Calculation of one-off salary received by employees/capital expense allowance

If an employee has not received accrued income for any year of assessment, such income shall not be included in assessable income. Subsequent repayments or remuneration paid by the employer to the employee during employment, at the end of the employment contract, or upon retirement, regardless of whether the payment is made by the employer during or after employment, are taxable in the year of payment. If an employee has left the company, the tax will be charged in the year at the time of separation. However, the employee may reduce the tax by submitting a written proposal within two years after the end of the year of assessment for which the payment is made to set aside the lump sum payment back for assessment during the relevant period (if the overall tax is reduced).

Examples of these accrued earnings are back paid back pay, deferred pay, or completion gratuity. If the reversal of the payment is for more than 3 years of service, the employee may only repay the payment at a fixed rate up to 36 months before the month in which the payment is made by the employer unless the service period is less than 3 Year, the Inland Revenue Department will assess the tax by apportioning the number of months of service for that period.

In addition, employees who need to incur capital expenditures in the performance of their duties, such as purchasing machinery or industrial equipment, can claim depreciation allowances under salaries tax under the Inland Revenue Ordinance. However, the employee must prove that the machinery or industrial plant is indispensable to his duties, that is, he cannot perform the required duties without the machinery or industrial plant, and he intends to use the machinery or industrial plant to directly generate assessable tax income, and his employer did not reimburse him for the related expenses. A relevant example is the purchase of wheelchairs, prosthetics, vision, hearing aids, etc., purchased by disabled employees for which depreciation allowances can be claimed. In addition, disabled employees can also claim deductions for the repair and maintenance costs of the equipment.

If the machinery or plant paid by the taxpayer is not wholly and solely used to generate assessable income, the depreciation allowance will be deducted at a rate that the Inland Revenue Department considers fair and reasonable.

The above information is for reference only. If in doubt, we welcome your tax inquiry