Property Tax Notes: What Does Rental Income Include? Should the lease premium be included?

Property Tax Notes: What Does Rental Income Include? Should the lease premium be included?

The Hong Kong Inland Revenue Ordinance stipulates that the rental income received from holding properties in Hong Kong for rental purposes falls within the taxable scope of property tax and needs to be reported in individual tax returns or property tax returns. The current relevant tax rate is 15%, plus the property tax can deduct the rates paid by the owner; the rent that cannot be recovered; and the standard tax allowance of about 20% for repairs and expenses, which is very beneficial to property investors in Hong Kong. In this article, you will learn more about taxation details, including the scope of rental income, whether the lease premium is included, etc.

What does rental income include?

According to the website of the Inland Revenue Department, taxable rental income generally includes:

• the total amount of rent received or receivable;

• permit fees paid for the right to use the building;

• Service and management fees paid to the owner;

• Landlord expenses paid by the resident, such as repairs and property taxes;

• Amounts recovered after irrecoverable rent deductions were made; and

• Lease premium.

Is the lease premium taxable?

According to the tax law, the lease premium is the same as the rental income, and it is undoubtedly the income that needs to be subject to property tax.

If you have received a lease premium, you must treat the payment as first-year lease income and include it in the assessable value of the property for that year of assessment.

However, if the lease term of the top-up fee does not fall within any tax year, you can also choose to spread it on a 3-year (36-month) period, or on a monthly basis during the lease period. Whichever is shorter, and the relevant amount is declared as rental income in the relevant year of assessment.

Examples of charging the top hand fee:

Let’s say you rent out the property for a two-year term in June 2021 and receive a top-off fee of $60,000 in May 2021. You should apportion the top-up fee on a monthly basis over two years, and the rental income for the year of assessment should be

You should amortize the premium on a monthly basis during the lease term and declare the relevant monthly apportionment in the relevant tax year as rental income. The calculation method is as follows:

The calculation method is as follows:

Year of assessment Assessable value

2021/22 $60,000 x 10/24 = $25,000

2022/23 $60,000 x 12/24 = $30,000

2023/24 $60,000 x 2/24   = $  5,000

If the lease term is 4 years, the above example should be divided into 3 years (36 months) to distribute the top-up fee equally, namely:

Year of assessment Assessable value

2021/22 $60,000 x 10/36 = $16,667

2022/23 $60,000 x 12/36 = $20,000

2023/24 $60,000 x 12/36 = $20,000

2024/25 $60,000 x 2/36   = $  3,333

The above information is for reference only. If you have any questions about tax returns and accounting, it is wisest to seek advice from professional accountants, and we welcome your inquiries.

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