Example:

Throughout the year ended 31 March 2006, Mr. Chan Tai Man, a singleton, was employed as an senior marketing manager with a monthly salary of $50,000. In addition, his employer provided him with a flat at a monthly rent of $1,000. In his tax return, he claimed deduction for membership fee to Hong Kong Institute of Marketing og HK$2,000, contribution to Mandatory Provident Fund $12,000 and expenses of self-education $15,500. According to his last-year tax bill, he had already paid $80,000 for Provisional Tax for 2005/2006.

In October 2006, Mr. Chan received a tax bill. Assuming the tax return was accepted by the Revenue, his assessment and tax payable shown in the tax bill would be as follows: -

Final tax payable for 2005/2006:

Assessable income: $50,000 * 12 = $600,000 less membership fee $2,000 equal $598,000.

Add Rental Value: $598,000 x 10% = $59,800 less rent suffered : $1,000 * 12 equal to $47,800.

Total net assessable income: $598,000 plus $47,800 minus $12,000 minus $15,500 equal to $618,300

Net chargeable income: $618,300 minus basic allowance $100,000 equal to $518,300.

Tax payable at progressive rates: $7,200 plus ($518,300 - $90,000) * 20% = $92,860

(Standard rate restriction: $618,300 * 16% = $98,928 --- not applicable)

Less: Provisional tax paid per last-year tax bill $80,000.

Balance tax payable: $92,860 minus $80,000 equal to $12,860.

Provisional tax payable for 2006/2007:

It is normally the same as 2005/2006. That is $92,860.

Two installments of payments

Tax is normally demanded in 2 installments.

The first installment is made up of (a) balance of tax payable for 2005/2006: $12,860 and (b) 75% of the provisional tax payable for 2006/2007, i.e. $92,860 * 75% = $69,645.

Total payable for first installment: $82,505. The due date is usually in January to March 2007. The 75% of the provisional tax payable under the first installment (the earliest due date is 2 January 2007) is in respect of the income earned during April to December 2006 --- In other words, tax payable is on earned income only and not on unearned income.

The second installment of tax is 25% of provisional tax payable for 2006/2007, i.e. $$92,860 * 25% = $23,215. The due date is usually in April to June 2007. The second installment (the earliest due date is 1 April 2009) is in respect of the income earned during January to March 2007. Therefore, again, tax payable is on earned income only and not on unearned income.