Structuring your compensation structure efficiently is a great way to lower your staff’s tax liability without incurring any extra costs to the company.
How it works:
Housing allowances are taxed at 10% of net salary (calculation example below). To take advantage of this, setup your staff’s salary so that a portion of their salary is considered as housing rental reimbursement.
Meaning, if the staff’s salary is $50,000 a month, and they pay $20,000 in rent each month, setup their salary statements so that they receive $30,000 of salary and $20,000 in rental reimbursements.
How much tax you save:
So how much would your staff really save on their salaries tax, let’s use the above example.
If housing allowance is not used:
Salary at $50,000 a month times 12 months, $600,000 per year. After basic allowance deductions, their taxable income is $468,000 and the tax bill is $55,560.
If housing allowance is used:
Salary is $30,000 a month times 12 months, $360,000 per year. The housing allowance is taxed at 10% of net salaries $36,000. Their taxable income is $396,000, and the tax bill is $20,880.
$34,680 saved, at no cost to the company, equivalent to giving your staff a 5.8% raise.
Is this legal?
The following excerpt is from a statement released by the IRD regarding the requirements for the IRD to consider the housing allowance as valid:
When your employer has established clear guidelines for control and has exercised proper supervision over the reimbursement of either all or part of the rent that you pay as tenant to the landlord, the Assessor will accept the arrangement as if the employer directly provides a place of residence to the employee. The RV will be calculated and included in your assessable income and the rental reimbursements will not be treated as income.
However, if your employer does not control how you spend the money or does not exercise proper control over the expenditure, the Assessor will regard the reimbursements as a cash allowance and include the full amount in your assessable income.
Proper control means:
- a clearly defined system is in place, under which the ranks of those employees who are entitled to rental reimbursements and the limits of their entitlements are clearly laid down;
- the mode of housing benefit that you as an employee are entitled to and the limit of rental reimbursement are clearly specified in your contract of employment; and
- your employer examines the tenancy agreement and rental receipts and verifies the actual payment of rent against the tenancy agreement at regular intervals, and retains the relevant documents as records.
Source: https://www.gov.hk/en/residents/taxes/salaries/salariestax/chargeable/residence.htm
This means that a few things need to be implemented to take advantage of housing allowance benefits:
Step by step:
- Your company should have a written housing benefits policy outlining which employees are entitled to the benefit and to what extent
- The employment contract should mention the housing benefits policy and to what extent the employee is entitled to it
- Employees will be required to submit their tenancy agreements and sign agreements confirming their adherence to the housing benefits policy.
If you would like a free template of the housing benefits and the agreement, please contact us here.
