PLC Sub-Committee on Subsidiary Legislation of the MPF System

Information Note

Self-employed Persons -
Calculation of Income, Compliance and Enforcement


This paper describes :

  1. the proposal to calculate the relevant income of self-employed persons for MPF contribution purposes on the basis of their profits tax (paragraphs 2-4 below); and

  2. the proposed measures to facilitate compliance and enforcement in respect of the MPF obligations of the self-employed persons (paragraph 5 below).


Calculation of Relevant Income

2.We propose to link the " relevant income " of the self-employed persons to their " assessable profits' provided in the Inland Revenue Ordinance (IRO). A three-tier definition for the " relevant income " should be adopted :

  1. For a person who received a Notice of Assessment (NoA)1 issued by the Inland Revenue Department (IRD), his " relevant income " should be the assessable profits as calculated in his latest NoA;

  2. For a person who did not receive any NoA, his " relevant income " should be taken as the average income prescribed in the MPF regulations which will be on the basis of the allowance for tax assessment under IRO (current rate at $8,333 per month);

  3. For a person who did not receive any NoA and claims that he earns less than the prescribed level in (b) above or for a person whose latest NoA is under appeal, his " relevant income " should be the profit as calculated in accordance with the IRO or in his latest tax return to IRD.

3.We propose that if a self-employed person chooses to make the maximum contribution of $1,000 each month (viz. 5% of $20,000 which is the statutory maximum level of income for contribution purpose), then he does not need to produce the NoA or his tax return as described in (a) and (c) above. We also propose that if a self-employed person suffers a loss during the scheme year, he can so declare to the trustee and stop making contributions until he makes a profit again.

4.The proposed definition of " relevant income " in paragraph 2 above has the effect of excluding director's fees received by non-executive company directors from the MPF System as such fees are regarded as " assessable income " in the IRO and subject to salaries tax instead of profits tax. Their income deriving from their principal employment would, nevertheless, still be caught in the MPF net.

Compliance and Enforcement

5.To facilitate compliance and enforcement, we propose a three-pronged approach as follows :

  1. Simple System : The MPF System will be designed in a way easy enough to encourage the self-employed to participate and clear enough for the MPFA to enforce. As described in paragraph 2 above, the definition of " relevant income " is such that the self-employed persons will not be required to calculate their profit and loss solely for MPF purposes. Duties of the self-employed under the MPF System will be kept to a minimum (Annex);

  2. Education Programme : The MPFA will increase the " incentives' of the self-employed persons by launching education programme on the benefits of the MPF System and their obligations under the System; and

  3. Enforcement Measures : The MPFA will concentrate its enforcement efforts on those self-employed persons with business registration2 . The role of the MPFA in ensuring participation and chasing after default contributions of these people can be the same as in the case of employers and employees. Self-employed persons not joining any MPF schemes will be included in the list of non-compliance to be compiled by the MPFA on the basis of the database from trustees and business registration records. They will also be chased and fined, alike employers, for failure to pay contributions.

Calculation of Relevant Income

6.We propose to rely on the assessable profits in IRO to evaluate the relevant income of the self-employed for the following reasons :

  1. Simplicity and unambiguity : The proposed definition is based on the well-established " assessable profits' as provided under IRO. The self-employed will not be required to calculate their profit and loss separately for tax purposes and MPF purposes. This avoids extra work and possible confusions and will facilitate compliance and enforcement. It also saves the effort of the trustees and MPFA to verify the calculations.

  2. Flexibility : We allow the self-employed to declare loss and stop making contributions until he makes a profit again. This avoids undue hardship. To facilitate compliance, we also waive the requirement of providing evidence of income level for those self-employed persons who contribute according to the maximum level.

Compliance and Enforcement

7.Providing MPF coverage for self-employed persons would have the following problems :

  1. Incentives : Unlike employees, the self-employed will not have corresponding contributions from employers. They would have relatively little incentive to participate in MPF schemes. This will lead to more enforcement difficulties since the MPFA cannot rely on them to play a self-policing role.

  2. Calculation of relevant income : It is extremely difficult to verify the relevant income of the self-employed, especially for those who have low and unsteady income. First, those who are not required to pay tax may not keep any detailed records of income. Secondly, it is relatively easy for the self-employed to falsify their actual income.

  3. Enforcement : (a) and (b) above make enforcement difficult. It is even more difficult to enforce MPF requirements on those self-employed persons who have no business registration.

8.The proposed three-pronged approach recognises the above problems. It is of paramount importance to provide a simple system so as to facilitate all the parties concerned, including the self-employed persons, trustees and the MPFA, to fulfill their obligations. The education programme aims at enabling the self-employed persons to have a better understanding of their rights and obligations under the MPF System. In view of the likely difficulties in enforcement, it is more pragmatic for the MPFA to focus on areas which are most important.

Mandatory Provident Fund Office
Financial Services Bureau
11 November 1997

1. Every self-employed person has an obligation to file a tax return to IRD. If his profit is higher than the basic allowance, then he will be issued a NoA requiring him to pay tax.

2. All persons carrying out a business are normally required to have business registration. However, there are persons who are engaged in a business without business registration. These include persons who in practice do not comply with the Business Registration Ordinance (e.g. street traders, private tutors, freelance taxi drivers or other freelance workers) or persons who are exempt from business registration (e.g. agricultural and livestock farmers, fishermen).