April is just around the corner and that means different things to different people. It can mean Lent for some, sprucing up the garden for spring for others. It’s the time for final exams for university students and the increased caffeination that goes with it. But April most often means taxes, that great symbol of civilisation that no one seems to want to honour even though we still want nicely paved roads, public sanitation, across the board basic education and $250 surgeries.
Anyone new to Hong Kong is probably well aware of its renowned simple and liberal taxation policies, but that doesn’t mean there aren’t a few key aspects to consider when getting ready to file if you’re a novice. The basics don’t shift all that much in the SAR. There have been, “No real changes to the current tax regime,” in the last few years explains Francis L Rodrigues, solicitor and notary public at independent legal firm Hampton, Winter and Glynn. “The Government only increased the allowance for personal income tax and tax rebates for 2012/2013 by 75 percent on profits tax and personal tax, but subject to maximum of $10,000.” The proverbial four horsemen are sales, corporate, property and income taxes, only two of which apply to the vast majority of us. The standard income tax form used in Hong Kong is also renowned for its simplicity, but as Rodrigues points out, people do make little errors that can influence their final assessments. “Some people tend to forget to fill in dependent allowances or charitable deductions. Dependent allowances often skip a taxpayer’s attention because it is quite a norm in Chinese society that children contribute a sum to his/her parents or grandparents monthly,” he notes. Only one taxpayer can claim the parent or grandparent’s allowance, and so the result is, “Quite often, to avoid arguing among siblings, no one claims,” says Rodrigues. Charitable donations where receipts are hard to find or even have issued it the first place are also frequently overlooked.
Income, But Not
Then there’s property tax. In many parts of the world, property tax is calculated via a complicated formula based on the assessed value of the land or the home. It’s frequently charged more than once if municipal, state/ provincial/county and federal revenue lords want a piece.
Hong Kong property tax is technically an income tax, determined by the sum of rental income or projected rental income for the year less irrecoverable rent (a runaway tenant for example). Let’s call that $1,000. From that sum government rates paid by the owner ($150) are deducted (for $850) and then a 20 percent statutory allowance can be further deducted from that sum ($170) for related expenses (repairs and such). That’s the final net assessable value, and in this ridiculous example, that’s $680, and, “Property Tax is 15 percent on net assessable value,” Rodrigues notes. So the property tax on the $1,000 flat is $102. It may seem like a lot of mathematics, but a property tax based on value could be a disaster in city where “value” shifts almost daily. But be careful with that first number. Make sure your bank statements support your declared rents, maximise mortgage loan interest and make sure you file the right form: investments and jointly owned properties should not be declared on personal taxes.
The Long Arm of the Taxman
Elsewhere in Hong Kong’s tax cocktail are residents who are also foreign nationals, many of whom own property both here and overseas. Depending on where home is you may be off the hook for income tax, but property is another matter. There is no disconnect between the rates residents and permanent residents pay but if you still own property overseas chances are you’re renting it out.
Specialist Mortgage Australasian Taxation Services (SMATS) Regional Finance Manager Dwight Stuchbery says about half of his clients fit that profile, however he theorises, “I personally believe that’s going to swing drastically against the trend of owning here now. With the new regulations in place, non-permanent residents aren’t going to be able to afford it, or it’s not going to be feasible for them … Pending any changes [here] I see the majority of swinging back to people just holding a property in Australia.”
The only time an Australian, for example, need worry about taxes at home is on income earned in Australia — like rental income — which is similar to American, Canadian and UK policy. “With regards to filing in Australia, there are a few things that can be claimed. We can claim travel back, accommodation, allowable depreciation benefits, everything incurred on holding it like interest, insurance, management and maintenance … So it’s quite detailed when it gets down to it. And then there’s the capital gains tax if applicable.”
So many Brits, American and Canadians in Hong Kong in similar positions means there’s no shortage of firms offering services like Stuchbery’s, which he thinks is crucial, more so for investors that may also own vacation properties in complex hotspots like Thailand. “You’d want to instruct someone trusted and recommended in those areas to provide you with the correct advice.” And even though North American and Western European systems may share fundamentals, unlike Hong Kong, tax policy in other parts of the world shifts from year to year and election to election. Stuchbery uses last May’s proposed abolition of a 50 percent capital gains exemption for non-resident Australians as an example.
And the same way we forget little things here, expats forget little things there. “The one thing we see is people forgetting, or not believing they need, to file a tax return for their Australian assets,” Stuchbery notes. “But really the most common problem I see over time is that people don’t maximise the power of their position as a non-resident. They’re not looking at the long-term and utilising equity they have in the property and building on their net worth over time.” Get your pencils ready.