The following is only intended to provide an outline of what taxable income, deductions, and allowances are. These terms will be explained further in separate questions and answers in other sub-sections on this website.

(a) Income
According to section 11B of the Inland Revenue Ordinance , the assessable income of a person in any year of assessment shall be the aggregate amount of income accruing to that person from all sources in that year of assessment.

For the purposes of Salaries Tax, the assessable income includes:

(i) Salaries/wages

(ii) Commission, bonus, leave pay, end-of-contract gratuities

(iii) Allowances or perquisites

These include cash allowances for food, traveling, housing, cost of living and education benefits.

(iv) Tips from any person

(v) Salary tax paid by an employer

(vi) The 'rental value' of a place of residence that is either: (a) provided by an employer, or (b) the rent for which is paid or refunded (fully or partially) to the employee by the employer. "Employer" here also includes a corporation associated with the employer

This is taken to be 10% of the income earned from the employer (excluding any lump sum payment or gratuity on termination of employment) after deductions and depreciation allowances (if any) for the period during which the residence is provided.

(vii) Share option gain

This refers to the gain realized by the exercise, the assignment, or the release of a right to acquire shares or stock in a corporation.

(viii) Back pay, gratuities and any terminal/retirement awards

You may apply to have the whole sum of money related back to the earning period for tax assessment (up to a maximum of 36 months).

ix) Certain p ayments received from Mandatory Provident Fund Schemes (MPF) or Recognized Occupational Retirement Schemes (except for those received due to retirement, death or incapacity) attributable to some voluntary contributions by an employer.

Income not chargeable to Salaries Tax (not required to be reported in tax return) includes:

• fees paid for your having served as a juror;
• severance payment or long service payment payable by the employer on termination of employment under the Employment Ordinance ;
• payments received from MPFS on retirement, death, incapacity or termination of service attributable to mandatory contributions.
(b) Deductions and Depreciation Allowances
(i) Outgoings and expenses

To qualify for deduction, the relevant outgoing and expense cannot be of a private or domestic nature and must meet the very stringent conditions of being wholly, exclusively, and necessarily incurred in the production of your assessable income.

(ii) Expenses of self-education

The maximum amount allowable for deduction (as from the year of assessment 2001/02) is $40,000 per year.

(iii) Approved charitable donations

The minimum amount allowable for deduction is $100. The total amount to be deducted for the year (as from the year of assessment 2003/04) should not exceed 25% of your assessable income less the deductions of outgoings and expenses and depreciation allowances. (Note: A maximum of 10% each year for years of assessment prior to 2003/04.)

(iv) Mandatory contributions to MPFS or contributions to Recognized Occupational Retirement Schemes

Contributions made after 1 December 2000 qualify for deduction. Although you may have many sources of income during the year, you can only get a maximum deduction of $12,000 per annum.

(v) Home loan interest (HLI)

As from the year of assessment 1998/99, y ou can get deductions of HLI paid on the mortgage of your home for 7 years of assessment (consecutive years or otherwise) . Following each HLI deduction, the Commissioner will notify you of the number of years for which deduction has been allowed and your remaining entitlement. The maximum amount of deduction for each year (as from the year of assessment 2003/04) is $100,000. [Note: A maximum deduction of $100,000 each year for years of assessment 1998/99 to 2000/01, and $150,000 for 2001/02 and 2002/03.]

(vi) Elderly residential care expenses (ERCE)

You can claim deduction of the ERCE actually incurred by you/your spouse in respect of the residential care for you/your spouse's parent/grandparent who is aged 60 or above at any time in the year of assessment, or who is under 60 but is entitled to claim an allowance under the Government's Disability Allowance Scheme; and is taken care of by a registered residential care home or nursing home situated in Hong Kong . For each year of assessment, the maximum claim for each parent/grandparent is $60,000. In respect of the same dependant, you can claim either Dependent Parent Allowance (see "Allowances" below), or ERCE, but not both . If ERCE and DPA are claimed simultaneously for the same dependant, you will only get a deduction for ERCE for that year.

(vii) Depreciation allowances on plant & machinery

To qualify for such allowances, you must show that the use of the machinery or plant is essential to the production of your income and produce the relevant receipt for inspection, when required. This kind of de preciation allowance, however, is uncommon for salaries tax.

c) Allowances

Year of Assessment 2005/06 ( HK$ )

Basic Allowance : 100,000

Married Person's Allowance : 200,000

Child Allowance (for each of the 1st and 9th child) : 40,000

Dependent Brother/Sister Allowance (for each qualified brother/sister) : 30,000

*Dependent Parent/Grandparent Allowance (for each qualified parent) : 30,000

*Additional dependent parent/grandparent allowance (for each qualified parent) : 30,000

Single Parent Allowance : 100,000

Disabled Dependant Allowance (for each qualified dependant) : 60,000

*Remarks:
With effect from the year of assessment 2005/06, two new allowances are introduced for taxpayers taking care of dependent parents or grandparents aged between 55 and 59. They will be granted a basic allowance of $15,000 a year, with an additional allowance of the same amount if their parents or grandparents are residing with them.