Establishing Housing Tax Benefit for Employees (Process Flow and Policy)

[CAP]

Hi All,

Lot of information on here about taxes and had a question on what constitutes proper care in monitoring the rental spend.

Firstly, to make sure I understand everything properly, the easiest way to implement from a process pov is:
1. Employee can have package split into salary and housing component (i.e. ttl comp = 100k, or 50k/50k split)
2a. the employee is free to choose his/her own housing with money from the housing component
2b. employee may rent directly from landlord
3. employee provides rental agreement to company
4. each month, employee get paid per usual (100k total comp)
5. after paying rent, employee provides monthly rental payment receipt to company
6. at year end, employee and company file taxes per usual (noting the splits between housing and salary)

Thus...
For the employee, instead of: (total package * Tax rate), the benefit is: [(total salary - housing cost) *(1.1)] * tax rate.

Correct so far?

Assuming the above is correct:
a) do I need to have HR incorporate policy officially into employee handbook?
b) for existing employees, would we have to change their contracts on paper and resubmit to immigration (if they are foreign hires) (and assuming they wanted the benefit)?
c) if the employee moves after 1 year and their rental increases, do we need to redo their contract (lest they keep the original value in the contract)?
d) must we maintain physical receipts or may we scan digitally and then destroy the old paper?
e) if somebody pays with direct debit from a bank account, is a monthly bank statement sufficient enough documentation?
f) for how many years must we keep the records?

I guess that's good enough for starting now. Thanks in advance!

[CAP]

Sorry, one more question: how does the 13th month gratuity get factored in? And bonuses (I was assuming these would be separate from the base salary so not multiplied by the 1.1)?

Thanks.

[Oldtimer]

Total compensation - housing allowance x 1.1= taxable income.

Sorry, one more question: how does the 13th month gratuity get factored in? And bonuses (I was assuming these would be separate from the base salary so not multiplied by the 1.1)?

Thanks.

[CAP]

Thanks, Old.
Any idea bout the policy point-of-view parts, by chance?

[CAP]

By the way, having the bonus included in the 1.1 seemingly reduces the benefit significantly (well, depending how much the bonus is, at least)

[MovingIn07]

Correct so far? YES

Assuming the above is correct:
a) do I need to have HR incorporate policy officially into employee handbook? MIGHT NOT HURT BUT I DO NOT BELIEVE IT 100% NECESSARY
b) for existing employees, would we have to change their contracts on paper and resubmit to immigration (if they are foreign hires) (and assuming they wanted the benefit)? AH YES I THINK SO (SORRY CHANGED ANSWER!)
c) if the employee moves after 1 year and their rental increases, do we need to redo their contract (lest they keep the original value in the contract)? NO YOU CAN HAVE AN EMPLOYMENT CONTRACT THAT STATES "UP TO X" IS THE HOUSING ALLOWANCE AND THE REST IS TREATED AS CASH, MEANING THAT ANY RENT NUMBER WORKS AND CHANGES ARE EASILY MANAGED
d) must we maintain physical receipts or may we scan digitally and then destroy the old paper? THIS IS HK. ALWAYS KEEP THE PAPER, FOR EVERYTHING.
e) if somebody pays with direct debit from a bank account, is a monthly bank statement sufficient enough documentation? NOT SURE. I THINK SO BUT HAVING RECEIPTS ARE BETTER.
f) for how many years must we keep the records? NOT SURE, HK LOVES PAPER THOUGH

[Oldtimer]

For Inland Revenue Department records for 7 years are to be kept.
f) for how many years must we keep the records? NOT SURE, HK LOVES PAPER THOUGH

[CAP]

Thanks for the info so far!!
Curiously, just off hand, how many of your employees take advantage of it and how labour intensive is it to set up and monitor (% of employees and % of hours spent per month)? Any idea from your experience handling it?

[MovingIn07]

I oversee this in our company (sign the forms etc). I think I am the only person in the office who does not take advantage of it (I own my place so I can't). We offer it to everyone as a matter of course and the monitoring process is pretty trivial. We are a very small company with two admin staff - we try and avoid any admin that is not strictly necessary, so I would suggest its's really not a big deal.

One thing to watch out for - if you have a well paid but thrifty employee who doesn't understand the rules, if their housing is less than 10% of total comp it's not worth it. We had one of these a couple of years back - it was pretty funny trying to explain to him why it would be better not to claim it on the tax form!

Other than the monitoring, all you really need to do is put the split onto the end of year tax form that the company submits for each employee (ONE page of A4 per employee, can you believe it?) so it's not much effort.