The Inland Revenue Department (IRD) recently issued two guidance notes, explaining the conditions for tax deductions in relation to premiums/contributions paid by taxpayers. The new tax deductions were made effective from 1 April 2019.
The guidance notes are:
- Departmental Interpretation and Practice Notes No. 56 Concessionary Deductions: Sections 26H to 26M Health Insurance Premiums
- Departmental Interpretation and Practice Notes No. 57 Concessionary Deductions: Sections 26N to 26U Annuity Premiums and MPF Voluntary Contributions.
Voluntary Health Insurance Scheme (VHIS)
What is VHIS?
VHIS is an individual indemnity hospital insurance plan provided by a VHIS provider and certified by the Food and Health Bureau (FHB). An indemnity hospital insurance plan refers to an insurance plan that reimburses actual medical expenses of in-patient care or in an ambulance setting. VHIS providers are insurance companies that are registered with the FHB. Non-indemnity critical illness insurance, hospital cash plans, dental/outpatient insurance plans do not qualify as VHIS.
Tax deductions for VHIS
With effect from 1 April 2019, qualifying premiums paid by the taxpayer and/or the taxpayer’s spouse as policy holder(s) into a certified VHIS are tax deductible up to HK$8,000 per insured person. There is no limit to the number of registered VHIS policies per insured person the taxpayer (and/or the taxpayer’s spouse) can claim. However, there are a number of conditions with respect to the insured person that must be satisfied, including:
- The insured person must be the taxpayer or a specified relative
- Specified relative means the taxpayer’s spouse, children, parents/grandparents, siblings or the spouse’s parents/grandparents, siblings
- The insured person is an HKID card holder
Qualifying VHIS premiums
Qualifying premiums means premiums paid in respect
of a VHIS policy for an insured person. The premiums must commensurate with the risk profile of the insured person and the Commissioner of the IRD has powers to apply anti-avoidance provisions if the premiums are artificially high.
Where there are more than one policy holder, qualifying premiums paid shall be apportioned to each policy holder in equal shares and no regard will be given on the share of premium actually borne by each policy holder.
Qualifying annuity premiums and MPF voluntary contributions
What is deferred annuity?
An annuity is a long-term insurance policy that provides a steady stream of income over a period of time (i.e. annuity payment). A deferred annuity refers to an insurance policy that has a distinct accumulation phase and an annuitization phase. During the accumulation phase, the policy holder makes regular premium payments. Annuitization phase starts only after the accumulation phase is completed when the policy holder will start to receive regular annuity payments from accumulated savings.
Only a deferred annuity that is certified as a Qualifying Deferred Annuity Policy (QDAP) qualifies for tax deduction. Immediate annuity where annuity payments start as soon as a lump sum annuity premium is paid do not qualify for tax deduction.
The Insurance Authority (IA) exercises oversight in certifying deferred annuity policies as QDAPs, which must have the following features:
- Total minimum premium is HK$180,000 to be paid over a minimum period of at least five years
- Minimum annuity period of ten years
- Annuitization at age of 50 or more
The IA publishes a list of QDAPs on its website.
Conditions for tax deduction in respect of QDAP
- The policy holder must be the taxpayer or the taxpayer’s spouse as sole policy holder
- For joint policy holders, it must be the taxpayer and the taxpayer’s spouse
- The annuitant must be the taxpayer and/or the taxpayer’s spouse
- The annuitant must be an HKID card holder
All conditions must be fulfilled in order to qualify for tax deduction. For example, if a taxpayer pays annuity premiums into a QDAP where the annuitant is not the taxpayer’s spouse, no tax deduction will be allowed.
For QDAPs jointly held by the taxpayer and the taxpayer’s spouse, qualifying annuity premiums paid can be apportioned among themselves in any way as long as the total tax deduction is within stipulated caps.
Tax deductible MPF voluntary contributions (TVC)
What is TVC?
TVC means “tax deductible voluntary contributions” as defined under the Mandatory Provident Fund Schemes Ordinance (MPFSO) that are paid into a TVC account, which is separate to, and distinct from the employer/employee mandatory and voluntary accounts in the MPF that are used to accumulate employment-related contributions. A taxpayer can set up a TVC account of his/her own choice directly with a TVC provider and contributions can be made at any time. However, TVC is subject to same preservation requirements as mandatory MPF contributions, i.e. withdrawal is allowed only upon retirement or specified grounds.
Please note that MPF voluntary contributions remain non-tax deductible.
Conditions for tax deduction in respect of TVC
- A deduction for TVC is allowable in respect of amounts paid (up to a cap) into a TVC account
- The taxpayer needs not be an employee or a self-employed person at the time of contribution
- A taxpayer can only claim tax deduction in respect of his/her own contributions (unlike QDAP, such claim for tax deduction cannot be transferred to the taxpayer’s spouse.)
Maximum allowable deduction for deferred annuity and TVC
There is no limit to the number of QDAPs and/or TVC accounts a taxpayer may be allowed. However the maximum total deduction of HK$60,000 per year of assessment is allowed in aggregate. Where the taxpayer owns both
a QDAP and TVC, tax deductions for TVC shall first be allowed.
Refund of VHIS/QDAP premiums
The taxpayer has an obligation to disclose and report any refund of VHIS/QDAP premiums that have been previously allowed so that the IRD can raise additional assessments on the refunded premiums.
If the taxpayer fails to notify the IRD without a reasonable excuse, the IRD has powers to impose penalties. The maximum penalty is HK$10,000, plus up to three times the tax undercharged or that would have been undercharged.
The tax deductions are a welcomed relief in that they help alleviate the Hong Kong tax burden, encourage saving for retirement, as well as ease the strain on public health services. As VHISs and QDAPs offered by a number of different certified providers are varied, a taxpayer should carefully consider how the products should be structured between him/herself and the spouse to take advantage of the available tax deductions.
If you require further information in relation to this alert, please contact any of the below or your usual EY contact.
EYG no. 003222-19Gbl
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