Capital allowances (tax depreciation allowances) are granted on most categories of plant and machinery assets, on limited categories of building assets and certain specified categories of intangible assets, in lieu of the commercial depreciation charged in the profit and loss account of a business. The allowances are calculated so as to write off the qualifying costs of such assets at rates set out in the legislation.
Plant and Machinery
Two alternative systems of allowances are available and the taxpayer can elect for either system on an asset-by-asset basis. Such elections are however irrevocable.
In practice, this is the more common of the two systems, and the cost of most categories of plant and machinery now qualify to be written off by equal installments over a three-year period.
Also, a complete write-off is available in the year of acquisition for expenditure incurred on certain specified categories of asset
Certain categories of motor vehicle do not qualify for accelerated allowances; a more limited category of vehicles do not qualify for any capital allowances.
Alternatively, the taxpayer may opt for an older, and generally slower, system of plant and machinery allowances made up of two parts. The first is an initial allowance of 20%. This is granted in respect of expenditure on plant and equipment incurred in the basis period (generally the preceding calendar or accounting year) for the relevant year of assessment. Secondly, an annual allowance is granted in relation to qualifying assets in use at the end of the basis period.
The annual allowance is computed by reference to the number of years of working life of such assets as specified in the Income Tax Act.
Special rules apply to assets acquired under hire purchase arrangements.
Industrial buildings also qualify for capital allowances although this is limited to buildings used for specific qualifying purposes and excludes, in particular, buildings used for offices and other commercial activities. For newly-constructed buildings, the available allowances comprise an initial allowance of 25% and an annual allowance of 3% of qualifying cost. Special rules apply to buildings purchased on the secondary market.
For industrial buildings or structures used in approved projects for the promotion of tourism, initial and annual allowances are provided at 20% and 2%, respectively. These allowances are not available to hotels located anywhere other than on the island of Sentosa.
Capital expenditure incurred to acquire approved know-how or approved patent rights, or expenditure incurred under approved cost-sharing agreements in respect of research and development activities qualify for straight line writing-down allowances over 5 years.
Also, with effect from effect from 23 February 2001, provided the specified criteria are met, companies that incur capital expenditure to acquire certain intellectual properties may apply for the expenditure to be written down over 5 years. The types of intellectual property that are eligible for the writing-down allowances are as follows:-
- Copyrights and related rights
- Trade marks
- Registered designs
- Geographical indications
- Layout designs of integrated circuits
- Protection of confidential information
- Finance Leases
The capital allowances available in respect of machinery or plant leased under certain categories of finance leases are granted to the lessee not the lessor. The effect is as if the leased asset had been sold by the lessor to the lessee. There are some fairly complicated regulations which define the conditions under which a finance lease will be treated in this manner.
Trading losses of corporate taxpayers may be offset against all income received in the same accounting period or carried forward indefinitely and offset against future trading profits, subject to the satisfaction of certain conditions. It is not necessary that losses be offset only against business or professional income. They can be offset against income from other sources(eg employment income, dividends, interest, rents, etc).
With effect from the year of assessment 2006, tax losses up to S$100,000 incurred in a current year may be carried back for one year. This is referred to as the carry-back relief system. The current requirements for carry forward of unutilised trade losses apply when these amounts are carried back.
Temporary Enhancement of the Carry-back Relief System
To assist viable businesses stay afloat during the global economic downturn, the loss carry-back relief system was temporarily enhanced for the years of assessment 2009 and 2010. The enhancements are as follows:
Current year unabsorbed trade losses can be carried back for up to three years of assessment immediately preceding the year of assessment in which the trade losses were incurred.
The order of set-off of the trade losses to the three immediate preceding years of assessments is as follows:
- first to the third year of assessment
- followed by the second year of assessment, and
- then the year of assessment immediately preceding the year of assessment in which the trade losses were incurred.
- The limit on the aggregate amount of current year trade losses that can be carried back is increased from S$100,000 to S$200,000.
These temporary enhancements are available to all businesses, including sole proprietorships and partnerships.
A company may transfer its current year unabsorbed trade losses to a claimant company within the same group to be deducted against the assessable income of the claimant company for the same year of assessment provided certain conditions are met.
Losses of pure investment companies may not be carried forward. Pure investment companies are companies whose activities are confined to holding investments and deriving income from investments.
Continuity of Ownership Test
The substantial shareholding test for companies requires the shareholders of a company and their respective shareholdings to remain substantially the same, such that, as at certain relevant dates, not less than 50% of the company’s total number of issued shares is held by, or on behalf of, the same persons.
For the shareholding test, shares in a company held by, or on behalf of, another company shall be deemed to be held by the shareholders of the last-mentioned company. Besides, shares held by or on behalf of the trustee of the estate of a deceased shareholder, or by or on behalf of the person entitled to those shares as the beneficiary under the will or any intestacy of a deceased shareholder, are deemed to be held by that deceased shareholder.
External Auditor’s Certificate
When a company carries forward unutilised losses, the Comptroller of Income Tax usually requires the company to furnish an external auditors’ certificate to substantiate that there was no substantial change in its ultimate shareholders on the relevant dates.
Company Secretary’s Certificate
For a public listed company, or a company whose ultimate parent company is a public listed company whose shares are actively traded on a recognised stock exchange, a certificate from the company secretary confirming that no merger or takeover of the company has taken place between the relevant comparison dates may be accepted by the Comptroller of Income Tax in lieu of the external auditors’ certificate.
Same Business Test
Capital allowances carried forward can only be offset against future profits derived from the same trade or business which gave rise to the capital allowances. For tax purposes, a change in business structure through which a business is conducted may not necessarily mean a cessation of that business.