Section 26C Approved Charitable Donations

BACKGROUNDWith the enactment of the Inland Revenue (Amendment) Ordinance1998, a concessionary deduction for approved charitable donations made in theyear of assessment by taxpayers subject to salaries tax and personal assessmentis allowable under section 26C of the Inland Revenue Ordinance (theOrdinance). The deduction for approved charitable donations was first enactedin section 42(1) by the Inland Revenue (Amendment) Ordinance 1970. Thebasic principles underlying the granting of the deduction have remainedsubstantially unchanged since its enactment.THE DEDUCTION2. Section 26C of the Ordinance allows a deduction for approvedcharitable donations made by a person during the year of assessment. Thebasic criteria governing the granting of the deduction are -• the payment must be a donation• the donation must be a donation of money• the donation must be to a charitable institution or trust of a publiccharacter which is exempt from tax under section 88 of theOrdinance or the Government• the donation must be for charitable purposes• the aggregate of the person’s donations (including the donationsof his or her spouse, not being a spouse living apart from theperson) must not be less than $100• the allowable deduction in any year cannot exceed 25% 1 of theperson’s assessable income• a deduction in respect of the same donation cannot be granted tomore than one person• no deduction is granted if the donation is allowable under profitstax.1For years of assessment up to and including the year of assessment commencing 1 April 2002, thepercentage is 10%

RECIPIENT MUST BE A TAX-EXEMPT CHARITABLEINSTITUTION OR TRUST OF A PUBLIC CHARACTER6. Voluntary and non-profit making organisations are not necessarilycharities. Hong Kong has many examples of clubs and societies operating on avoluntary, non-profit making basis for the benefit of their members. In mostcases, section 24(1) of the Ordinance deems these clubs and associations not tobe carrying on a business in Hong Kong. They are therefore not subject toprofits tax (rather than being exempted under section 88 from the payment oftax) and donations to them are not tax deductible.7. The Inland Revenue Department is not responsible for registeringcharities in Hong Kong. Nevertheless, any charity wishing to be exemptedfrom the payment of tax must apply to the Commissioner of Inland Revenue(the Commissioner) for recognition as an approved charitable institution ortrust of a public character. Once charitable status has been approved, theorganisation’s income is exempt from tax (subject to certain limitations) anddonations made to it are (subject to the other qualifying conditions beingsatisfied) deductible to the donors for tax purposes.8. For an institution or a trust to be a charity, the purposes for which thebody is established must be exclusively charitable. It is not permissible for abody to have mixed objectives, some of which are charitable and others whichare non-charitable. The decision of Lord MacNaghten in Income Tax SpecialCommissioners v. Pemsel 3 TC 95 summarises objectives which are charitableas -• the relief of poverty• the advancement of education• the advancement of religion• any other purposes of a charitable nature beneficial to thecommunity and not coming within the scope of the precedingthree categories.Any body whose objectives fall outside of these parameters cannot be anapproved body for the purposes of section 88.3

9. A purpose is not charitable unless it is directed to the public or asufficient cross section of the public. In general, an organisation cannot beclassified as charitable if, in principle, it is established for the benefit ofspecific individuals. It is not possible to lay down a precise rule as to whatconstitutes a sufficient cross section of the public. Over the years, the courthave considered various situations where charitable status was claimed. Insummary, the Courts decisions have been -• Purposes held to be charitable purposes- Relief of poor people- Relief of victims of a particular disaster- Relief of sickness- Relief of physically and mentally disabled- Establishment or maintenance of non-profit-making schools- Provision of scholarships- Diffusion of knowledge of particular academic subjects- Establishment or maintenance of a church- Establishment of religious institutions of a public character- Prevention of cruelty to animals- Protection and safeguarding of the environment orcountryside• Purposes held not to be charitable purposes- Attainment of a political object- Promotion of the benefits of the founders or subscribers- Encouragement of a particular sport such as football orcycling- Provision of a playing field, recreation ground or scholarshipfund for employees of a particular company or industry.4

10. To facilitate members of the public in checking whether theirdonations will qualify for tax deduction, a list of charitable institutions andtrusts of a public character which have been granted exemption from tax undersection 88 is uploaded to the Department’s website and accessible atwww.ird.gov.hk/eng/tax/ach_index.htm. Taxpayers wishing to enquire as to thestatus, for tax deduction purposes, of any particular institution or organisationmay obtain further information from -Assessor (Donations)Inland Revenue DepartmentRevenue Tower5 Gloucester RoadWanchai Hong KongTelephone : 2594 5300Email: taxinfo@ird.gov.hk.AGGREGATE OF DONATIONS NOT LESS THAN $10011. Section 26C(1) prescribes that a deduction for approved charitabledonations may only be allowed where the aggregate amount of the donationsmade is not less than $100. The “aggregate” is the total amount of all approvedcharitable donations made by the person and his or her spouse in the year ofassessment. It is not necessary for every donation made by the person to be notless than $100. It is sufficient that the total of all approved charitable donationsmade in the year of assessment is not less than $100.DEDUCTION LIMITED TO 25% OF ASSESSABLE INCOME(Applicable to any year of assessment commencing on or after 1 April 2003)12. For salaries tax payers, the maximum deduction that may be allowedfor approved charitable donations in any year of assessment commencing on orafter 1 April 2003 cannot exceed 25% of the taxpayer’s assessable income asreduced by his or her deductions for losses and outgoings incurred in earningthe income (deductions allowable under section 12(1)(a)) and depreciationallowances on machinery and plant used in the production of the assessableincome (granted under section 12(1)(b)).5

Example 1Year of assessment 2006-07$ $Mr A’s salary income 250,000Less:Employment-related expenses (section 12(1)(a)) 7,000Depreciation allowances (section 12(1)(b)) 3,000 10,000240,000Less:Approved charitable donations (aggregate is $75,000) 60,000Basic allowance 100,000 160,000Net Chargeable Income $80,000Note:The taxpayer’s income as reduced by employment-related deductions is $240,000.The aggregate of the approved charitable donations made during the year ($75,000)exceeds 25% of this amount and the allowable deduction is restricted to $60,000.13. If a husband and wife have elected under section 10(2) to be jointlyassessed, the deduction for charitable donations cannot exceed 25% of theirjoint assessable incomes as reduced by their respective entitlements todeduction for employment-related expenses and depreciation allowances.Example 2Year of assessment 2006-07$ $Mr A’s salary income 250,000Less:Employment-related expenses (section 12(1)(a)) 7,000Depreciation allowances (section 12(1)(b)) 3,000 10,000240,0006

$ $Mrs A’s salary income 100,000Less:Employment-related expenses (section 12(1)(a)) 2,000Depreciation allowances (section 12(1)(b)) 1,000 3,00097,000Aggregate of reduced assessable incomes (section 26C(2)(a)(ii)(B)) 337,000Less:Approved charitable donations (aggregate is $100,000) 84,250Married person’s allowance 200,000 284,250Net Chargeable Income $52,750Note:The joint assessable income as reduced by employment-related deductions is$337,000. The aggregate of the approved charitable donations made during the year($100,000) exceeds 25% of this amount and the deduction is restricted to $84,250.14. When personal assessment is elected, the situation essentially mirrorsthat applicable to salaries taxpayers. In essence, a person with multiple sourcesof income (such as business profits, property rentals and salaries) can only beallowed a deduction for approved charitable donations to the extent that thetotal deduction allowed does not exceed 25% of his or her adjusted totalincome (see Example 3 below). Where the 25% limit is exceeded, thededuction otherwise allowable under section 26C is reduced such that theaggregate of the approved charitable donations allowed under section 26C andsection 16D (in the profits tax assessment) do not exceed 25% of the person’stotal income, as adjusted, under personal assessment. The adjusted totalincome is the total income for personal assessment purposes (computed inaccordance with section 42) increased by the amount of the approved charitabledonations allowed in the profits tax assessment under section 16D and selfeducation expenses allowed in the salaries tax assessment under section12(1)(e).7