Why tax deduction on domestic rents is not really a win for tenants

Under a newly passed bill, about $100,000 can be deducted from a tenant’s annual rent.

When the legislation allowing tax deduction on domestic rents was passed by the Legislative Council, it was called an “ease to the burden” of taxpayers who are renting; however, a law expert argues that the bill is not necessarily a win for tenants.

“Whilst it might look like tenants will be the real winners here, the reality is that only a small proportion will reap the full benefit,” Janice Yau Garton, partner at Stephenson Harwood, told Hong Kong Business.

According to Garton, many taxpayers will still not be able to fully claim their actual cost of rent given the deduction ceiling of $100,000 for each year of assessment.

“Given the high costs of living in Hong Kong, especially with regards to property, the deduction ceiling may be too low for many taxpayers,” Garton said, adding that property costs in Hong Kong are amongst the highest in the world.

Garton said that a $100,000 deduction amount for annual rent is only equivalent to a monthly rent of just over $8,300.

“Hopefully, the deduction ceiling will be raised for future tax years,” she said.

The law expert also raised the possibility that employers might also choose to remove their rental reimbursement programmes to let the government “address the cost of housing instead.”

In the short- to medium-term, however, this will be unlikely given that the market for top talent is as “competitive as ever.”

Garton also countered the government’s estimate that 430,00 taxpayers will benefit from the bill, given that taxpayers benefitting from rental reimbursement programs with their employers will not be able to claim any further deductions for rent paid.

“Many taxpayers already enjoy a more favourable tax treatment offered by their employers under existing rental reimbursement programs, some of which offer deductions of up to 50% of an employee's salary,” she said.

Qualifications for reimbursement

Apart from taxpayers benefitting from rental reimbursement programs, the bill will also not benefit individuals who are provided with a place of residence by their employers.

Garton said the rule applies to the individual’s spouse. The spouse likewise should not have accommodation be provided by their employer.

To qualify for the tax deduction, Garton said the taxpayer must have a stamped tenancy agreement and live at the premises.

Taxpayers, including their spouses, must also not be the owner or be an "associate" of the owner of the property they are living in. 

To claim their tax deduction, Garton said taxpayers must “complete the declaration as part of the tax return.”
 
“As the Amendment covers the year of assessment commencing 1 April 2022, this option is already available under a newly added Part 10A of the most recent tax return form,” she said.

“The IRD can ask to see a copy of the tenancy agreement and/or evidence of rental payments, so a taxpayer should keep all relevant documents such as originals of the lease/tenancy agreement and rental receipts,” she added.

Property coverage

In terms of property type, Garton said the bill covers only the private housing market, which means that no deduction will be allowed for public housing tenancies with the Hong Kong Housing Authority or the Hong Kong Housing Society.
 
“Essentially, most types of domestic premises that are rented through the private housing market are covered, although the ordinance states that only domestic premises are allowed,” she said.

Under the bill, domestic premises were defined as “a building, or part of such a building, including a bedspace, cubicle, room, floor and portion of a floor” which is not illegal and is being used wholly or partly for residential purposes.

Whilst the bill does not cover public housing, Garton believes that it won’t affect the demand in the market.

“Public housing will still be in strong demand, even though this group of tenants would not enjoy any rental tax deductions, because public housing rents remain low, an average of around $2.3k per month,” she said.

As for the private rental market, Garton said the effect may be muted given that the bill does not provide “enough of an incentive” to make a significant difference to the market overall.