Who and When will taxpayers be taxed?

WHO are the taxpayers?

s10(1) of Income Tax Act (ITA):"Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore..."


s2 of Income Tax Act (ITA):
"person" =
+ individuals
+ a company
+ a body of persons
+ a Hindu joint family

WHEN will the taxpayers be taxed?

(a) Preceding Year Basis
Year of Assessment (YA): YA refers to the tax year in which income tax is calculated and charged. Each YA begins on 1 Jan and ends on 31 Dec.

Basis Period (BP): BP refers to the period that the income is earned for a particular YA.
In Singapore, we are on the preceding year basis, therefore the BP for a particular YA is always the previous year of that YA.

(a) Individuals : BP is the preceding calendar year.
(b) Business: BP is the preceding financial accounting year.

Question:

John owns a sole-proprietoship business providing consultancy services. The SP business adopted 31 March to be its year-end. For the year ended 31 March 2016, the SP business recorded an adjusted taxable profit of $60,000.
In addition, the SP business purchased an office unit 3 years ago which is currently rented out since 1 September 2015. The net rental income per month is $2,000.

John also rented out his private condominium since 1 March 2016. The net rental income per month is $1,900.

Calculate the tax payable by John for the year of assessment 2017.

What is Taxable in Singapore?

So what is taxable in Singapore?
(a) Territorial System of Taxation
Income under s10(1)(a) - (g) of Income Tax Act (ITA) is chargeable to tax if it is:
Accrued in Singapore OR
Derived from Singapore OR
Received in Singapore from outside Singapore

(b) Income of Revenue Nature
Only income of a revenue nature is taxable. Singapore does not impose tax on Capital gains.

Guidelines from common law:
1. Receipts of a recurrent nature are more likely to be treated as revenue receipts.

2. Compensation received for the destruction of the recipient's profit-making apparatus are receipts of a capital nature.
- Barr, Crombie & Co vs CIR.

3. Money received in lieu of trading receipts is of revenue character.
- Kelshall Parsons & Co vs CIR.

4. Money received for restriction on income earning activities of a person is capital in nature.
- Higgs vs Oiliver
- Glenboig Union Fireclay Co Ltd vs IRC.

5. Receipts for the sale of the (non-current) assets of a business are prima facie capital receipts.

Question:
James, an machinery manufacturer, received $200,000 as compensation from its raw materials supplier for the cancellation of a trading contract. He was given the following advice:
1. Compensation for the cancellation of a trading contract is always a taxable receipt.
2. Compensation for the cancellation of a trading contract is always a non-taxable receipt.
3. The taxability of the compensation is dependent solely on whether the contract is for trade purposes.
4. Compensation for the cancellation of a trading contract is not taxable if the cancellation of the contract will cause destruction to James's manufacturing operations.

Which of the above advice is correct?

Determining Revenue vs Capital: Badges of Trade

1. Nature of subject matter

This refers to the nature of the asset/ property that is being bought and sold. Some property (e.g. commodities, manufactured items) are normally regarded as the subject of trading while others are less likely to be regarded as trading when they are not bought in quantity (e.g. antiques, art work).

 2. Length of ownership

This refers to the holding period of the asset/ property in question. The shorter the holding period, the more likely it would be regarded as held for trading.

 3. Frequency of transactions

High frequency of similar transactions is more indicative of trading than an isolated transaction.

 4. Supplementary work

This refers to additional work done on the asset/ property in question to make it more marketable or extra effort made to find or attract purchasers. If this is done, it is more likely that the subsequent disposal would be regarded as trading.

 5. Circumstances of the realisation

Some circumstances are less likely to indicate trading (e.g. company is forced to sell the property in question due to compulsory acquisition, sudden urgent need of cash or threat of foreclosure by creditors).

 6. Motive

This refers to whether there was an intention to trade at the time of the acquisition of the asset/ property in question.

 7. Mode of financing

This refers to how the purchase of the asset/property in question is being financed. Short-term financing is more indicative of trading than long-term financing. The company's financial position and ability to hold on to the property will also be taken into consideration.

 8. Other factors

Other factors include whether there were any feasibility studies conducted, the accounting treatment of the company, the availability of documentation or other evidence maintained by the company to indicate its intention.

Charging Section - S10

Charge of income tax
Section 10 (1) of Income Tax Act (ITA) - Income tax shall, subject to the provision of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of-

(a) gains or profits from any trade, business, profession or vocation for whatever period of time such trade, business, profession or vocation may have been carried on or exercised;

(b) gains or profits from any employment;

(c) (deleted by Act 29/65)

(d) dividends, interest or discounts;

(e) any pension, charge or annuity

(f) rents, royalties, premiums and any other profits arising from property; and

(g) any gains or profitss of an income nature not falling within any of the preceding paragraphs.

Tax Avoidance and Tax Evasion

Tax avoidance 
A tax avoidance arrangement normally involves an arrangement that is artificial, contrived or has little or no commercial substance and is designed to obtain a tax advantage that is not intended by Parliament.

Tax evasion 
Tax evasion is a criminal offence which involves the reduction of one’s tax liability or obtainment of tax credits or refunds through illegal means such as the claim for fictitious or non-existent expense and the failure to declare taxable income.

Tax planning 
Tax planning is a process of structuring a transaction or series of transactions to minimise one’s liability to tax, and usually fulfills both the legal requirements and intent of the income tax law.

Tax AVOIDANCE seeks to minimize tax legally within the framework of the law and tax planning is done through tax avoidance. While tax planning is acceptable, it should be noted that in accordance to S33 of the Income Tax Act (ITA), the Comptroller may disregard certain transactions & dispositions so as to counteract any tax advantage obtained or obtainable by that person from or under that arrangement.


The examples of arrangements (as well as their key features) that CIT would regard as having the purpose or effect of tax avoidance within the meaning of section 33(1) of the ITA may be classified into the following broad groups:
(i) Circular flow or round-tripping of funds;
(ii) Setting-up of more than one entity for the sole purpose of obtaining tax advantage;
(iii) Change in business form for the sole purpose of obtaining tax advantage; and
(iv) Attribution of income that is not aligned with economic reality

However, S33 shall not apply to any arrangement carried out for bona-fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax.

Tax EVASION is the act of reducing tax liability through illegal means such as:
1. Under declaring income
2. Claiming fictitious expenses
3. Preparing false accounts

Tax evasion is an offence and specific penalties under S96 will be imposed.

Circular flow or round-tripping of funds 
In a circular flow of funds, there is usually no change in the financial position of the taxpayer as a result of the round-tripping of funds. A key characteristic of the round-tripping of funds is that a payment which accords a tax deduction to one party is flowed directly or indirectly from that party to another related party as a non-taxable receipt.

Different Types of Taxes in Singapore

Different type of taxes in Singapore:

1. Corporate Income Tax
- Income tax chargeable on companies
2. Personal Income Tax
- Income tax chargeable on individual
3. Goods & Services Tax (GST)
- GST is a tax on consumption. The tax is paid when money is spent on goods and services, including imports.
4. Betting Taxes
- These are duties on private lottery, betting & sweepstake.
5. Casino Tax
- The casino tax is a new tax levied on the casinos' gross gaming revenue.
6. Stamp Duties
- This is imposed on commercial and legal documents relating to stock and shares and immovable property.
7. Motor Vehicle Taxes
8. Customs & Excise Duties
9. Others - Foreign Worker Levy, airport passenger service charge, water conservation tax etc.

Difference between Direct & Indirect Taxes:

The various types of taxes are broadly classified as "Direct" and "Indirect" taxes.

Direct tax refers to a tax paid directly by the person who bears the tax to the tax authority and is charged on the income of any person.
It is based on the principle that the burden of taxation is in accordance with a person's ability to pay and therefore the higher the income level of a person, the higher would be his tax burden.

Indirect tax refers to a tax borne by one person but collected via another person and an example of this is Goods & Services Tax (GST). It is a regressive tax based on the principle that the burden of tax is in accordance with the person's consumption pattern.

The Singapore Tax System

1. Introduction to Singapore Tax Authority

The Inland Revenue Authority of Singapore (IRAS) is a statutory board under the Ministry of Finance (MOF) and acts as an agent of the Government in providing services to administer, assess, collect and enforce payment of taxes. The IRAS also provides inputs to MOF on policy formulation and advises the Government and represents Singapore internationally on matters relationg to taxation.

The Comptroller of Income Tax (CIT) who heads the IRAS is responsible to oversee the administration and management of IRAS.


2. Function and Purpose of Taxation

A. The overall Function of taxation in a modern economy:
Taxes are used to develop Singapore into a stronger community, a better environment and a more vibrant economy, a place that Singaporeans can be proud to call home. Taxes go towards the funding of government expenditure.

The Fundamental principle of Singapore's tax policy is to keep tax rates competitive. Competitive corporate tax rate will help Singapore to continue to attract a good share of foreign investment while competitive individual tax rates will encourage our people to work hard. It will also make risk-taking worthwhile and encourage entrepreneurship.

B. The Purpose of Taxation in a modern economy:
There are 2 major main objectives of tax policy in Singapore and they are:
i) Revenue Raising
This is the traditional aim of tax policy. Tax revenue is a substantial source of funding for government operations.

ii) Promotion of Economic and Social Goals
Tax has been used to influence behaviour towards desirable social and economic goals.
Social goals: To encourage the workforce to upgrade their skills and learning to meet different needs of industries. e.g: Course fee relief
Economic goals: To encourge mechanisation and automation e.g: Capital allowances