Singapore Company Taxable Income
Singapore tax computation is a statement showing the tax adjustments and deductions to the accounting profit to arrive at the income that is chargeable to tax.
Below are some important tax points when computing a tax computation.
- Capital Allowances
- Continuity of Ownership Test
- Same Business Test
Your company is required to submit a tax computation and the audited/unaudited* accounts, together with the Form C annually.
The chargeable income of your company may be different from the net profit/loss shown in its accounts.
This is because some of the expenses incurred by your company may not be deductible for tax purposes. Similarly, some of the income received by your company may not be taxable or it may be taxed separately as a non-trade source income.
Besides, you may wish to claim for capital allowances on your fixed assets or claim for unutilised losses/capital allowances/donations brought forward from your previous Years of Assessment (YA).
Generally, you may need to make the following deduction to your net profit/loss. The deductions include:-
- Deduct non-taxable income-it is required to deduct non-taxable income from the chargeable income. Some examples of non-taxable income include capital gains, gains on sale of fixed assets, gains on foreign exchange on capital transactions, exempt shipping income derived by a shipping company, foreign-sourced dividends, branch profits, service income received by a resident company that satisfies the qualifying conditions and any income exempted under the Singapore Income Tax Act.
- Deduct investment income (e.g. interest, dividend and rental) which are to be assessed separately as non-trade income.
- Deduct capital allowances for assets owned and used for the purpose of producing trade or business income.
- Deduct prior period losses and unabsorbed capital allowances of a trade or business, subject to certain conditions being met.
- Deduct entertainment expenses and club fees provided the expenditure was incurred in the production of income and in relation to the taxpayer’s business. The amount claimed must also be reasonable.
- Deduct interest on monies borrowed and employed in the producing income being assessed.
- Deduct unutilised losses brought forward from previous YA where applicable.
- Deduct unutilised donations brought forward from previous YA where applicable.
- Deduct donations made to approved institutions of a public character if any.
Certain categories of expenses, although incurred in the production of income, are not allowed deductions for income tax purposes. These include:
– Disallowable expenses- expenses that are wholly or exclusively incurred in the production of income are deductible which include bank charges, commission, office upkeep, wages, etc.,
– Direct expenses relating to the investment income (to be allowed against the respective investment income taxed as non-trade income)
– Net investment income such as interest, dividend and rental (after deducting the direct expenses relating to the investment income)
– Temporary differences adjusted for corporate income tax purposes
– Profits are adjusted for temporary income and expense items such as:
- foreign source income not remitted into Singapore
- provision for doubtful debts
- provision for warranties
- provision for stock obsolescence
- provision for unutilised leave
- accounting depreciation vs tax depreciation
– Domestic or private expenses
– Capital expenditure-capital expenditures are not allowed as a deduction. In general, expenditure which relates to the acquisition of a source of income or a capital asset is considered as being capital in nature.
– Income taxes paid in Singapore or overseas
– Payments to employee or pension funds other than to:-
- the Singapore Central Provident Fund; or
- other Singapore pension or provident funds approved by the Minister for Finance; or
- certain obligatory contributions to foreign pension or provident funds.
– General provisions-general provisions are not deductible. For example, no deduction will be allowed for a provision for foreseeable losses.
– Bad trade debts-a general provision for bad debts or debts that are no longer collectible is not allowed as a deduction.
– Expenses incurred on most categories of motor cars
– Accrued employee benefits-amounts recognised in respect of long service leave, annual leave, sick leave and other leave are not deductible until the expenditure is incurred
– Fines and penalties-statutory fines and penalties are generally non-deductible.
– Pre-commencement expenses-expenses incurred prior to the commencement of business are generally not allowed as a deduction
– Renovation or refurbishment works-any capital expenditure incurred on renovation or refurbishment works (R&R costs) carried out on the business permises of a taxpayer is not allowable as a tax deduction.
– Goods and services tax (GST) payable by a person who is required, but has failed, to be registered under the GST Act, or payable by a registered person who is entitled to credit it as input tax in his GST return
– Except in cases where the payer is a financial institution, the IRAS regards most types of finance expenses, other than interest, as capital costs of raising funds, and resists allowing tax deductions for them. The IRAS also disallows any interest expenses that it can match against the cost of assets that do not yield taxable income (such as non-interest bearing loans or share investments that do not yield taxable dividend income).
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.
In addition, 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.
In addition, with 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 purposes of 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. In addition, 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 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.