Are you sure you enjoy all those tax allowances? The devil is in the details

Are you sure you enjoy all those tax allowances? The devil is in the details

Are you sure you enjoy all those tax allowances? The devil is in the details

FINANCE

2021-04-29

5  Mins Read

It is the tax filing season! Time and again, it is tempting to check all those items for deductions or allowances. Yet, it is important not to check the wrong items, which may make you pay extra taxes or, worse, fall into legal pitfalls.

Do you take some allowances for granted and enjoying the best deductions from supporting your parents and children? Before your tax return filing, please read the following article, especially for tips on dependent parent and child allowance. 

Place of residence is crucial for parent allowance. Frequent travellers to mainland should pay attention.

The dependent parent allowance is the best starting point to minimise tax payments. However, there are certain prerequisites to claim dependent parent allowance, while interpretations for some terms could vary. For instance, the meaning of “ordinarily” residing in Hong Kong and the definition of a parent “resided” with you. 

Most of us know that we could claim such allowance only when parents or grandparents are “ordinarily resident” in Hong Kong. And we could enjoy a bigger amount of allowance if we had a parent who “resides” with us. Should our parents move to other countries and only briefly stay in town every year, they are not considered “ordinarily resident” in Hong Kong. But in recent years, many families frequently go back and forth to mainland China, which raised questions on how to draw the lines for “ordinarily resident” in town.

So does it count when parents are frequent travellers across the border? According to the Inland Revenue Department, the key lies in their social and economic connections to Hong Kong. For example,

  1. How frequent do they come back in town? How long do they stay each time?
  2. Do they have a fixed residence in Hong Kong?
  3. Do they own any residential property outside Hong Kong?
  4. Do they work or run a business in Hong Kong?
  5. How many relatives do they have in Hong Kong?

If most answers for 2-5 questions were “no”, you might want to rethink whether to claim the dependent parent allowance. 

For those with parents who are counted as “ordinarily resident” locally, you can move on to weigh on whether they are “resided” with you. 

Scenario 1: Living in the same building, yet on different floors, and paying the housing expenses for parents → not counted as residing together 

Scenario 2: Parents often visit me and take care of my children, yet they just won’t stay overnight → not counted as residing together

Scenario 3: We live in the same apartment, which is owned by my parents → counted as residing together 

One thing to note: only one taxpayer can be granted an allowance for each parent. Any duplication would violate the law. Therefore, siblings have to discuss and agree with one another on how to claim the allowances. 

Stepparents can enjoy child allowance too?

Many parents are aware that all child allowance can only be claimed by either the father or the mother. Thus, it is usually the one with higher taxable income to claim child allowance. If the one with higher income had reached the standard tax rate, it would be more beneficial to let the other one, who hasn’t reached the standard tax rate, claim the allowances. What if the parents were divorced, and even the child’s living costs were paid by stepparents?

It is common for divorced parents to jointly support their child’s expenses, while stepfather and stepmother may also support the child’s living and education costs. In these situations, both parents and stepparents are entitled to a portion of the allowances.

A better arrangement is that all parties negotiate and agree among themselves. Should no agreement be reached, the Inland Revenue Department would allocate the allowances based on how much each parent and stepparent paid for the child’s expenses. 

 

Two conditions to claim “single parent allowance” 

If you are divorced but not yet remarried and are responsible for child’s caretaking, you may claim “single parent allowance” under two conditions.

First, even if you have completed all the separation and divorce procedures in this tax year, you’ll need to wait till the next tax year to claim the “single parent allowance”.

Second, what matters is not who provides financial support to the child, but who has the guardianship of the child. There was a case where a father filed for tax appeal as he was solely supporting the living expenses of his ex-wife and child but failed since the guardianship belonged to the ex-wife.

 

Do I lose “child allowance” if my child is studying abroad or just graduated? 

Some parents may worry if they are no longer entitled to “child allowance” as their child leaves Hong Kong to study overseas. 

According to the Inland Revenue Department, you are eligible for such allowance if your child is of age between 18 and 25 who is receiving full-time education at a university, college, school, or other similar educational establishments. So you don’t need to worry if your child is below 25 and having full-time education overseas.

For those with child who has just graduated but not secured a job yet, your entitlement depends on whether your child received full-time education in the same tax year. For instance, your child graduated in September, which means he or she was still a full-time university student from April to June; then you can claim “child allowance”. 

Having said that, those who are younger than 25 but are receiving part-time education or participating in Youth Pre-Employment Training Program are not eligible, as these programs do not meet the requirements of full-time education. Therefore, parents need to be aware that not all education programmes count. 

Smart ways to reduce tax payments? Tax-deductible annuities are worth noting.

While it is challenging to manoeuvre for tax allowances, why don’t we take some tangible steps for tax deductions? 

In recent years, the government has been promoting Deferred Annuity policies and Voluntary Health Insurance Scheme (VHIS). Tax deductions are granted as incentives for us to plan well for health and retirement. The maximum tax deductible limit for a qualified deferred annuity policy is HK$60,000 per year, while each policyholder under the voluntary health insurance scheme enjoys as much as HK$8,000 tax deductible limit. In this way, you are not only protecting yourself and your family, but also benefiting from less tax payment. A perfect outcome that is! Click here to learn more about ways to deduct taxes.

The above content is reviewed by Mr Daniel Lau - Head of Investment Proposition of AXA Hong Kong and Macau

No warranty or responsibility is assumed by AXA Hong Kong and our related or holding companies regarding non-infringement, security, accuracy, completeness, adequacy, reasonableness, fitness for a purpose or free from computer viruses in connection with the information and materials provided.  AXA Hong Kong and our related companies and holding companies do not accept any liability for any loss, damage, cost or other expense, whether wholly or partially, directly or indirectly, arising from any error, inaccuracy or omission of the information and materials to the extent that such liability is not excluded by law.

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