PLC Bills Committee on Provident Fund Schemes Legislation (Amendment) Bill 1997

Information Note

Consequential Amendments to the Inland Revenue Ordinance

Purpose

In response to Members' query, this paper seeks to explain :

  1. the special tax arrangements for retirement benefits of existing voluntary retirement schemes; and

  2. the purposes of making consequential amendments to the Inland Revenue Ordinance (IRO).

Existing Tax Arrangements for Scheme Members
Bills Committee's Comments

2.When discussing the consequential amendments to the IRO, Members expressed concerns about the application of the existing tax arrangements to scheme members' MPF benefits. Members requested the Administration to prepare a paper explaining the existing tax arrangements for retirement benefits.

Administration's Response

3.Under the IRO, retirement benefits of existing voluntary retirement schemes currently enjoy some special tax arrangements, including :

  1. For benefits attributable to an employee's contributions, exempt from salaries tax when the benefits are withdrawn;

  2. For benefits attributable to an employer's contributions, exempt from salaries tax when the benefits are withdrawn upon retirement, death and incapacity;

  3. For benefits attributable to an employer's contributions, exempt from salaries tax when the benefits are withdrawn upon termination of service, but subject to the " proportionate benefits rule " . (Details of the mechanism of the " proportionate benefits rule " are at Annex A); and

  4. For benefits attributable to an employer's contributions, no exemption from salaries tax is provided for when the benefits are withdrawn in accordance with scheme rules other than under a circumstance of death, incapacity, retirement or termination of service.

Consequential Amendments to IRO

Bills Committee's Comments

4.To facilitate the Committee's examination of the Bill, Members requested the Administration to explain briefly the purpose of the consequential amendments to the IRO.

Administration's Response

Overall Purpose

5.To tie in with the implementation of the Mandatory Provident Fund (MPF) system, we extend the existing tax arrangements concerning retirement benefits to the MPF accrued benefits. Consequential amendments to the IRO are thus necessary to :

  1. Mandatory Contributions : Provide for salaries tax exemptions for the MPF accrued benefits attributable to mandatory contributions (including both the employer's and employee's contributions) when the benefits are withdrawn upon the circumstances prescribed in the MPF Ordinance i.e. :

  • retirement (including early retirement1 );
  • death;
  • incapacity; and
  • permanent departure from Hong Kong.

When compared with the tax arrangements for existing voluntary retirement schemes, the exemptions described in paragraph 3(a) and (b) above will apply equally to MPF benefits derived from mandatory contributions, with " permanent departure from Hong Kong " added to the list of circumstances for benefit withdrawal. Due to the principle of preservation under the MPF System, the circumstances for benefit withdrawal described in paragraph 3(c) and (d) above do not arise in withdrawal of MPF benefits derived from mandatory contributions.

  1. Voluntary Contributions : Regarding the MPF accrued benefits attributable to voluntary contributions, provide for similar tax arrangements as those under existing voluntary retirement schemes as set out in paragraph 3 above.

Annex B compares the tax arrangements for scheme members under existing voluntary retirement schemes and MPF schemes.

6.We have also taken the opportunity to improve the drafting of the IRO to facilitate easy understanding of the Ordinance. Most of the amendments made fall into this category. No changes in policy are made to the provisions concerned.

Specific Provisions

7.Major amendment items in the IRO are summarised below :

Item No.
(Schedule 5
of the
Amendment
Bill)

Section No.Purpose
(a) Interpretation
1, 2, 3 & 8S.2 & S.9(6)--To define the relevant terms in relation to the MPF Ordinance, for example, " voluntary contributions', " mandatory contributions' and " accrued benefits' etc.

(b) Tax arrangements for scheme members
4 - 6S.8(2) - (4)--To provide for salaries tax exemption for MPF accrued benefits derived from mandatory contributions (both the employer's and employee's contributions) withdrawn upon death, incapacity, retirement or permanent departure from Hong Kong. "

--To apply the " proportionate benefits rule " to MPF accrued benefits attributable to employer's voluntary contributions.

--To improve the drafting of existing provisions to make it more user-friendly, e.g. using formula to express the " proportionate benefits rule " .

7S.9(1)--To include as income for tax purposes the MPF accrued benefits attributable to employer's voluntary contributions which are withdrawn in accordance with scheme rules other than under a circumstance of death, incapacity, retirement or termination of service.

(c) Tax arrangements for employers and self-employed persons
9S.15(l)(h)--To include the refund of employer's contributions under an MPF scheme, if any, as taxable item for the calculation of profits tax so as to be in line with existing retirement schemes.

10 & 11S.16A--To provide for deduction under profits tax the special payments regarding voluntary contributions made by an employer under an MPF scheme so as to be in line with existing retirement schemes.

12 & 13S.17(1) &(2)--Recast to :

--improve drafting; and

--specify that MPF contributions made in respect of a self-employed person himself, his spouse, his partner or his partner's spouse are not deductible for calculation of profits tax.


Mandatory Provident Fund Office
Financial Services Bureau
30 December 1997

1. The early retirement age under the MPF Ordinance is 60 years old.

Annex A

Proportionate Benefits Rule

Application under the existing voluntary retirement schemes

  • Retirement benefits (attributable to an employer 's contributions) withdrawn upon termination of service of an employee are totally exempted from salaries tax if the employee has worked for 10 years or more for that employer. In case the employee has worked for less than 10 years, the benefits are exempted from salaries tax only to the extent equal to the " proportionate benefits"

  • Calculation of the "proportionate benefits" as prescribed in the IRO is as follows :

    CMS
    PB=-------x AB
    120

    where :

    PB=the proportionate benefits which can be exempted from salaries tax.
    CMS =the number of completed months of service which the employee has completed with the employer.

    AB=the amount of accrued benefits attributable to the employer 's contributions which the employee entitles to receive.

    Proposed application under the MPF schemes

    1. The same mechanism for the calculation and application of the "proportionate benefits rule" set out above also applies to the MPF benefits, but only to the accrued benefits attributable to an employer ' s voluntary contributions.

    Annex B

    Comparison of Salaries Tax Arrangements for Accrued Benefits Withdrawn by Members

    Existing Voluntary Retirement Schemes

    Mandatory Provident Fund Schemes

    Circumstances

    for Withdrawal

    Accrued benefits attributable to employee’s contributions

    Accrued benefits attributable to employer’s contributions

    Accrued benefits attributable to -

    (i) employee’s contributions (both mandatory & voluntary contributions); and

    (ii) employer’s mandatory contributions

    Accrued benefits attributable to employer’s voluntary contributions

    (1) On retirement

    Exempted

    Exempted

    Exempted

    Exempted

    (2) On death

    Exempted

    Exempted

    Exempted

    Exempted

    (3) On incapacity

    Exempted

    Exempted

    Exempted

    Exempted

    (4) On termination of service

    Exempted

    Exempted but subject to the "proportionate benefits rule"

    Exempted

    Exempted but subject to the "proportionate benefits rule"

    (5) On permanent departure from Hong Kong (coupled with termination of service)

    Exempted

    Exempted but subject to the "proportionate benefits rule"

    Exempted

    Exempted but subject to the "proportionate benefits rule"

    (6) On withdrawal in accordance with scheme rules other than a circumstance stated in (1) to (5)

    Exempted

    Assessable for tax purposes

    Exempted

    Assessable for tax purposes