New tax incentive to boost retirement protection

On 20 March 2019, the Inland Revenue and MPF Schemes Legislation (Tax Deductions for Annuity Premiums and MPF Voluntary Contributions) (Amendment) Bill 2018 (Amendment Bill) was passed by the Legislative Council. The Amendment Bill will come into effect on 1 April 2019.

The Amendment Bill aims to (i) amend the Inland Revenue Ordinance to introduce new concessionary deductions for salaries tax and tax under personal assessment that may allow for premiums paid for qualifying deferred annuity policies and for mandatory provident fund (MPF) tax deductible voluntary contributions (MPF TVCs), and (ii) amend the Mandatory Provident Fund Schemes Ordinance and the Mandatory Provident Fund Schemes (General) Regulation to provide for the tax deductible voluntary contributions. 

Current position

Currently, MPF mandatory contributions by employees are tax deductible under salaries tax, personal assessment and profits tax (for the self-employed). The contribution rate is 5% of the relevant income. The MPF mandatory contributions are subject to preservation requirements, i.e. withdrawal is allowed only upon retirement at the age of 65 or on grounds permissible by law such as early retirement at the age of 60, total incapacity, terminal illness, permanent departure from Hong Kong, death and small balance in an MPF scheme (Preservation Requirements).

On the other hand, MPF voluntary contributions are neither tax deductible, nor subject to the Preservation Requirements, which therefore can be withdrawn with less rigidity. Like MPF mandatory contributions, MPF voluntary contributions by employees are also deducted by employers from the employees’ monthly salary and paid to MPF trustees.

New changes

The Amendment Bill represents a reform of the existing pension system by encouraging taxpayers to purchase deferred annuities or make MPF voluntary contributions.

(i) Tax deduction

 Under the Amendment Bill, a taxpayer is entitled to claim tax deductions under salaries tax and personal assessment for contributing to deferred annuity premiums or making voluntary contributions to MPF. The aggregate maximum tax deductible limit for both deferred annuity premiums and MPF TVCs for each taxpayer is set at $60,000 per year.

In addition, in the case of husband and wife, tax deduction for deferred annuity premiums is now extended to cover a taxpaying couple as joint annuitant, or either the husband or the wife as the sole policy holder.A taxpaying couple is allowed to allocate tax deduction among themselves in order to claim the maximum total deduction of $120,000, provided that the claim by each does not exceed the individual limit of HK$60,000.

By way of illustration, salaries tax is chargeable on the smaller of taxpayers’ net chargeable income at progressive rates and their net total income at standard rate.Assuming, for the time being that a taxpayer earns $60,000 per month, and that the standard rate of 15% applies, the salaries tax payable on his/her net total income (i.e. total income of $720,000 less MPF mandatory contribution of $18,000) would be $105,300. If the taxpayer makes $60,000 MPF TVCs under the new regime, an additional deduction of $60,000 would be allowed in calculating the salaries tax payable on his/her total income, which is therefore revised to $96,300, achieving further tax savings of $9,000.

(ii) TVC account

To benefit from tax deduction under salaries tax and personal assessment, an MPF scheme member who holds a contribution account or personal account (MPF Scheme Member) or a member of MPF exempted Occupational Retirement Scheme (ORSO Member) must open a new and separate tax deductible voluntary contribution account (TVC Account) of their own choice for making MPF TVCs. 

An MPF Scheme Member or an ORSO Member may pay contributions directly into a TVC Account and hold in such TVC Account his/her accrued benefits derived from those contributions; and his/her accrued benefits transferred to such TVC Account.

The withdrawal of MPF TVCs (including contributions exceeding the tax deductible limit) will be subject to the Preservation Requirements.

Conclusion

The Amendment Bill, which is welcomed by banks and MPF service providers, introduces tax incentives and addresses the ageing population of Hong Kong by encouraging voluntary savings and offering more options to people in making financial arrangements for their retirement. According to the Mandatory Provident Fund Schemes Authority, a working group with MPF trustees has been set up to co-ordinate the implementation of the MPF TVCs and to handle MPF TVCs applications. Employees and holders of deferred annuity policies should understand how the new arrangement works, and allocate their tax-incentivised savings that best suit their needs and preferences accordingly.