Get documents about "DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES NO
Document Sample
Inland Revenue Department
Hong Kong
DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES
NO. 37 (REVISED)
CONCESSIONARY DEDUCTIONS : SECTION 26C
APPROVED CHARITABLE DONATIONS
These notes are issued for the information of taxpayers and their tax
representatives. They contain the Department’s interpretation and practices in
relation to the laws as it stood at the date of publication. Taxpayers are reminded
that their right of objection against the assessment and their right of appeal to the
Commissioner, the Board of Review or the Court are not affected by the
application of these notes.
These notes replace those issued in January 2000.
LAU MAK Yee-ming, Alice
Commissioner of Inland Revenue
September 2006
Our web site : www.ird.gov.hk
DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES
No. 37(REVISED)
CONTENT
Paragraph
Background 1
The deduction 2
Donations 3
Donation must be a donation of money 5
Recipient must be a tax-exempt charitable institution or trust of a 6
public character
Aggregate of donations not less than $100 11
Deduction limited to 25% of assessable income 12
Multiple claimants for same donation 15
Donations allowed under profits tax 17
BACKGROUND
With the enactment of the Inland Revenue (Amendment) Ordinance
1998, a concessionary deduction for approved charitable donations made in the
year of assessment by taxpayers subject to salaries tax and personal assessment
is allowable under section 26C of the Inland Revenue Ordinance (the
Ordinance). The deduction for approved charitable donations was first enacted
in section 42(1) by the Inland Revenue (Amendment) Ordinance 1970. The
basic principles underlying the granting of the deduction have remained
substantially unchanged since its enactment.
THE DEDUCTION
2. Section 26C of the Ordinance allows a deduction for approved
charitable donations made by a person during the year of assessment. The
basic criteria governing the granting of the deduction are -
• the payment must be a donation
• the donation must be a donation of money
• the donation must be to a charitable institution or trust of a public
character which is exempt from tax under section 88 of the
Ordinance or the Government
• the donation must be for charitable purposes
• the aggregate of the person’s donations (including the donations
of his or her spouse, not being a spouse living apart from the
person) must not be less than $100
• the allowable deduction in any year cannot exceed 25%1 of the
person’s assessable income
• a deduction in respect of the same donation cannot be granted to
more than one person
• no deduction is granted if the donation is allowable under profits
tax.
1
For years of assessment up to and including the year of assessment commencing 1 April 2002, the
percentage is 10%
DONATIONS
3. In its ordinary sense, the word “donation” means a gift. A “gift” is a
transfer of property in a thing without any valuable consideration. To
constitute a gift, the property transferred must be transferred voluntarily and
not as a result of a contractual obligation to transfer it. Further, the transferor
cannot receive any benefit or advantage of a material character by way of
return [Sanford Yung-tao Yung v. C.I.R. 1 HKTC 1081]. There is no provision
in the Ordinance to permit payments to be apportioned into “charitable” and
“material benefit” components. If the person making the payment received a
material benefit, the whole of the payment falls outside of the ambit of a gift
because the requirement that no material advantage may accrue to the donor, is
breached. Payments other than those which are strictly gifts are not donations
for the purposes of section 26C.
4. Payments that fall outside the categorisation of donations include
payments for grave spaces, purchases of raffle tickets, admission fees to charity
film shows and the cost of tickets for charity balls and concerts etc. The receipt
by the donor of a benefit which is minute in nature does not compromise the
“materiality” requirement to preclude the payment from being a donation.
Benefits received by donors which fall within the classification of “minute”
include badges, flags and other similar token acknowledgements of a donation.
DONATION MUST BE A DONATION OF MONEY
5. The term “approved charitable donation” is defined in section 2 of
the Ordinance. It is a donation of money to -
• any charitable institution or trust of a public character that is
exempt from tax under section 88 of the Ordinance; or
• the Government
for charitable purposes.
The donation must be one of money. Deductions under section 26C cannot be
allowed for the monetary value of any property (such as landed property or
works of art) gifted to a charitable institution or trust of a public character.
2
RECIPIENT MUST BE A TAX-EXEMPT CHARITABLE
INSTITUTION OR TRUST OF A PUBLIC CHARACTER
6. Voluntary and non-profit making organisations are not necessarily
charities. Hong Kong has many examples of clubs and societies operating on a
voluntary, non-profit making basis for the benefit of their members. In most
cases, section 24(1) of the Ordinance deems these clubs and associations not to
be carrying on a business in Hong Kong. They are therefore not subject to
profits tax (rather than being exempted under section 88 from the payment of
tax) and donations to them are not tax deductible.
7. The Inland Revenue Department is not responsible for registering
charities in Hong Kong. Nevertheless, any charity wishing to be exempted
from the payment of tax must apply to the Commissioner of Inland Revenue
(the Commissioner) for recognition as an approved charitable institution or
trust of a public character. Once charitable status has been approved, the
organisation’s income is exempt from tax (subject to certain limitations) and
donations made to it are (subject to the other qualifying conditions being
satisfied) deductible to the donors for tax purposes.
8. For an institution or a trust to be a charity, the purposes for which the
body is established must be exclusively charitable. It is not permissible for a
body to have mixed objectives, some of which are charitable and others which
are non-charitable. The decision of Lord MacNaghten in Income Tax Special
Commissioners v. Pemsel 3 TC 95 summarises objectives which are charitable
as -
• the relief of poverty
• the advancement of education
• the advancement of religion
• any other purposes of a charitable nature beneficial to the
community and not coming within the scope of the preceding
three categories.
Any body whose objectives fall outside of these parameters cannot be an
approved body for the purposes of section 88.
3
9. A purpose is not charitable unless it is directed to the public or a
sufficient cross section of the public. In general, an organisation cannot be
classified as charitable if, in principle, it is established for the benefit of
specific individuals. It is not possible to lay down a precise rule as to what
constitutes a sufficient cross section of the public. Over the years, the court
have considered various situations where charitable status was claimed. In
summary, the Courts decisions have been -
• Purposes held to be charitable purposes
- Relief of poor people
- Relief of victims of a particular disaster
- Relief of sickness
- Relief of physically and mentally disabled
- Establishment or maintenance of non-profit-making schools
- Provision of scholarships
- Diffusion of knowledge of particular academic subjects
- Establishment or maintenance of a church
- Establishment of religious institutions of a public character
- Prevention of cruelty to animals
- Protection and safeguarding of the environment or
countryside
• Purposes held not to be charitable purposes
- Attainment of a political object
- Promotion of the benefits of the founders or subscribers
- Encouragement of a particular sport such as football or
cycling
- Provision of a playing field, recreation ground or scholarship
fund for employees of a particular company or industry.
4
10. To facilitate members of the public in checking whether their
donations will qualify for tax deduction, a list of charitable institutions and
trusts of a public character which have been granted exemption from tax under
section 88 is uploaded to the Department’s website and accessible at
www.ird.gov.hk/eng/tax/ach_index.htm. Taxpayers wishing to enquire as to the
status, for tax deduction purposes, of any particular institution or organisation
may obtain further information from -
Assessor (Donations)
Inland Revenue Department
Revenue Tower
5 Gloucester Road
Wanchai Hong Kong
Telephone : 2594 5300
Email: taxinfo@ird.gov.hk.
AGGREGATE OF DONATIONS NOT LESS THAN $100
11. Section 26C(1) prescribes that a deduction for approved charitable
donations may only be allowed where the aggregate amount of the donations
made is not less than $100. The “aggregate” is the total amount of all approved
charitable donations made by the person and his or her spouse in the year of
assessment. It is not necessary for every donation made by the person to be not
less than $100. It is sufficient that the total of all approved charitable donations
made in the year of assessment is not less than $100.
DEDUCTION LIMITED TO 25% OF ASSESSABLE INCOME
(Applicable to any year of assessment commencing on or after 1 April 2003)
12. For salaries tax payers, the maximum deduction that may be allowed
for approved charitable donations in any year of assessment commencing on or
after 1 April 2003 cannot exceed 25% of the taxpayer’s assessable income as
reduced by his or her deductions for losses and outgoings incurred in earning
the income (deductions allowable under section 12(1)(a)) and depreciation
allowances on machinery and plant used in the production of the assessable
income (granted under section 12(1)(b)).
5
Example 1
Year of assessment 2006-07
$ $
Mr A’s salary income 250,000
Less:
Employment-related expenses (section 12(1)(a)) 7,000
Depreciation allowances (section 12(1)(b)) 3,000 10,000
240,000
Less:
Approved charitable donations (aggregate is $75,000) 60,000
Basic allowance 100,000 160,000
Net Chargeable Income $80,000
Note:
The taxpayer’s income as reduced by employment-related deductions is $240,000.
The aggregate of the approved charitable donations made during the year ($75,000)
exceeds 25% of this amount and the allowable deduction is restricted to $60,000.
13. If a husband and wife have elected under section 10(2) to be jointly
assessed, the deduction for charitable donations cannot exceed 25% of their
joint assessable incomes as reduced by their respective entitlements to
deduction for employment-related expenses and depreciation allowances.
Example 2
Year of assessment 2006-07
$ $
Mr A’s salary income 250,000
Less:
Employment-related expenses (section 12(1)(a)) 7,000
Depreciation allowances (section 12(1)(b)) 3,000 10,000
240,000
6
$ $
Mrs A’s salary income 100,000
Less:
Employment-related expenses (section 12(1)(a)) 2,000
Depreciation allowances (section 12(1)(b)) 1,000 3,000
97,000
Aggregate of reduced assessable incomes (section 26C(2)(a)(ii)(B)) 337,000
Less:
Approved charitable donations (aggregate is $100,000) 84,250
Married person’s allowance 200,000 284,250
Net Chargeable Income $52,750
Note:
The joint assessable income as reduced by employment-related deductions is
$337,000. The aggregate of the approved charitable donations made during the year
($100,000) exceeds 25% of this amount and the deduction is restricted to $84,250.
14. When personal assessment is elected, the situation essentially mirrors
that applicable to salaries taxpayers. In essence, a person with multiple sources
of income (such as business profits, property rentals and salaries) can only be
allowed a deduction for approved charitable donations to the extent that the
total deduction allowed does not exceed 25% of his or her adjusted total
income (see Example 3 below). Where the 25% limit is exceeded, the
deduction otherwise allowable under section 26C is reduced such that the
aggregate of the approved charitable donations allowed under section 26C and
section 16D (in the profits tax assessment) do not exceed 25% of the person’s
total income, as adjusted, under personal assessment. The adjusted total
income is the total income for personal assessment purposes (computed in
accordance with section 42) increased by the amount of the approved charitable
donations allowed in the profits tax assessment under section 16D and self
education expenses allowed in the salaries tax assessment under section
12(1)(e).
7
Example 3
Year of assessment 2006-07
$ $
Mr A’s salary income 280,000
Less:
Employment-related expenses (section 12(1)(a)) 7,000
Depreciation allowances (section 12(1)(b)) 3,000
Self education expenses (section 12(1)(e)) 40,000 50,000
230,000
Mr A’s business profits before charitable donations deduction 100,000
Less:
Charitable donations allowed under section 16D 3,000
Assessable profits 97,000
Total income (personal assessment elected) 327,000
Less:
Approved charitable donations (aggregate is $100,000) 89,500*
Married person’s allowance 200,000 289,500
Net Chargeable Income $37,500
* Calculation of maximum allowable charitable donation
Total income under section 42 327,000
Add:
Self education expenses allowed
in salaries tax assessment (section 12(1)(e)) 40,000
Charitable donations allowed in profits tax assessment (section 16D) 3,000
Adjusted total income $370,000
Maximum allowable deduction (25% of $370,000) $92,500
Less:
Deduction allowed under section 16D 3,000
Deduction allowable under personal assessment $89,500
8
MULTIPLE CLAIMANTS FOR SAME DONATION
15. In general, taxpayers may only claim a deduction for approved
charitable donations that they themselves have made. The only exception
relates to donations made by married couples not living apart from each other.
For married couples not living apart, the husband may claim a deduction for
approved charitable donation made by the wife, and vice versa. In no case can
a deduction for the same donation be allowed to both of them.
16. Sections 33(2) and (3), dealing with allowances granted under Part V
of the Ordinance, contain supplementary provisions to enable the
Commissioner to resolve situations where two or more persons are claiming, or
have been allowed, an allowance in respect of the same person, or it appears to
the Commissioner that two or more persons are eligible to claim an allowance
for the same person for that year. These supplementary provisions, suitably
modified, also apply to deductions for approved charitable donations (section
26C(3)(b)). Where more than one person is claiming, or has been allowed, a
deduction for an approved charitable donation, the Commissioner will invite
the claimants to agree amongst themselves as to which of them will claim the
deduction. In the event that they are unable to reach an agreement, the
Commissioner will allow the deduction in a manner that, having regard to the
information available to him, is just in the circumstances.
DONATIONS ALLOWED UNDER PROFITS TAX
17. The general principle of our taxation system is that any payment,
whether for approved charitable donations or otherwise, can only be allowed to
one person. This principle is equally applicable in relation to deductions being
claimed for the same amount by different taxable entities that are, in essence,
the same person. A person who is taxable under both profits tax and salaries
tax may only claim a deduction for any one donation under either section 16D
or 26C. The same approved charitable donation cannot be claimed as a
deduction in both assessments.
9
Related docs
Other docs by niusheng11
