Fundamentals Level Skills Module, Paper F6 (SGP)

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2 Fundamentals Level Skills Module, Paper F6 (SGP) Taxation (Singapore) December 20 Answers and Marking Scheme Marks (a) High Three Pte Ltd (HTPL) Tax liability for the year of assessment 20 Basis period: January 200 to 3 December 200 $ $ Net profit as per accounts 600,000 Tax adjustments on income Government grant (taxable) $00,000 0 Interest from fixed deposit (separate source) (8,000) One-tier tax exempt dividend (separate source) (8,300) Recovery of ex-employee loan (non-taxable) (30,000) (56,300) Tax adjustments on expenses Provision for warranty expense 50,000 Obsolete stocks written off (deductible) 0 Depreciation 250,000 Medical expense capping ($28,000 less 2% of {855,000 5, ,000}) 3,000 2 Valuation fees 45,000 Legal fees deductible 0 Tax advisor fee deductible 0 Hire purchase interest for van deductible 0 Guarantee fees deductible 0 Donations ($2,000 + $8,000) 20,000 Loss on disposal of asset factory 400,000 Training expenses deductible 0 768,000,3,700 Less: Further Deductions Productivity and Innovation Credit External training (50% of $0,000) (marking note ) (5,000),296,700 Company van (75% of $30,000) (22,500) Executive chairs (under one-year claim) (7,200) Laptops (00% of $20,000) (20,000) Productivity and Innovation Credit laptops (50% of $20,000) (marking note ) (30,000) IBA balancing charge (,400,000 {(2,000,000 ( x 3)% x 2,000,000)}) 20,000 (59,700) 2 Trade adjusted profit,237,000 Add: Non-trade income Interest from fixed deposit not earned yet 0 One-tier tax exempt dividend exempt 0 0 Statutory income,237,000 Less: Approved donation ($20,000 x 2 5) (50,000) 2 Assessable/Chargeable income,87,000 Less: Full tax exemption: First $00,000 00% exempt (00,000) Next $200,000 50% exempt (00,000) (200,000) Chargeable Income after partial exemption 987,000 Tax thereon at 7% (marking note 2) 67, Marking notes:. PIC deductions and capital allowances computed based on the total of 400% of qualifying expenditure would also have been accepted as correct, even though the revised rate of 400% was announced after 30 September The mark allocated would still have been given if the one-off 20% rebate, capped at $0,000, announced after 30 September 200 was included. 3

3 (b) Marks On the basis that the company has met all applicable qualifying conditions, it will have the following options in relation to an unutilised trade loss and/or allowance arising from the Productivity and Innovation Credit:. carry it forward; 2. carry it back to the immediate preceding year of assessment; 3. transfer it to a related Singapore-incorporated company under the group relief system; and 4. opt to convert it into a cash payout. Only THREE options required, mark each, maximum (a) Michael and Jill Lee Computation of chargeable income for the year of assessment 20 Michael Jill $ $ Salary ($5,000 x 2) 80,000 Bonus Contractual (sign-on) ($5,000 x 3) 45,000 Non-contractual ($5,000 x 2 = $30,000) 0 Car benefits car usage [(3/7 x /0 x $05,000) + ($7,000 x 0 45)] 7,650 2 car 70, ,650 Partnership profit ($96,000 x /4) 24,000 Capital allowance ($20,000 x /4) (5,000) 402,650 9,000 Partnership rental ($30,000 x /4) 7,500 Rental /2 each of [$72,000 ($8,000 + $20,000)] 7,000 7,000 2 Statutory income 49,650 43,500 Less: Donations (individual donor not eligible) 0 Assessable income 49,650 43,500 Personal reliefs Earned income (wife has no earned income) (,000) 0 Nsman (,500) (750) QCR (4,000 x 2) husband with higher income should claim (8,000) 0 WMCR (wife has no earned income) 0 Foreign maid levy 0 CPF (capped) (5,300) Chargeable income 393,850 42,750 8 (b) John Lee In the absence of a capital gains tax regime in Singapore, John would not be taxed if the income arising from the sale of the condominium constitutes a capital gain and not a trading gain. The Singapore income tax act does not define when and whether a person is in the business of trading or dealing in properties. However, guidance can be obtained from case law. In practice, the Inland Revenue Authority of Singapore ( IRAS ) would examine the facts and circumstances surrounding the purchase and sale of the properties and consider these against factors developed through case law. These factors are commonly referred to as the badges of trade. These factors would be applied to John s case as follows: Subject matter this is probably neutral by itself as the condominium unit could either be held for long-term investment (e.g. to derive rental income) or for sale Holding period three months is very short and so high risk Frequency of transactions low risk as this is the first transaction Supplementary work actively engaging property agents, so high risk 4

4 Marks Circumstances for sale he needed money, so low risk by itself Profit motive intention to trade at the point of acquisition is not evident as the unit was a win and not acquired with the intention to trade for profit low risk mark for discussion of each relevant badge of trade, maximum 4 The windfall of $ 5 million should not be taxed. Whether the profit of $200,000 will be treated as a capital or trading gain depends on the strength of the evidence that John could provide to support his position (a) Multi One Pte Ltd $ $ Chargeable income (before carried forward loss items) for the year of assessment (YA) ,000 Less: unabsorbed capital allowances brought forward from YA 200 (40,000) Less: unabsorbed capital allowances brought forward from YA 20 (30,000) Less: unabsorbed trade losses brought forward from YA 200 (20,000) Less: unabsorbed trade losses brought forward from YA 20 (0,000) Less: unabsorbed donations brought forward from YA 200 part (30,000) - (30,000) - Chargeable income 0 - Unabsorbed donations from YA 200 carried forward (60,000 30,000) 30,000 - Unabsorbed donations from YA 20 carried forward 50,000-6 (Note: the order of claim is important when marking) (b) (i) As the following conditions are satisfied, Multi One Pte Ltd (MOPL) can transfer its loss items to Multi Kingdom Ltd (MKL) in the year of assessment 20: Both companies are incorporated in Singapore. They both belong to the same group of companies and maintain the minimum 75% shareholding threshold. They both have the same year end. mark for each condition 3 (ii) Multi Kingdom Ltd Chargeable income (before group relief) for year of assessment 20 80,000 Less: loss items transferred from MOPL: Current year unabsorbed capital allowances (30,000) Current year unabsorbed trade losses (0,000) Current year unabsorbed donations part (40,000) (80,000) Chargeable income after group relief 0 MOPL unabsorbed capital allowances from year of assessment (YA) 200 carried forward 40,000 MOPL unabsorbed trade losses from YA 200 carried forward 20,000 MOPL unabsorbed donations from YA 200 carried forward 60,000 MOPL unabsorbed donations from YA 20 carried forward (50,000 40,000) 0,

5 Marks 4 (a) Additive Energy Pte Ltd (AEPL) (i) The withholding tax should have been accounted for to the IRAS by the 5th of the month following the date of payment, which is based on the earliest of the following dates: when the payment is due and payable based on the loan agreement; when the payment is credited or deemed credited to the account of the non-resident; and the date of actual payment. 3 Since the amount was accrued in AEPL s accounts on 3 December 2009, which is the earliest of the three dates, the others being 30 January 200 (based on the contract) and July 200 (interest payment date), the withholding tax should have been accounted for by 5 January (ii) If the withholding tax is not paid by the due dates, a 5% penalty on the withholding tax will be imposed. In addition, a further penalty of % of the withholding tax will be imposed for each completed month (subject to a maximum of 5 months, i.e. 5%) that the tax remains outstanding. 2 As the withholding tax is borne by AEPL, the withholding tax payable should be $7,647 ($00,000/0 85*5%). The payment is overdue by six complete months after the due date, and hence the total penalty should be $,94 (i.e. % of $7,647). 5 AEPL also needs to account for the shortfall in the withholding tax paid of $2,647 ($7,647 $5,000). 5 (b) (i) The company should immediately inform IRAS upon discovery of the error. In addition to the fact that this is the ethical thing to do, a voluntary disclosure could reduce the penalty to a maximum of 5% of the withholding tax due. If disclosure is made within one year from the statutory filing date, the penalty can also be waived. 2 (ii) In the case of errors for corporate income tax, if the errors do not arise from tax evasion, a waiver of the penalty is also available if voluntary disclosure is made within one year from the statutory filing date (usually 30 November of each year). Beyond one year, the penalty is based on 5% per annum. 2 Where the errors arise from tax evasion, the waiver and reduced penalty would not apply. However, the voluntary disclosure will still be accepted as a mitigating factor when IRAS considers penalty charges. If the company does not make a voluntary disclosure, then the usual penalties would apply, i.e. up to 200% of the tax undercharged for negligence cases, and up to 400% for serious tax evasion (a) Technoplex Pte Ltd Goods and services tax (GST) for the quarter ended 3 December 200 Value Input tax Output tax $ $ $ Export sales (zero-rated) 800,000 0 Local sales (standard-rated) 900,000 63,000 Imports of purchases on behalf 200,000 0 Local purchases (standard-rated) 300,000 2,000 Freight costs of exports (zero-rated) 00,000 0 Rental of office premises (standard-rated) 450,000 3,500 Recreational club subscription fee standard-rated but blocked 3,000 0 Rental of apartment for staff exempt supply 60,000 0 Donation (no supply) 50, ,500 63,000 (52,500) Net GST payable 0,

6 Marks (b) (i) In general, a supply is treated as taking place at the earliest of the following: when the goods are removed or made available or when the services are performed; when a tax invoice is issued; or when payment is received. 5 However, an exception to the general time of supply rule applies where a tax invoice is issued within 4 days from the day that the goods are removed or made available, whereby the time of supply becomes the date of issuance of the tax invoice. This is provided that payment has not been received from the customer. 5 3 Marking note: If the time of supply rule with effect from January 20 is explained (i.e. the earliest of the date of the issuance of the invoice or the payment date), the allocated 3 marks will be awarded accordingly. (ii) () In this case, the time of supply should be 30 September 200 (i.e. the date of removal of the goods which is the earliest of the three events) and should be accounted for in the quarter ended 30 September (2) In this case, the tax invoice was issued within 4 days from the day that the goods were removed or made available, but full payment was received from the customer even earlier. Hence, the time of supply should be 29 September 200 and this supply should also be accounted for in the quarter ended 30 September