DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES NO. 37 (REVISED) CONCESSIONARY DEDUCTIONS : SECTION 26C APPROVED CHARITABLE DONATIONS

Transcription

1 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 LAU MAK Yee-ming, Alice Commissioner of Inland Revenue September 2006 Our web site :

2 DEPARTMENTAL INTERPRETATION AND PRACTICE NOTES No. 37(REVISED) CONTENT Paragraph Background The deduction Donations Donation must be a donation of money Recipient must be a tax-exempt charitable institution or trust of a public character Aggregate of donations not less than $100 Deduction limited to 25% of assessable income Multiple claimants for same donation Donations allowed under profits tax

3 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 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%

4 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

5 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

6 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

7 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 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 : taxinfo@ird.gov.hk. AGGREGATE OF DONATIONS NOT LESS THAN $ 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

8 Example 1 Year of assessment $ $ Mr A s salary income 250,000 Employment-related expenses (section 12(1)(a)) 7,000 Depreciation allowances (section 12(1)(b)) 3,000 10, ,000 Approved charitable donations (aggregate is $75,000) 60,000 Basic allowance 100, ,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, 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 $ $ Mr A s salary income 250,000 Employment-related expenses (section 12(1)(a)) 7,000 Depreciation allowances (section 12(1)(b)) 3,000 10, ,000 6

9 $ $ Mrs A s salary income 100,000 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 Approved charitable donations (aggregate is $100,000) 84,250 Married person s allowance 200, ,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, 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

10 Example 3 Year of assessment $ $ Mr A s salary income 280,000 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 Mr A s business profits before charitable donations deduction 100,000 Charitable donations allowed under section 16D 3,000 Assessable profits 97,000 Total income (personal assessment elected) 327,000 Approved charitable donations (aggregate is $100,000) 89,500* Married person s allowance 200, ,500 Net Chargeable Income $37,500 * Calculation of maximum allowable charitable donation Total income under section ,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 Deduction allowed under section 16D 3,000 Deduction allowable under personal assessment $89,500 8

11 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