Provisional Legislative Council

PLC Paper No. CB(1) 1348
(These minutes have been
seen by the Administration)

Ref : CB1/BC/10/97/2


Bills Committee on
Inland Revenue (Amendment) Bill 1998

Minutes of meeting held on Monday, 16 March 1998, at 8:30 am in Conference Room A of the Legislative Council Building


Members present :

Hon IP Kwok-him (Chairman)
Hon NG Leung-sing
Hon Eric LI Ka-cheung, JP
Hon LEE Kai-ming
Hon Ronald ARCULLI, JP
Hon Mrs Sophie LEUNG LAU Yau-fun, JP
Hon CHAN Yuen-han
Hon CHAN Kam-lam
Hon Ambrose LAU Hon-chuen, JP

Members absent :

Hon WONG Siu-yee
Hon Henry WU
Hon MA Fung-kwok
Hon Bruce LIU Sing-lee

Public officers attending :

Mr Martin Glass,
Deputy Secretary for the Treasury

Mr Alan SIU,
Principal Assistant Secretary (Treasury) (Revenue)

Miss Vivian SUM,
Assistant Secretary (Treasury) (Revenue)

Mr WONG Ho-sang,
Commissioner of Inland Revenue

Mr LEE Kwok-leung ,
Assistant Commissioner of Inland Revenue

Mrs Agnes SIN,
Deputy Commissioner of Inland Revenue (Technical)

Mrs Brenda LEE,
Senior Assessor, Inland Revenue Department

Ms Sherman CHAN,
Senior Assistant Law Draftsman, Department of Justice

Clerk in attendance :

Ms LEUNG Siu-kum,
Chief Assistant Secretary (1)2

Staff in attendance :

Ms Bernice WONG,
Assistant Legal Adviser 1

Miss Becky YU,
Senior Assistant Secretary (1)3


I Election of Chairman

At the request of members, Mr IP Kwok-him chaired the meeting for electing the Chairman.

2. Nominated by Mr LEE Kai-ming and seconded by Mr WONG Siu-yee, Mr IP Kwok-him was elected Chairman of the Bills Committee.

II Meeting with the Administration
(Provisional Legislative Council Brief Ref: FIN SCR 7/2201/97 (Part)
PLC Paper Nos. LS 118 and CB(1) 1117)

3. At the invitation of the Chairman, the Deputy Secretary for Treasury (DS for Tsy) advised that the purpose of the Inland Revenue (Amendment) Bill 1998 was to amend the Inland Revenue Ordinance (Cap. 112) to give legal effect to the revenue concession proposals, principally relating to salaries tax, in the 1998-99 Budget.

Home loan interest

Application of the concession on home loan interest

4. Noting that under the Bill, owner-occupiers could claim up to a maximum mortgage interest deduction of $100,000 per year in respect of a dwelling in any five tax years, a member sought clarification on the basis upon which the duration of five years was arrived at. The Commissioner of Inland Revenue (C of IR) explained that in general, the burden of interest on home buyers would be heavier at the threshold of mortgage because of the large amount of principal involved which would gradually diminish as the principal reduced over time. The proposed tax concession for five years would serve as a financial relief to home buyers, in particular at the initial stage of mortgage. To optimize the benefits of the concession, arrangement had been made for taxpayers to choose the period within which the deduction should apply taking into account their individual circumstances. For example, some existing home owners might wish to exercise the concession at a later stage when they acquired a new home. Such an arrangement would also help to spread the revenue loss in respect of the deduction to different tax years.

5. On the application of the deduction on married couples, C of IR reiterated that every taxpayer, as an owner-occupier with a home mortgage for a property, could benefit from the deduction. In the case of a married couple, if the husband and wife together owned only one property and used it as their place of residence, they would be jointly subject to the deduction limit of $100,000 per property per year, up to a maximum of five years. The same rule would apply to a property held and occupied on a joint tenant or tenant in common basis, regardless of the relationship between the partners co-owning the property. The deduction would be calculated in proportion to the shares of ownership of respective tenants in common.

6. A member was not convinced that the Administration should use dwellings rather than individual taxpayers as the basis for the concession. He was of the view that every owner-occupier should be entitled to the maximum deduction of $100,000 a year. C of IR explained that in his Budget speech on 18 February 1998, the Financial Secretary had made it clear that individual properties would be used as the basis for the mortgage relief. He cautioned that the revenue loss in respect of the concession on mortgage interest would be much higher than the estimated $3 billion if every owner-occupier were allowed to claim the maximum amount of deduction as was suggested.

7. In reply to Mr Ronald ARCULLI's question, C of IR advised that mortgage interest paid in respect of a home loan provided by an employer could be eligible for the deduction, but had to be subject to the approval of the Commissioner. C of IR was concerned about any possible tax avoidance arrangement such as in the cases where the employer and the employee were of the same family. Since it was not uncommon for employees to obtain home loans from employers, Mr ARCULLI considered that the Administration should include in the list under section 26E(9) that home loan interest paid to the employer could be eligible for claiming deduction. C of IR undertook to move a Committee stage amendment (CSA) to this effect. Admin

8. As regards car parking spaces, C of IR advised that the proposed deduction would apply to mortgage interest payments in respect of car parking spaces if these formed part and parcel of the dwellings and were valued together with the dwellings as a single tenement under the Rating Ordinance (Cap. 116).

Discretion of the Commissioner of Inland Revenue

9. Mr Eric LI considered the scope of C of IR's discretionary power under section 26E too wide in view of the numerous scenarios arising from the deduction of home loan interest, as illustrated in the information paper tabled at the meeting, which required special consideration by the Commissioner. While acknowledging the member's concern, C of IR remained of the view that the discretion was necessary since not all scenarios could be listed out before the implementation of the Bill and the discretion would enable the Commissioner to deal with different cases according to individual merits. C of IR emphasized that the Commissioner's decision was not final and adjudication from the Board of Review could be sought in the event of disputes. He also undertook to consider drawing up practical guidelines on exercising the discretion as was suggested by the member. Mr LI was however concerned that the Board might be reluctant to revoke the Commissioner's decision since the Bill had expressly provided the Commissioner with the discretion. Besides, the cost for review could be very expensive. C of IR assured members that the Board which comprised independent members, including barristers, solicitors and professional tax consultants would deal with disputes in an impartial manner. He supplemented that no cost would be incurred from the review, and that arrangements had been made to conduct all proceedings in Chinese to improve the transparency of the review procedures.

Contributions to recognized retirement schemes

10. In reply to a member's question, C of IR confirmed that the maximum deduction of $12,000 per year in respect of contributions to retirement schemes would apply to the schemes under the Occupational Retirement Schemes Ordinance.

11. Members then proceeded to examine the Bill clause by clause.

Clause 1. Short title

Clause 2. Application

12. No particular comments were made on these clauses.

Clause 3. Interpretation

13. DS of Tsy advised that consequential amendments would be made to the clause to take account of the enactment of the Provident Fund Schemes Legislation (Amendment) Ordinance. The relevant CSAs had been circulated vide PLC Paper No. CB(1) 1117(02).

Clause 4. Salaries tax on spouses to be paid separately unless they elect to be jointly assessed

Clause 5. Ascertainment of net chargeable income

Clause 6. Charitable donation

Clause 7. Calculation of salaries tax

Clause 8. Ascertainment of chargeable profits

Clause 9. Section added - 16AA. Mandatory contributions in self-employment cases allowable as a deduction

Clause 10. Approved charitable donations

14. No particular comments were made on these clauses.

Clause 11. Deductions not allowed

15. C of IR advised that the purpose of section 17(1)(a)(ii) was to spell out clearly that apart from contributions provided under section 16AA, other contributions paid to a mandatory provident fund scheme would not be eligible for deduction under profits tax.

16. Some members pointed out that the definition of "spouse" under the Inland Revenue Ordinance was different from that in the Provident Fund Schemes Legislation (Amendment) Ordinance which included cohabitants. They asked if the Inland Revenue Department had experienced any difficulties in interpreting the definition in tax assessment. C of IR admitted that it was not uncommon for the Board of Review to examine the definition of 'spouse' in joint assessment cases, particularly for couples married overseas. In processing these cases, the Board had to ascertain if these couples were married in accordance with the matrimonial law in the countries concerned. Nevertheless, the Administration undertook to review the consistency of the definition in the Inland Revenue Ordinance and other legislation. Admin


Clause 12. Part IVA added

Clause 13. Basic allowance

Clause 14. Married person's allowance

Clause 15. Dependent parent allowance

Clause 16. Dependent grandparent allowance

Clause 17. Disabled dependant allowance

Clause 18. Calculation of total income

Clause 19. Amount of provisional salaries tax

Clause 20. Rates

Clause 21. Deduction for expenses of self-education

Clause 22. Schedules added

Clause 23. Allowances

Clause 24. Transitional

17. No particular comments were made on these clauses.

III Any other business

18. While members were supportive of the general principles of the Bill, they noted that the Hong Kong Society of Accountants was preparing a submission on the Bill and agreed to hold a meeting on Monday, 23 March 1998, at 9:30 am to consider the submission. In order not to delay the implementation of the Bill, the Administration was requested to give notice to resume Second Reading debate of the Bill on 7 April 1998. Admin

19. There being no other business, the meeting ended at 10:20 am.



Provisional Legislative Council Secretariat
10 June 1998