How is MPF taxed? Contributions, returns and withdrawals explained

Tax season prompts an overlooked question: how does MPF interact with your tax bill? In a November 2011 column, 李秉熙, AXA’s chief director for retirement and intermediary sales development, unpacked the tax treatment of MPF contributions, investment returns and withdrawals.

Are MPF contributions tax-deductible?

Under the Inland Revenue Ordinance, both employer and employee MPF contributions enjoy tax relief, calculated differently (2011 tax-year rules): employees may deduct mandatory contributions up to HK$12,000 a year; voluntary employee contributions deducted via payroll count as income and are not deductible. Employers may deduct mandatory and voluntary contributions as profits-tax expenses, capped at 15% of the employee’s annual pay. Self-employed persons may deduct mandatory contributions as business expenses, also capped at HK$12,000 a year.

Are MPF investment returns taxable?

No. Whether your MPF account gains or loses, you never report the swing: profits are not treated as income, losses cannot offset tax. The profit-and-loss figures on your annual benefit statement are disclosure only.

Is withdrawing MPF taxed?

An employee’s own mandatory and voluntary portions are fully exempt. The employer’s mandatory portion is exempt too. The employer’s voluntary portion faces the “proportional benefit” rule: complete months of service divided by 120, multiplied by the benefits derived from the employer’s voluntary contributions — that slice is tax-free, the excess is taxable.

Three tax reminders for MPF members

1. Voluntary contributions routed through payroll are not deductible — the commonest misunderstanding in 2011.
2. A self-employed person’s spouse on the company payroll: the spouse’s MPF contributions are not deductible.
3. Tax rules evolve; check the Inland Revenue Department’s latest guidance before filing.

The MPF education hub covers the latest deduction rules for voluntary contributions.