Understanding what can be written off and what must be included for tax purposes is crucial when it comes to filing your company tax. Find out some broad principles for calculating the taxable income for Singaporean businesses.
Taxable income and net income are two different things for businesses. A company’s taxable income is determined by starting with the net profit or loss recorded in its financial statements and then applying different adjustments to arrive at the taxable income for the specific accounting year.
Adjustments are required because certain costs incurred by your business might not be tax deductible. Similar to this, some of the money your business makes might not be taxable or might be taxed separately as income from sources other than trading.
Overview of Taxable Income Adjustments
Income accumulated in or derived from Singapore is taxed for Singapore companies. Outside of Singapore, income is subject to any applicable tax deductions and reliefs. Income consists of:
Any gains or profits from a business or trade
Investment income, such as interest and rental revenue
Royalties, premiums, and all other property-related earnings
Other income-related gains
The Singaporean company’s net profit/loss data is modified as follows in order to determine the taxable income:
Deduct Non-taxable income. The chargeable income is reduced by non-taxable income. Examples include capital gains, gains from the sale of immovable property, gains from foreign exchange on capital transactions, exempt shipping income derived by a shipping company, dividends from foreign sources, branch profits & service income received by a resident company that meets the qualifying requirements, and other income exempt from tax under the provisions of the Singapore Income Tax Act.
Adjust net investment income. Non-traded income such as interest, dividend, and rental income is referred to as investment income. Because excess expenses over the income received from one source of investment cannot be deducted from the surplus resulting from another source of investment, investment income is assessed separately for income tax computation purposes. For instance, excess costs related to rental income cannot be offset by dividend or interest income. The next step in calculating net investment income is to first subtract all investment income from chargeable income, then subtract investment-related qualified expenses from each type of investment income, and finally add the remaining net investment income for each type of investment.
Deduct qualified business expenses. Deductible expenses are those that are entirely and only incurred in the production of trade income. Wages, office rent, services fees, R&D costs, and other costs are examples of deductible expenses. Fines, write-offs for fixed assets, income tax, personal and domestic expenses, and car expenses for private passenger cars are a few examples of expenses that are not tax deductible. As a result of its size, the list of deductible and non-deductible business expenses cannot be fully explored in the context of this article.
Deduct capital allowances. As fixed assets are considered capital, the cost of purchasing them cannot be deducted for tax purposes. Additionally, depreciation on fixed assets is not tax deductible. Instead of depreciation, the business can instead claim a “capital allowance” deduction for the wear and tear of the fixed asset. On fixed assets, it is possible to deduct unutilized capital allowances from both past accounting periods and the current account period.
Deduct unutilised losses. In Singapore, qualified losses incurred may be offset against income. A qualified loss is one that has not been used previously and that must be incurred while operating a business. Losses are deducted on a “preceding year” basis, meaning that they may be written off in the year or years that follow the one in which they were incurred. The residual amount can be carried forward to the following year of assessment if the losses cannot be fully adjusted in the applicable year of assessment. Losses may be carried forward indefinitely under some circumstances.
Deduct unutilised donations. For the purpose of calculating the company’s income tax, only donations made to recognized institutions of a public nature may be written off.
