduct the employee's money for tax payment. Should the employer fulfill his obligation under the Recovery Notice before making income deduction under the Mandatory Provident Fund Schemes Ordinance?
The Department is prepared to accept, in the absence of legal precedent to the contrary, the income deduction for making mandatory contributions to a registered Mandatory Provident Fund Scheme [MPFS] has priority over the income deduction for paying tax in default. Mandatory contributions refer to those contributions in respect of which an employer has the statutory responsibility to make income deductions under Section 7A(1)(b) and Section 7A(2)(b) of the MPFSO. They do not cover other contributions including the employee's voluntary contributions made through the employer under Section 11 of that ordinance.
For enquiry on recovery notice issued by the Department, please call the telephone number printed on the recovery notice.
Government's injection of $6,000 into MPF scheme / MPF-exempted Occupational Retirement Schemes Ordinance registered scheme members' accounts
I have received the Government's injection of $6,000 into my MPF account. Is the injection amount taxable under Salaries Tax or Profits Tax? Do I have to report the injection amount as part of my assessable income in the Tax Return–Individuals?
No, you are not required to report the Government's injection as part of your assessable income or profits in the Tax Return–Individuals. The injection is an unsought payment from the government. It is paid as a measure of the government to enhance the retirement protection of persons who earn not more than $10,000 a month. It is unlikely to be from any source of employment or trade and is non-taxable income.