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Tax exemption under section 88 of the Inland Revenue Ordinance

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					          IRD




                Charities
                    Tax exemption under section 88
                    of the Inland Revenue Ordinance




     T
              he chief executive announced            may apply to the
              in his policy address in                Inland Revenue Department (IRD)
              October 2006 a series of                for recognition as tax-exempt charities,     3. Advancement of religion
     forward-looking new initiatives for pre-         the IRD isn’t responsible for the            4. Other purposes of a charitable
     primary education. One of them is the            registration of charities. There is also          nature beneficial to the community
     introduction of an education voucher             no provision in the IRO that exempts              not falling under any of the
     scheme to provide subsidy to parents             a voluntary or non-profit-making                   preceding heads
     from the 2007-08 school year onwards.            organization from tax, as not all of them         While the purposes under the
          Kindergartens can redeem vouchers           are charities.                               first three heads may be in relation to
     during the three-year transition period              For an organization to be recognized     activities carried out in other countries,
     if they meet with all the requirements           as a tax-exempt charity, it must be          those under the fourth will generally be
     that are required of a non-profit-                established for purposes which are           regarded as charitable only if they are of
     making kindergarten.                             exclusively charitable according to law      benefit to the Hong Kong community.
          The Education and Manpower                  and must be subject to the jurisdiction           A purpose is not charitable unless it
     Bureau also announced that kindergartens         of Hong Kong courts. The law defining         is directed to the public or a sufficient
     exempt from tax under section 88 of the          the legal attributes of a charity is based   section of it. An organization cannot
     Inland Revenue Ordinance (IRO) would             upon case law developed through court        be charitable if it is, in principle,
     be recognized as non-profit-making                decisions. For practical purposes, the       established for the benefit of specific
     kindergartens for the purposes of the            judgment of Lord MacNaghten in the           individuals. However, it is not possible
     education voucher scheme.                        case of IT Special Commissioners vs.         to lay down any precise definition of
                                                      Pemsel is regarded as an authoritative       what constitutes a sufficient section of
     Who can obtain                                   summary of the purposes that may be          the public, which means each case must
     tax exemption?                                   accepted as charitable.                      be considered on its own merit.
     Under section 88 of the IRO, charitable              Charitable purposes are grouped               On condition that admission to
     institutions or trusts of a public character     under four heads:                            a non-profit-making kindergarten is
     (referred to as charities in this article) are   1. Relief of poverty                         open to the public (established for
     exempt from tax. While organizations             2. Advancement of education                  public benefit), the operation might

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be accepted as charitable for the                  and properties among its members.
advancement of education.                        • Prohibit members of its
                                                   governing body (directors,
Governing instrument                               trustees, etc.) from receiving
of a charity                                         remuneration.                              The application should be sent to
It is essential that a written                               • Specify how the assets      the Commissioner of Inland Revenue,
governing instrument be                                    should be dealt with            G.P.O. Box 132, Hong Kong.
used to establish a charity.                               upon its dissolution (the            Provided that the governing
Promoters or founders of a                                 remaining assets should         instrument is in order and no
charity must be clear in their                            normally be donated to           supplementary information is required,
own minds about the purposes                           other charities).                   tax exemption would normally be granted
of the charity and the manner in                         • Require the keeping             within eight weeks after receipt of the
which it should be administered before                     of sufficient records of          application. Otherwise, the time required
they seek legal advice about the format,                   income and expenditure          would depend on when the organization
content and legal sufficiency of the                         (including donation             could provide all the required
charity’s governing instrument.                            receipts), proper               information or remove any irregularities
     For an organization to be recognized                  accounting books and            in its governing instrument to satisfy the
as a tax-exempt charity, its governing                     compilation of annual           requirements for tax exemption.
instrument should generally contain                        financial statements.
clauses that:                                    • Exclude the powers set forth            Review of tax-exempt
     • State precisely and clearly                 in the seventh schedule to the          charities
        its objects.                               Companies Ordinance if the              To protect revenue, IRD will review
     • Limit the application of its funds          charity is incorporated under           from time to time the status of tax-
        towards the attainment of its              this ordinance.                         exempt charities to ensure their objects
        stated objects.                                                                    are still charitable and their activities
     • Prohibit distribution of its incomes   Application procedure                        are compatible with their objectives.
                                              Organizations need to submit an              For review purposes, the charities are
                                              application letter to IRD together with:     required to provide their accounts
                                                 • A copy of the relevant certificate       (audited if incorporated), annual reports
                                                            of registration (if            and documents, such as a list of activities
                                                             appropriate).                 carried out during the review period.
                                                             • A certified true copy or
                                                               a draft of the governing    Further information
                                                               instrument and rules        Detailed information on tax exemption
                                                               governing its activities.   under section 88 of the IRO is
                                                             • A list of activities        contained in the information pamphlet
                                                      planned for the next 12 months.      A Tax Guide for Charitable Institutions
                                                         • A list of activities that       and Trusts of a Public Character, which is
                                                              have been carried out in     available on the IRD website:
                                                                    the past 12            www.ird.gov.hk/eng/tax/ach_tgc.htm.
                                                                    months and a copy
                                                                    of accounts for the        Contributed by the Inland
                                                                   last financial year          Revenue Department.
                                                                   (if appropriate).

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