Filling in tax returns is a puzzling experience for most people in the first few years of their working life. Many are uncertain about the relevant tax rules and methods of calculation and are not sure which exemptions can apply.
Patrick, who last year started working as a merchandiser in a trading firm, is no exception. He carefully read through the instructions and guidelines when completing his tax return. Since it was the first time he had filed a return, he also sought the assistance of his elder sister, Joanna, to see if he had missed out any of the necessary information.
"Everything is fine, except that you have not deducted your MPF contributions from your taxable income," said Joanna, after going through the tax return. She explained to Patrick that, according to the Inland Revenue Ordinance, an employee's mandatory MPF contributions are tax deductible, subject to a maximum of HK$12,000 per year. (Now revised: Subject to a maximum of HK$15,000 per year.)
"However, voluntary MPF contributions made by employees are still subject to salaries tax. The same tax exemption rule is also applicable to self-employed persons," Joanna added.
"How come I missed this point?" Patrick asked. "By the way, I had a part-time job for five months last year. Are the MPF contributions made during that part-time job also eligible for tax deduction?"
"Yes. If you have more than one job, you can add up your MPF contributions from each of the jobs for tax deduction purposes, subject to the same maximum of HK$12,000 per year," answered Joanna.
To better illustrate the calculation, Joanna quoted the example of an employee who has two jobs with salaries of HK$10,000 and HK$5,000 per month. Monthly MPF contributions for the two jobs, calculated at five per cent of the salary, are HK$500 and HK$250, making yearly contributions of HK$6,000 and HK$3,000 respectively. In this case, the total amount of MPF contributions available for tax deduction is HK$9,000.
But if the salaries for the two jobs are HK$10,000 and HK$3,000 respectively, the employee does not need to make MPF contributions for the second job (since the salary is below the minimum contribution level of HK$5,000), and the MPF contributions available for tax deduction will be HK$6,000 (HK$10,000 x 5 percent x 12 months).
|Q&A about MPF contributions|
|Q1 ||While employees can deduct their MPF contributions from their taxable income, can employers use the MPF contributions made for their employees as a deduction from taxable profits?|
|A1 ||According to the Inland Revenue Ordinance, employers' regular MPF contributions, both the mandatory and voluntary parts, are also tax deductible, provided that the deduction does not exceed 15 per cent of the employee's total emoluments. |
|Q2 ||When withdrawing accrued MPF benefits after attaining the retirement age of 65, do scheme members need to pay salaries tax for their accrued MPF benefits?|
|A2 ||When a scheme member withdraws his or her accrued MPF benefits under the conditions prescribed under the Mandatory Provident Fund Schemes Ordinance (e.g. at the retirement age of 65), accrued benefits attributable to contributions made by scheme members, no matter mandatory or voluntary contributions, are exempted from salaries tax. Accrued benefits attributable to employers' mandatory MPF contributions also enjoy the same exemption. However, if an employee terminates employment with an employer other than upon retirement, death or total incapacity, the amount of accrued benefits attributable to the employer's voluntary MPF contributions which exceeds the proportionate benefit is subject to salaries tax.|
The proportionate benefit is determined by a formula and increases with the employee's duration of service as follows:
PB = CMS / 120 x AB
PB is the proportionate benefit to be calculated;
CMS is the number of completed months of service that the person has completed with the employer; and
AB is the amount of the person's accrued benefits.
|Q3 ||Apart from attaining the retirement age of 65, under what conditions can scheme members withdraw their accrued MPF benefits?|
|A3 ||The Mandatory Provident Fund Schemes Ordinance allows for the withdrawal of accrued benefits by scheme members before attaining the retirement age of 65 under the following conditions:|
(1) The scheme member has died (in which case the personal representatives of the member may claim for payment of the member's accrued benefits)
(2) The scheme member has attained the age of 60 and retired early
(3) The scheme member has departed or will depart from Hong Kong permanently
(4) The scheme member has become totally incapacitated
(5) The scheme member has a small balance account (below HK$5,000) in an MPF scheme and declares that he or she will not return to employment.