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What You Might Not Have Known About Provisional Tax

2021-11-11

No matter if you are an employer or employee, you may lose your footing on tax assessment notices regarding personal income or company revenue. Specifically, there is a tax item on assessment notices named “provisional tax”, and we will be introducing this type of tax in this article. Read on to learn more about this type of tax, as well as strategies for applying for a holdover of provisional tax.

Provisional Tax

Provisional tax is required from taxpayers by the government to pay part of the coming year’s tax in advance. Generally speaking, the Inland Revenue Department will make an estimate based on the taxpayer’s income and expenditure of the current year.

Are provisional tax rates greater than general tax rates?

In recent years, the government has had different tax concessions, but when estimating provisional taxes, the Inland Revenue Department does not assume that there will be tax concessions in the coming tax year. Thus, the rates of provisional taxes are usually higher than general taxes.

What happens if I overpay the coming year’s provisional tax?

When assessing taxes in the coming year, the provisional tax paid for this year will be deducted first, and if there is balance remaining, the provisional tax for the following year will be deducted.

Can I not pay provisional tax?

Short answer: no. Provisional tax is regarded as a type of tax, and taxpayers must pay on or before the payment date specified in the tax assessment notice, otherwise it will be regarded as tax arrears. However, if there are sufficient reasons, you as a taxpayer have the right to apply for a holdover of provisional tax.

How to Apply for Holdover of Provisional Tax

The IR1121 form is available on the website of the IRD. Return the form to the IRD after filling in by the following ways:

  1. Mail to postbox 28487 of Gloucester Road Post Office, Hong Kong;
  2. Fax to the IRD fax number 2519 6896; or
  3. Apply through eTAX (only for eTAX account holders).

Application Deadline

The application for a holdover of provisional tax must be submitted to the IRD within the following deadlines (whichever is later):

  1. 28 days before the deadline for payment of provisional tax; or
  2. Within 14 days after the issuance date of the notice for payment of provisional tax.

Reasons for Application

When applying for a holdover of provisional tax payment, you should have suitable and convincing reasons in order for a successful application. The following are the reasons that usually lead to a high chance of success:

A. Profits tax

  1. The assessable profit in the new year of assessment may be less than 90% of the assessable profit in the previous year*;
  2. (Example: The assessable profit for the year of assessment 2020/21 is HK$300,000, and the assessable profit for the year of assessment 2021/22 may be less than HK$270,000);
  3. The assessable profit in the new tax year may be less than 90% of the assessable profit in the year of assessment for provisional tax*;
  4. Any loss carried forward to offset the tax year is omitted or is inaccurate;
  5. The company has ceased operations or will cease operations before the end of the tax year, and the assessable profit of that year may be less than the assessable profit of the previous year or the assessable profit in the year of assessment for provisional tax;
  6. Having selected personal assessment for the year of assessment for provisional tax; or
  7. Having objected to the profits tax assessment of the previous year.

**Note: When submitting the IR1121 form, it is necessary to submit information on the date when the company ceased to be a landlord (such as sales and purchase contracts), as well as rent received and rent receivable (such as lease agreements and rent receipts).

*Note: When submitting the IR1121 form, relevant supporting documents must be submitted at the same time (e.g. accounts of no less than 8 months signed by the director).

B. Salaries tax

  1. In a new year of assessment, one is eligible for tax allowances that have not been calculated in the notice of payment for provisional tax. (For example, if your mother is 55 years old in the tax year of provisional tax, in the new tax year, you will be provided a dependent parent allowance of HK$25,000)*;
  2. In a new year of assessment, the taxable income may be less than 90% of the previous year’s actual taxable income;
  3. In a new year of assessment, the taxable income may be less than 90% of the estimated income in the year of assessment for provisional tax;
  4. In a new year of assessment, tax deductibles include personal education expenses, recognized retirement plan contributions, residential care expenses, home loan interest, eligible premiums on the list of VHIS or eligible annuity premiums. Tax deductibles have been or are likely to be paid in the new tax year’s Mandatory Provident Fund contributions, and the related expenses may likely exceed the amount specified in the year of assessment for provisional tax;
  5. Has ceased or will cease to earn salaries as taxable income before the end of the provisional tax year of assessment**;
  6. Lodging an objection to the salaries tax assessment of the previous year.

*Note: You must clearly provide detailed information about the related tax allowance when filling in the IR1121 form. (e.g. provide the dependent parents’ name, date of birth, Hong Kong identity card number and whether they usually live in Hong Kong during the relevant year for dependent parent allowance)

**Note: When filling in Form IR1121, it is necessary to clearly fill in the amount of estimated income for the entire tax year. (e.g. specify the estimated income from April 1, 2021 to March 31, 2022, and provide the reason for the decrease in income to apply for deferment of payment of provisional salaries tax for the year of assessment 2021/22)

C. Property tax

  1. The assessable value of the property in the new year of assessment may be less than 90% of the assessable value of the previous year*;
  2. The assessable value of the property in the new year of assessment may be less than 90%* of the estimated assessable value in the year of assessment for provisional tax;
  3. You are no longer the owner of a certain property, or you will no longer be the owner of the property before the end of the provisional tax year of assessment, thus reducing the assessable value of the provisional tax. You must submit the information about the date when you ceased to be the landlord, the rent received and the rent receivable together with the application form**;
  4. Have selected personal assessment for the year of assessment for provisional tax;
  5. You have lodged an objection to the property tax assessment of the previous year.

*Note: When submitting the form IR1121, the information about the rent received and the rent receivable must be submitted at the same time (e.g. lease agreement, rent list).

**Note: When submitting the IR1121 form, it is necessary to submit information on the date when the company ceased to be a landlord (such as sales and purchase contracts), as well as rent received and rent receivable (such as lease agreements and rent receipts).

Conclusion

Although paying taxes is the duty of taxpayers, in times of economic difficulties, we should always strive to make our cash flow more flexible.

Pacers is a company that provides multifaceted and professional consulting services. We are eager to grow with our clients, so if you encounter any issues on taxation, you’re welcome to contact us through our website or email at info@pacersconsulting.com.

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