TAX ALERT
ISSUE 1 | January 2015
Tax-time crunch: Tips to boost your tax savings
While being a sole proprietor entails certain freedom, it also creates added
responsibilities. A sole proprietor will face additional taxes and reporting requirements,
but he may also be eligible for certain business tax deductions.
This article was first published in The Business Times on 30 December 2014.
As a business owner who is a sole
proprietor, you are in charge of your
own business. Where the tax laws are
concerned, you and your business are
a single entity.
While this entails certain freedom, it
also creates added responsibilities.
You will face additional taxes and
reporting requirements, but you may
also be eligible for certain business
tax deductions.
Under Singapore law, the income that
a person derives through his business
as a sole proprietor is assessable
under his name. However, the person
would be able to claim tax deductions
for qualifying expenses against his
business income.
In order to qualify for tax deduction,
the expenses incurred by the
individual should be a legitimate
business expense. There also needs
to be a nexus between the expenses
incurred and the income produced,
although the income does not
necessarily needs to be
produced in the year in which the
expense is incurred.
To comply with tax reporting, a selfemployed individual should always
maintain separate bank accounts for
his personal and business outgoings.
Let us consider how business owners
can optimise their tax deductions as
the year draws to a close.
Expenses incurred by employers in
respect of their employees are
generally deductible as long as the
expense or payment made is not
capital in nature.
However, the deductibility of certain
payment and expenses is subject to
restrictions. For example, medical
expenses incurred by employers
for their employees are capped at
certain percentage of the total
employees' remuneration.
In addition, payments made to related
employees (that is, spouse and child
of the employer) are deductible only to
the extent that the payments are
reasonable based on the services
performed by these employees.
In general, running expenses incurred
for the business are fully deductible.
These may include rental, utilities,
telephone charges and general upkeep
of the business premises. Where part
of the business premises is occupied
for non-business purposes, for
example the upper floor of a
shophouse is the individual's
residence, it will be necessary to
apportion these expenses accordingly.
To be considered a business trip, the
trip should have a specific business
purpose such as meeting with clients,
seeking new customers or engaging in
other forms of business activities.
Deductible expenses may include airfare costs, and costs of transportation
and lodging at the destinations.
However, individuals should be
particularly careful to maintain complete
and accurate records and receipts for
their business travel expenses, as
travel expenses often draw the
attention of the Inland Revenue
Authority of Singapore (IRAS).
Miscellaneous expenses
In practice, the IRAS allows expenses
incurred by doctors, engineers,
lawyers and other professional
persons in attending conferences in
Singapore or overseas. Such
conferences should be related to the
business of the professional person
and should be approved by the IRAS
or the professional body to which the
person belongs.
In addition, the professional person
should keep a record of these
conferences with the dates, names
and locations of the conferences,
purpose of attending the
conferences, nature of the expenses
and amount incurred.
Such expenses may be incurred to
entertain current or prospective
business associates and clients. It is
advisable to keep proper records with
notes on the relevance of the expense
to the business including dates and
places of entertainment, names of
persons entertained, nature of the
expenses and amount spent.
In practice, the IRAS allows a
deduction for expenses incurred in the
course of business such as accounting
fees and professional expenses
incurred for preparation of tax returns.
The purpose for which the principle of
the loan is applied will determine the
deductibility of the interest expense. If
the loan is used for the purchase of
business assets or in meeting of
expenses incurred in carrying on the
business, it would be tax deductible.
On the other hand, if the money
borrowed is used to acquire private
assets or pay income taxes, the
interest expense would not qualify
for deductions.
The Productivity and Innovation Credit
(PIC) scheme is available from the
Years of Assessment 2011 to 2018.
Businesses can claim either enhanced
tax deduction or cash payout for
qualifying activities.
Qualifying activities may include
acquisition or leasing of certain
automation equipment, registration of
intellectual property rights, training of
employees, and design work carried
out in Singapore.
Businesses with at least three local
employees (that is, Singapore citizens
or permanent residents) may elect to
convert a portion of the tax deductions
into non-taxable cash grant, subject to
meeting certain conditions. Once an
amount of qualifying expenses is
converted into cash, the same amount
is no longer available for tax deduction.
Fixed-asset costs
The PIC scheme was introduced with
the intent of encouraging businesses to
raise their productivity by measures
including training and automation of the
production process. Businesses should
therefore only take advantage of the
scheme for the intended purposes.
Generally, the costs of acquiring a
fixed asset (such as office furniture
and equipment), including hirepurchase instalments, are not tax
deductible. However, deductions on
the costs of acquiring these assets
are available in the form of a
capital allowance.
The law recognises that wear and tear
of fixed assets represent a real
business cost and hence should qualify
for tax deductions. Capital allowance is
given on due claim in place of
depreciation of the fixed asset which is
not a deductible expense.
To facilitate the claim of capital
allowance, a fixed-asset schedule
showing the dates of purchase, costs
of purchase and the capital allowance
to be claimed should be prepared and
filed with the IRAS.
Self-employed individuals who are
Singapore citizens or permanent
residents are required under the CPF
Act to contribute to their Medisave
account if their yearly trade income is
more than S$6,000.
The net trade income is the balance of
the gross trade income after
deducting all allowable business
expenses and capital allowances.
Self-employed individuals can also
voluntarily contribute additional
amounts into their CPF (Central
Provident Fund) accounts, for which
they can claim a tax deduction.
With these CPF contributions, they
would effectively enjoy tax benefits
similar to an employee. For the Year of
Assessment 2015, the total amount of
relief that a self-employed person can
claim for his CPF contribution is
S$30,600 (36% x S$85,000).
Self-employed individuals
Sole proprietorships are not legal
entities and are not separate tax
entities for income tax purposes.
Hence, a self-employed individual
would be assessable on his income
derived from his business.
The self-employed individual is
required to file his tax return by April
15 each year, to report his income
derived through his business as a sole
proprietor, unless an extension of time
is granted by the IRAS.
When claiming tax deduction for
expenses incurred, the question to
ask is whether the expense is wholly
and exclusively incurred in the
production of income. This is the
same question that the IRAS will ask
when it scrutinises the expenses if
one gets audited. If the answer is no,
the deduction should not be taken.
To ensure compliance with the law, a
self-employed individual should
always keep proper documentation of
all business takings and outgoings.
In addition, an individual with a gross
trade income of S$500,000 or more is
required to submit a certified
statement of accounts of his business
together with his tax return. The
individual may wish to seek the help
of a qualified book-keeper to prepare
the statement of accounts.
It is often easy to overlook deductions
to which you are entitled if you
prepare only one return a year.
Whether you're a wage earner, an
investor, a business owner, or all
three, you should use the tax-cutting
benefits available in the tax law. If you
are a self-employed individual, take
the opportunity now to prepare for tax
filing next year. If you are still not
sure, you should seek professional
help with your tax return.
How we can help
As a committed tax advisor to our
clients, we welcome any opportunity
to discuss the relevance of the above
matters to your business.
About Tax Alert
KPMG’s Tax Alerts highlight the
latest tax developments,
impending change to laws or
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potential problem areas that may
impact you or your company. As
certain issues discussed herein are
time sensitive it is advisable to
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and should not be used or relied
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advice or a basis for formulating
business decisions.
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Senior Manager, Global Mobility
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