Businesses are designed to be profitable, but market, technical, and economic changes can have an adverse effect on a company’s bottom line, which can result in a loss for the company.
For businesses of all sizes, maintaining revenue is the largest challenge in the current uncertain economic environment. The secret to relieving the pressure is to handle business losses effectively and optimize cash flow.
A high-level summary of Singapore’s handling of business losses is given in this article.
Understanding the rules governing the accounting and tax handling of company losses in the country where a business operates is essential. It is important to keep in mind that many countries offer a loss carry-forward system, whereby the use of tax losses currently depends on the company’s future performance.
Singapore, one of the countries having an advance tax system, permits loss carry-back. Companies can use loss carry back to offset current period losses against taxes that have already been paid.
In other words, it is a clause that allows taxpayers to recover back taxes they have already paid on the basis of recent losses. The program is available to all types of firms, including partnerships and sole proprietorships, which is a tremendous relief for small businesses.
Treatment of Business Losses
Singapore allows business taxpayers to balance all incomes and losses within the same accounting period. Any revenue, including dividend income, interest income, or rental income, may be used to cover trading losses.
Tax losses that have not yet been used may be carried forward forever and applied to upcoming trading profits.
Qualifying Conditions
The company that requests a loss carry forward must pass a shareholding test. As a result, there must not have been a significant change in the shareholders’ shareholdings as of the relevant dates.
The final day of the year (31 December) in which the loss was incurred and the beginning day of the tax year of assessment in which the losses are to be deducted are relevant dates.
The shareholding test contrasts the proportion of a company’s shares held by the same individuals as at the relevant dates. If the percentage of shares owned by the common shareholders (shareholders who held shares throughout the two relevant dates) as at the two relevant dates is 50% or more, then there hasn’t been a material change in the number of shareholders and their shareholdings.
Group Relief
The unused trading losses that a firm incurred in the current year may be transferred to another company in the same group to which it belongs. If certain requirements are completed, such transferred losses are offset against the assessable income of the claimant company (transferee) for the same assessment year. As long as the claimant company is capable of bearing the losses, a transferor firm may transfer all of its lost items to a claimant company.
Qualifying Conditions
The claimant and the transferor both need to
Note: The shareholders must show a beneficial right to the remaining assets or residual earnings, and the ordinary shareholding must be maintained at or above 75% for the entire continuous period that ends on the last day of the base period.
Loss items that aren’t eligible
These loss items are not eligible for transfer:
Loss Carry-Back Relief
A loss carry-back program was implemented in 2006 to help small corporate taxpayers, sole proprietors, and partnership enterprises withstand economic downturns.
The scheme, which went into force with the Year of Assessment (YA) 2006, permitted losses from the current year to be carried back, but only up to an aggregate trade loss of S$100,000 to the year of assessment before the current year.
Temporary Enhancements
Following the 2008 global economic crisis, the scheme’s temporary improvements were announced. For the YA 2009 and YA 2010, unabsorbed trade losses from the current year can therefore be carried back for up to three years of assessment that immediately preceded the year of assessment in which the trade losses were incurred. The setoffs are in the following order:
There is now a S$200,000 cap on the total amount of trade losses that can be carried back.
By requesting a return on the tax that was already paid in prior years, you can use the carry back method to make up some of the losses that were sustained. The prerequisites for qualifying are comparable to those for carrying forward unused trade losses.
The start day of the year in which the trade losses were incurred and the end day of the immediately previous YA in which the trade losses are to be subtracted are the essential dates for the shareholding test.
Businesses that choose to carry back a loss must specify their choice on Form C, the income tax form, along with the tax computation for the applicable YA, and they must also submit the updated tax computation for the prior YA. A firm may submit the “Election Form” to request a refund of taxes paid prior to filing its Form C.
Investment Holding Companies
Pure investment company losses cannot be carried over. Companies classified as pure investment firms only hold investments and derive revenue from those investments in the form of dividend, interest, or rental payments.
Note to New Start-up Businesses
It is important for new start-up businesses to be aware of the tax exemption program. A newly formed business that satisfies the requirements of this program is eligible to claim a full tax exemption on the first $100,000 of normally taxable income for each of its first three consecutive YAs as of 2005. Since 2008, each of the first three successive YAs receives an additional 50% exemption on the first $200,000 of the usual chargeable income.
A start-up company’s qualified deductions will be utilized to offset its assessable income for the prior YA if it chooses to carry over its losses. If there is no chargeable income left after the deduction, the corporation will not be able to take use of the above-mentioned exemption scheme. Instead, the company will be able to benefit from a significant savings in the form of lower tax burden if it chooses to carry over its unabsorbed trade losses and employ the tax exemption plan. New businesses must therefore carefully assess the effects of trade loss treatment. The decision to opt in to the Enhanced Carry-Back Relief System is final once it has been made.
An Example
Consider the 2008 incorporation of ABC Pte Ltd. It had a trading loss of S$100,000 in the year 2011, and the ramifications for its chargeable income and income tax are shown in the figure below.
If the business decides to carry the loss back:
| Year of Assessment | |||||
| 2010 (in S$) | 2011 (in S$) | 2012 (in S$) | |||
| Chargeable profit/loss | 150,000 | Chargeable profit /loss | (100,000) | Chargeable profit /loss | 300,000 |
| Less: Losses carried back from YA 2011 | 100,000 | Less: Losses carried back to YA 2010 | (100,000) | Losses brought forward | Nil |
| Chargeable income | 50,000 | Chargeable income | Nil | Chargeable income | 300,000 |
| Less: tax exemption for new start-up | (50,000) | Less: Partial Tax exemption-(10,000*75%)+290,000*50%) | (152,500) | ||
| Chargeable income after exemption | Nil | Chargeable income after exemption | Nil | Chargeable income after exemption | 147,500 |
| Tax Payable @20% | Nil | Tax Payable @17% | Nil | Tax Payable @17% | 25,075 |
Total tax liability for YA 2010,2011 and 2012 is S$ 25,075.
If the company chooses to carry forward the loss made in YA 2011 then the tax implications will be as below.
| Year of Assessment | |||||
| 2010 (in S$) | 2011 (in S$) | 2012 (in S$) | |||
| Chargeable profit/loss | 150,000 | Chargeable profit /loss | (100,000) | Chargeable profit /loss | 300,000 |
| Less: Losses carried back from YA 2011 | Nil | Less: Losses carried back to YA 2010 | (100,000) | Losses brought forward | (100,000) |
| Chargeable income | 150,000 | Chargeable income | Nil | Chargeable income | 200,000 |
| Less: tax exemption for new start-up | (125,000) | Less: Partial Tax exemption-(10,000*75%)+190,000*50%) | (102,500) | ||
| Chargeable income after exemption | 25,000 | Chargeable income after exemption | Nil | Chargeable income after exemption | (97,500) |
| Tax Payable @20% | 5,000 | Tax Payable @17% | Nil | Tax Payable @17% | (16,575) |
Total tax liability for YA 2010, 2011 and 2012 is S$21,575.
If the business chooses to carry the loss forward rather than carry it back, the tax obligation is significantly reduced. A fresh start up business must therefore treat its business loss with due diligence.
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