A guide to what to expect in the form of gratuity, end of service and payments in lieu of notice for the Hong Kong employee
6 April 2014| Last updated on 28 June 2017
The Hong Kong Government website has all the information that an employee needs in order to know his/her rights while employed in Hong Kong.
Different types of termination payments may be made either under the terms of the employment contract or the Employment Ordinance. Here you can learn about what you and your employer should report as taxable income when your employment has been terminated.
Payment in Lieu of Notice
In the years prior to the year of assessment 2012/13, payments in lieu of notice received from your employer and paid in accordance with the terms of your employment contract or the provisions of the Employment Ordinance were not assessed to tax. This is no longer the case because the Court of Final Appeal and Court of First Instance in their recent decisions have given clear guidance that payments in lieu of notice contractually agreed should be assessed to tax. Here you can learn about the tax treatment of "Payment in lieu of notice".
From 1 April 2012 onwards, any payment in lieu of notice that accrued to you from your employer, whether paid under an explicit contract term or under an implied contract term (e.g. section 7 of the Employment Ordinance) will be assessed to tax. Section 7 of the Employment Ordinance provides that either the employer or the employee may terminate a contract of employment by agreeing to make a payment in lieu of notice to the other party. The amount of payment necessary to terminate an employment contract is equal to the amount of wages which would have been accrued to the employee during the period of notice.
Your employer is required to report the payment in lieu of notice on the "Notification by an employer of an employee who is about to cease to be employed" (Form IR56F) or the "Notification by an employer of an employee who is about to depart from Hong Kong" (Form IR56G) and you have to report it on your Tax Return - Individuals (BIR60) from 1 April 2012 onwards. If you are given sufficient notice of termination and receive income during the notice period, your income during the notice period is a normal reward derived from your employment and should also be assessed to salaries tax.
Payment in Lieu of Leave
Any salary you receive as an employee while you are on leave is part of your income and is taxable. This is called “leave pay”. However, if your employment is terminated and you have earned but not taken leave, your employer may wish to make a cash payment in lieu of leave to eliminate the accumulated leave balance. Cash in lieu of leave is similar to the salary paid when you take leave, and is thus taxable. Your employer must report it on Form IR56F or 56G and you must report it on BIR60.
Furthermore, as an employee you are entitled to annual leave upon completion of one year’s service. Sometimes for business reasons you may have to defer your leave. If your employment is terminated you may take the entitled leave before the cessation date. However, if your employer asks you to forego this option and tops up the payment for this earned but untaken leave with a cash payment as compensation, the topped-up payment is in nature similar to leave pay and should be reported by both you and your employer.
Employee Compensation Arising from Injury
If you suffer personal injury through an accident arising out of and in the course of your employment, the payments that you receive under the Employees’ Compensation Ordinance are not considered as income. Hence, your employer need not report such payments on Form IR56B, 56F or 56G, and you need not report them on BIR60.
Severance Payments and Long Service Payments
Sums paid to you as severance payments or long service payments strictly in accordance with the provisions of the Employment Ordinance (EO) are not assessable to salaries tax. The amount not assessable to salaries tax should be computed after deduction of :
(a) contract gratuities based on length of service;
(b) benefits attributable to employer’s contributions paid under an occupational retirement (OR) scheme; and
(c) accrued benefits attributable to employer’s contributions held in a mandatory provident fund (MPF) scheme or which have been paid.
Your employer need not report the sums computed as above on Form IR56F or 56G and you need not report them on BIR60. However, you and your employer have to report sums that were paid in excess of your statutory entitlement.
Details of an employee's entitlement to severance payment or long service payment under EO are available on the website of Labour Department.