For discussion FCR(97-98)7
on 25 April 1997

ITEM FOR FINANCE COMMITTEE

CAPITAL WORKS RESERVE FUND
HEAD 701 - LAND ACQUISITION
Home Purchase Allowance

Members are invited to approve revisions to the eligibility for the Home Purchase Allowance payable to owners of domestic premises affected by resumption.

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PROBLEM
PROPOSAL
JUSTIFICATION
Current position
Members’ views on the original proposal
The revised proposal
Appeal channel
FINANCIAL IMPLICATIONS
BACKGROUND INFORMATION
Examples of Home Purchase Allowance (HPA) cant properties to be resumed by the Government
Assumptions
Note
Examples of how the proposed revised eligibility for Home Purchase Allowance (HPA) would work in practice

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PROBLEM

The current Home Purchase Allowance (HPA) is over generous in certain respects and has given opportunities for abuse by speculators.

PROPOSAL

2. We propose to revise the eligibility for HPA and the amount of the allowance payable as set out in paragraph 6 below.

JUSTIFICATION

Current position

3. Owners of domestic premises are eligible for statutory compensation if their premises are resumed by the Government. These owners are also eligible for HPA, which is an ex-gratia allowance payable to enable affected owners to purchase a replacement flat of a similar size in the neighbourhood of the resumed flat. The amount of HPA payable is the difference between the cost of a replacement flat and the amount of statutory compensation. Under current practice, we estimate the cost of a replacement flat on the basis of a brand new one of a size similar to the one being resumed and in the same locality. Also, at present, HPA is paid to the owners, irrespective of whether the premises are vacant, tenanted or occupied by the owners. This is too generous to non-owner-occupiers and investment owners because they do not need replacement flats for occupation upon resumption, which was the original purpose of HPA. Moreover, owners of tenanted premises effectively receive a higher amount of HPA than those whose premises are vacant, as shown in Enclosure 1. This has created an opportunity for speculators to acquire properties with a view to profiting from the payment of HPA. The Public Accounts Committee of the Legislative Council has asked for a review of the policy on the grant of HPA payments to owners of multiple flats.

Members’ views on the original proposal

4. On 19 July 1996, we put forward to Finance Committee a proposal to revise the eligibility for HPA. Details of the proposal are as follows -

1. HPA should normally be payable only to owner-occupiers, and restricted to one residential property per owner;

2. guidelines should be drawn up for determining whether a claimant is an owner-occupier and to address exceptional situations where payment to non-owner-occupiers and/or multiple payments to an owner may be allowed;

3. for partly tenanted properties, HPA should be paid only for the area occupied by the owner, but not for those occupied by the tenants;

4. residential property used for non-domestic purposes should not be eligible;

5. owners whose claims are rejected should be able to appeal to the Secretary for Planning, Environment and Lands (SPEL); and

6. HPA should be based on a reasonably modern, but not necessarily brand new, replacement flat in the same locality as the resumed property.

Members recognised the financial burden of HPA on the Government and agreed that there should be a restriction on the number of payments made to a single owner. However, they expressed reservations about the details of the proposed arrangements such as the calculation of compensation and the implementation plan, and considered that these issues should be given further thought. Specifically, in subsequent consultations, some Members felt that it was too restrictive for HPA to be payable to owner-occupiers only and on the basis of one residential property per owner. They argued that some affected property owners might be elderly people who depended on income from tenanted flats, and they should not be penalised by changes to the policy, which has been in place for many years. They took the view that owners of fully or partly tenanted flats should remain eligible for HPA.

5. Also in those consultations, there was support for certain changes to address the present deficiencies in HPA along the following lines -

1. a cap on the number of flats for which HPA will be paid at two per eligible owner, because an owner may live in one flat and rent out the other to generate income;

2. basing HPA on the replacement cost of a reasonably modern flat, rather than a brand new one; and

3. making a deduction from the full HPA, if rehousing of, and/or cash compensation to, tenants are required.

They also considered that non-domestic premises being used for non-profit-making purposes, such as churches, hostels for the aged, etc. should be eligible for HPA, and generally favoured an independent appeal channel, rather than appeals to SPEL.

The revised proposal

6. Having carefully considered the above views, we propose to revise the eligibility for HPA and the amount of the allowance payable as follows -

1. HPA should be calculated on the basis of the vacant possession value of the property only, namely, HPA is the cost of a replacement flat (subject to (h) below) less the amount of statutory compensation assessed on the assumption that the property were vacant. Owner-occupiers and owners of tenanted flats would be paid HPA on this basis, but the differential in statutory compensation and a deduction in the amount of HPA payable (see (c) below) would mean that the owners of tenanted flats would receive less overall;

2. HPA (calculated as in (a) above and subject to (c) to (g) below) will only be payable in respect of the ownership or partial ownership of a maximum of two flats per resumption exercise (subject to (e) below), in recognition of the fact that some owners may live in one flat and rent out the other to generate income;

3. full HPA should be paid for owners occupying the whole of one flat. For tenanted flats and the tenanted portion of flats which are partially rented out, HPA will still be payable, but a deduction will be made to take into account the fact that the Government rehouses the tenants;

4. full HPA entitlement will arise from a second flat if the owners can show that the flat is occupied by their immediate family members, i.e. children, parents or dependent siblings, prior to the gazetting of the resumption, and that the occupiers do not own another property elsewhere in Hong Kong;

5. HPA should be paid at 50% of the full allowance for one tenanted flat per owner per resumption exercise. Where an owner is paid full HPA for one flat occupied by himself or his immediate family, he should be eligible for 50% HPA for a second, tenanted, flat. Where an owner receives full HPA for two flats under (d) above, he should not be eligible for any further payments in view of (b) above. An owner who does not occupy a flat (or part of a flat) being resumed in a particular exercise but owns one or more affected tenanted flats, should be eligible for 50% HPA in respect of one flat only;

6. an owner who partially occupies his flat and lets out part of it should be eligible for full HPA, on a pro-rata basis, for the area he occupies and 50% HPA for the tenanted area;

7. for joint owners or company owners, the same principles in (a) to (f) above should apply for each individual owner, or shareholder in the case of company ownership. The principle is that an individual owner/shareholder should be eligible for HPA in respect of up to two flats, with the HPA calculated pro rata to the share for each joint owner/shareholder;

8. HPA should be assessed on the basis of a reasonably modern flat (about ten years old) in the same locality and having a similar area as that of the resumed property, rather than a brand new flat;

9. no HPA will be paid for vacant flats, unless the owner can prove that the property resumed is the only property owned by him in Hong Kong when the notice of resumption is gazetted, and he is currently living elsewhere because of his occupation or is occupying a quarter provided by his employer or renting one, using a tenancy allowance provided by his employer; and

10. domestic property being used for non-domestic purposes should not be eligible for HPA, except for such non-profit-making uses as churches, hostels for the aged, etc., provided that the use is not in breach of the lease conditions or any legislation, or that it has been approved by the relevant authorities. (Non-profit-making owners are favoured because of the public purposes they serve.)

The revised proposal recognises the fact that some property owners depend on rent from tenanted properties as a source of income and takes into account the cost to the Government, not the owners, of rehousing tenants. Some examples of how the revised proposal would work in practice are set out in Enclosure 2.

Appeal channel

7. The Director of Administration is examining the feasibility of establishing an independent appeal mechanism for dealing with ex-gratia compensation issues in general. Until a decision is made on this, an owner who is aggrieved by the Director of Lands’ decision that he/she is not eligible for HPA should, within three months of such a decision, be allowed to appeal to SPEL, who would, upon receiving notice of the appeal, hear or consider representations from parties to the appeal and make a final decision on the appellant’s eligibility for HPA.

8. An owner who claims to have suffered injustice in consequence of maladministration in connection with the decision of the Director of Lands or SPEL, would be able to lodge a complaint with The Ombudsman as at present.

FINANCIAL IMPLICATIONS

9. The revised proposal will restrict the number of payments to an owner and allow a deduction, if applicable, from the full HPA payable. This will significantly reduce the net acquisition costs incurred by the Government when compared with the existing practice. The financial implications of the revised proposal, as compared to the original proposal of 19 July 1996, depend on various factors, such as the number of non-owner-occupiers and the flats which are rented out. As shown in paragraph 10 below, in most cases the revised proposal would involve a higher cost than the original proposal because it allows for multiple payments.

10. The financial implications of the existing practice, the original proposal and the revised proposal are illustrated, using three completed resumption projects, as follows -

The amount of HPA payable under the original proposal is the lowest in each of the three cases because the majority of claimants are non-owner-occupiers and in some cases the owner has more than one flat.

11. The revised proposal involves a more complicated method of assessing HPA. Thus, it is likely that the time taken to process HPA claims will be lengthened. It is, however, not possible to assess the exact processing time and the staffing implications as we are uncertain about the number of cases to be dealt with at any given time.

BACKGROUND INFORMATION

12. The original proposal was endorsed by the Governor in Council in June 1996 before it was presented to Finance Committee on 19 July 1996. In view of Members’ views on the original proposal, we revised the proposal and obtained the Governor in Council’s endorsement of the revised proposal in March 1997. We briefed the Legislative Council Panel on Planning, Lands and Works on the

revised proposal on 15 April 1997. The Panel supported the revised proposal. Some Panel members asked if the revised proposal allowed more than two HPA payments to an owner who could show that his properties were occupied by his immediate family members. We explained that the revised proposal provided for a maximum of two HPA payments per eligible owner, and hence the owner in question would not be eligible for HPA for the third or other properties.

Planning, Environment and Lands Branch
April 1997

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Enclosure 1 to FCR(97-98)7

Examples of Home Purchase Allowance (HPA) currently payable to owners of tenanted and vacant properties to be resumed by the Government

Assumptions

(1) The properties under Columns (A) and (B) are of similar size in the same buildings.

(2) All figures are hypothetical for illustration purposes only.

Note

Under the revised proposal, the HPA payable would be $0.5 million, irrespective of whether the properties are vacant, tenanted or occupied by the owners.

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Enclosure 2 to FCR(97-98)7

Examples of how the proposed revised eligibility for

Home Purchase Allowance (HPA) would work in practice

* HPA is the cost of a replacement flat (assuming a reasonably modern flat in the same locality and having a similar area as that of the resumed property) less the amount of statutory compensation assessed on the assumption that the property were vacant.

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