Section 9(1)(a) of the Inland Revenue Ordinance (IRO) defines taxable emoluments to include: salary, wages, leave pay, fee, commission, bonus, gratuity, perquisite or allowance whether 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.
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.
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
payment in lieu of notice for early termination of employment
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)
An employee can claim deduction for his mandatory contribution to a recognized retirement scheme. Click here for more on retirement benefits.