Provisional Legislative Council

PLC Paper No. CB(1) 1211

Ref : CB1/BC/10/97

Paper for the House Committee Meeting
on 27 March 1998

Report of the Bills Committee on
Inland Revenue (Amendment) Bill 1998


This paper reports on the deliberations of the Bills Committee on Inland Revenue (Amendment) Bill 1998.

The Bill

2. The Bill seeks to give legal effect to the following revenue concession proposals, principally relating to salaries tax, in the 1998-99 Budget:

  1. introducing new deductions for -

    1. elderly residential care expenses for supporting an elderly dependant in a residential care home;

    2. home loan interest, deductible for 5 years of assessment;

    3. contributions to a recognized retirement scheme, i.e. a registered scheme as defined in the Mandatory Provident Fund Schemes Ordinance (Cap. 485), or a recognized occupational retirement scheme as defined in the Inland Revenue Ordinance (Cap. 112);

  2. widening the marginal tax bands and reducing the marginal tax rates;

  3. increasing the salaries tax allowances and prescribed amounts of contribution towards maintenance of parent or grandparent; and

  4. increasing the existing deduction for expenses of self-education.

The Bills Committee

3. Members agreed at the House Committee meeting on 6 March 1998 to form a Bills Committee to study the Bill. The Bills Committee, under the Chairmanship of Hon IP Kwok-him, has held two meetings with the Administration. The membership list of the Bills Committee is at Appendix I.

Deliberations of the Bills Committee

4. During the detailed study of the Bill, the Bills Committee has taken note of two submissions on the Bill: one is from the Hong Kong Society of Accountants, and the other one from a member of the public who has written to the Equal Opportunities Commission expressing views on the home loan interest. The Administration’s response to these submissions has been examined by the Bills Committee.

5. The Bills Committee has mainly focused on the examination of deductions for home loan interest and contributions to retirement schemes. Its deliberation is summarized in the paragraphs below.

Home loan interest

6. The Bills Committee has considered various issues raised by the Hong Kong Society of Accountants on home loan interest, namely:

  1. right of nomination of the principal place of residence by a taxpayer who has more than one place of residence [proposed Section 26E(9)];

  2. discretion of the Commissioner of Inland Revenue [proposed Section 26E(2)(a)(i)(B), (3)(a) and (b)] ;

  3. nomination of spouse to claim the deduction by an owner with income property or profits chargeable to tax [proposed Section 26F].

Principal place of residence

7. Under Section 26E(9), "place of residence" in relation to a person who has more than one place of residence means his principal place of residence. The Administration considers that the question of "principal place of residence" is a matter of fact. A person cannot have two or more places of residence, being equally "a principal place of residence" at any one time. Furthermore, the concept of "principal place" has been widely applied in other legislation such as the Insurance Companies (General Business) (Valuation) Regulation (Cap. 41G), Immigration Ordinance (Cap. 115), etc.

8. The Hong Kong Society of Accountants, however, considers that it is not clear how the principal place of residence is determined and that the taxpayer should have the right of nomination of the principal place of residence if he has more than one place of residence.

9. The Administration holds the view that the meaning is clear in this respect and therefore does not agree that the taxpayer should be allowed to nominate his own principal place of residence. The Administration envisages that by allowing the taxpayer to nominate the principal place of residence, the taxpayer would naturally select the premises for which a higher interest is payable for claiming deduction irrespective of whether the premises is genuinely his principal place of residence.

Discretion of the Commissioner of Inland Revenue

10. Members have noted that under Section 26E, the Commissioner has been provided with discretionary power to decide on a number of issues. The Hong Kong Society of Accountants considers that because of the wide scope of the situations catered for by this provision, the scope for the discretion of the Commissioner is also very wide and therefore suggests that this discretion should be narrowed down. The Society’s views are shared by members of the Bills Committee.

11. In response, the Administration has agreed to move a Committee stage amendment (CSA) to delete "in the opinion of the Commissioner," in subsections (2)(a)(i)(B), (3)(a) and (b).

Nomination of spouse to claim home loan interest under salaries tax

12. The Hong Kong Society of Accountants has pointed out that under Section 26F, an owner of a property with no income chargeable to tax may nominate his taxable spouse to claim home loan interest under salaries tax. The Society would like to seek clarification on why this is restricted only to an owner with no income chargeable to tax, and to explore if it is equally applicable to an owner with chargeable income who wishes to nominate his spouse to claim the deduction. The Society also does not find any reason for providing for a nomination under Section 26F when it is obvious that an owner with no chargeable income would elect joint assessment if he would wish to make use of his deduction.

13. In response, the Administration considers it reasonable to allow nomination only if the person concerned has no income. It, however, admits that if the person has assessable income but the deduction is in excess of the assessable income, the person concerned can elect joint assessment to ensure that he can enjoy the full benefit of the deduction allowed.

Definition of "home loan interest"

14. Under the new Section 26E(9), home loan interest for claiming deduction is defined as interest paid to:

  1. the Government;

  2. a financial institution;

  3. a credit union registered under the Credit Unions Ordinance (Cap. 119);

  4. a money lender licensed under the Money Lenders Ordinance (Cap. 163);

  5. the Hong Kong Housing Society; or

  6. any recognized organization or association.

15. Members of the Bills Committee are of the view that the above list should be extended to include the employer of the taxpayer. The Administration has accepted members’ view and will move a CSA to this effect.

Dwelling owned by joint tenants

16. The Bills Committee has taken note of a letter addressing to the Equal Opportunities Commission raising concern about discrimination against married couples under the new provision on home loan interest.

17. In response to the Bills Committee’s enquiry, the Administration has clarified the owners of a property held and occupied on a joint tenant or tenant in common basis would be jointly subject to the maximum deduction of $100,000 for that property per year in any five years of assessment, regardless of the relationship between the co-owners. In cases where the husband and wife each owns a home and each uses his/her respective home as the principal place of residence, then each of them, as individual taxpayer, can be eligible for a maximum mortgage interest deduction of $100,000 a year in respect of his/her self-occupied home. However, the couple has to prove to the satisfaction of the Commissioner of Inland Revenue that, despite being married, each of them has a separate home as his/her principal place of residence. The Administration stresses that there is no question of discrimination against married couples.

Deduction for the Mandatory Provident Fund (MPF) contributions of the self-employed

18. The Hong Kong Society of Accountants has drawn the Bills Committee’s attention to the new section 16AA regarding the spouse’s contribution to MPF scheme. The Administration clarifies that the spouse of a self-employed person, if he/she is also a self-employed person, is allowed a deduction for his/her contribution paid to MPF scheme. However, in computing the profits or losses of a person carrying on a trade, profession or business, the salaries or other remuneration of the person’s spouse, or in the case of partnership, any partner’s spouse, are not deductible. The Administration explains that it is a long-standing tax principle that expenses incurred in respect of the spouse are not allowed for tax deduction. It also applies for contributions paid to MPF scheme in respect of a spouse or a partner’s spouse. The Administration has also drawn members’ attention to the Employment Ordinance (Cap. 57) that a spouse of an employer or of a partner in a partnership is not normally regarded as an employee and therefore no contribution to MPF scheme in respect of the spouse as an employee is thus necessary.

19. Members have also raised concern about the consistency of the definition of "spouse" under the Inland Revenue Ordinance with that under other legislation. The Administration responded that upon members’ request, the definition under the Inland Revenue Ordinance and the MPF legislation has been examined and concluded that no change to the Inland Revenue Ordinance in respect of this area is necessary.

Committee stage amendments

20. Apart from the CSAs highlighted in this report, the Administration will also move other consequential and technical amendments to the Bill. A full set of the CSAs agreed by the Bills Committee and to be moved by the Administration is at Appendix II.


21. The Bills Committee recommends that, subject to the CSAs being moved by the Administration, the Second Reading debate on the Bill be resumed on 7 April 1998.

Advice sought

22. Members are invited to support the recommendation of the Bills Committee in paragraph 21 above.

Provisional Legislative Council Secretariat
27 March 1998

Appendix I

Provisional Legislative Council

Bills Committee on

Inland Revenue (Amendment) Bill 1998

Membership list

Hon IP Kwok-him (Chairman)

Hon WONG Siu-yee

Hon NG Leung-sing

Hon Eric LI Ka-cheung, JP

Hon LEE Kai-ming

Hon Henry WU

Hon Ronald ARCULLI, JP

Hon MA Fung-kwok

Hon Mrs Sophie LEUNG LAU Yau-fun, JP

Hon CHAN Yuen-han

Hon CHAN Kam-lam

Hon Bruce LIU Sing-lee

Hon Ambrose LAU Hon-chuen, JP

Total : 13 Members

Provisional Legislative Council Secretariat
16 March 1998