Case 3 - Ada Wong: rental reimbursement, share options and the salaries tax computation
Ada Wong is Regional Sales Director of a Hong Kong listed group and is employed by the Hong Kong parent company. For the year of assessment 2024/25 her package was: monthly salary HK$95,000; a 13th month payment of HK$95,000; a performance bonus of HK$250,000; and reimbursement of the full rent she pays under a tenancy agreement taken in her own name, HK$38,000 per month for 12 months. Her employer contributed 5% MPF (capped at the statutory maximum) and an additional voluntary HK$50,000 to a recognised scheme. In November 2024 she exercised share options granted in 2023; the gain, being market value at exercise less the exercise price and the option cost, was HK$420,000. She paid HK$8,000 in subscriptions to a professional body relevant to her role and donated HK$30,000 to an approved charity; her employer did not reimburse either. She is single, has no other income and is not entitled to any allowances beyond the basic allowance. Ignore any one-off tax reduction announced in the Budget.
1. Compute Ada's income from employment and the taxable value of the rent reimbursement, and explain why the HK$456,000 reimbursement is not simply added to income.
Read the worked answer
Income from employment (before the rental value)
- Salary: 95,000 x 12 = 1,140,000
- 13th month: 95,000
- Bonus: 250,000
- Share option gain: 420,000
- Sub-total = 1,905,000
The rent reimbursement of 456,000 is not added as a perquisite. Where an employer reimburses rent paid by the employee for a residence, the taxable perquisite is a deemed rental value equal to 10% of the income from employment, excluding the rental value itself but including all other income and benefits.
- Deemed rental value: 10% x 1,905,000 = 190,500
- Assessable income = 1,905,000 + 190,500 = 2,095,500
Why this matters. The actual rent of 456,000 is far above the deemed 190,500, so the statutory basis produces a much lower taxable amount than the cash received. The computation base is the income from employment before deductions under s.12(1), which is why the 10% is taken on 1,905,000 and not on a figure reduced by MPF or donations.
Note that the 13th month payment and the bonus are ordinary employment income, and the share option gain is chargeable at exercise because the options were granted in respect of her employment.
2. Explain the treatment of the MPF contributions (both the 5% and the voluntary HK$50,000), the professional subscriptions and the charitable donation.
Read the worked answer
MPF - employer contributions. Neither the 5% employer contribution nor the voluntary HK$50,000 is taxable in Ada's hands. Employer contributions to a recognised scheme are not income from employment; the employee is taxed only when benefits are drawn. The voluntary contribution is therefore not assessable and cannot be claimed as a deduction by her.
MPF - employee contributions. Her own mandatory contributions are deductible, but the deduction is capped by statute at HK$18,000. Her 5% contributions would be 4,750 per month (57,000 for the year), so the deduction is limited to 18,000. The cap is a common trap: candidates often deduct the full 57,000.
Professional subscriptions. A subscription to a professional body is deductible as an outgoing incurred in producing the employment income where membership is relevant to the employment and the employer does not reimburse it. Both conditions are met, so 8,000 is deductible. She should keep the receipt and evidence that her employer did not reimburse it.
Charitable donation. A donation to an approved charitable institution is deductible, subject to a minimum of HK$100 and a ceiling of 35% of adjusted assessable income. The ceiling here is 2,095,500 x 35% = 733,425, so the full 30,000 is allowed. The donation must be aggregated with any donations she wishes to claim and supported by official receipts. It is not an expense of the employment and should not be analysed as one.
3. Compute Ada's salaries tax payable for 2024/25 and state which rate applies.
Read the worked answer
Net assessable income
- Assessable income: 2,095,500
- Less employee MPF contributions (capped): (18,000)
- Less professional subscriptions: (8,000)
- Less approved charitable donation: (30,000)
- Net assessable income = 2,039,500
Tax at progressive rates (2024/25 bands)
- First 50,000 at 2% = 1,000
- Next 50,000 at 6% = 3,000
- Next 50,000 at 10% = 5,000
- Next 50,000 at 14% = 7,000
- Remainder 1,839,500 at 17% = 312,715
- Total = 328,715
Tax at standard rate
- 2,039,500 x 15% = 305,925
Result. Tax is the lower of the two: HK$305,925. She is a standard-rate taxpayer this year, which is typical once a package includes a large rental benefit and a share option gain. Ignoring any one-off reduction, the tax payable is HK$305,925.
The wider lesson is that the deemed rental value has pulled her into the standard-rate zone; the marginal progressive rate of 17% exceeds 15%, so every additional dollar of income above the point of crossover is taxed at 15%. If she were offered a choice between a salary increase and an increase in the rent reimbursement, the reimbursement would only help up to the point where the 10% deemed value is reached - beyond that, extra rent reimbursement still increases the deemed value because it increases income from employment only indirectly. The real planning point is to keep benefits that are not chargeable (employer MPF, medical cover) rather than cash allowances.