Allowances and Deductions
Common Allowance and Deductions that you should be aware of
The following are the most common forms of Allowance and Deductions availed to businesses to reduce the overall chargeable income of the business:
- Capital Allowance
- Unutilised losses, capital allowances and donations
- Section 14Q Deduction for Refurbishment and Renovation costs
- Productivity and Innovation Credit
- Medical Expenses
Capital allowances (CA) are deductions that you can claim on the wear and tear of fixed assets bought and used in your trade or business. CA is given in place of depreciation (which are non-deductible expenses). Capital allowance is availed to businesses carrying out a trade or a business. This implies that CA is not available for investment holding companies deriving passive income from its investments.
The following table provides a non-exhaustive list of qualifying and non-qualifying fixed assets for your better understanding.
|Qualifying Fixed Assets
|Non-Qualifying Fixed Assets
CA Claiming Methods
There are generally 3 types of methods to calculate and claim for CA for your tax computation.
A. 100% Write Off Method
Section 19A allows you to claim 100% of the cost of the following assets as CA:
- Prescribed automation equipment
- Low Value Assets not exceeding $5,000 per item, with a cap of $30,000 for all Low Value Assets per YA.
For assets purchased by cash, you can claim for the entire amount.
For assets purchased under Hire Purchase arrangement, you can claim for 100% of the principal paid (plus deposit amount if any).
B. 3 Year Write Off Method
Effective YA2009, all assets can use the 3 Year Write Off method to claim CA. The CA per year computed is simply cost of assets divide by 3.
For assets purchased by cash, you will claim 1/3 of the cost of the asset as CA.
For assets purchased under Hire Purchase arrangement, you will claim for 1/3 of the principal paid each year (plus deposit amount if any).
C. Write-off over the prescribed working life of the asset under Section 19
Under this method, the CA is claimed over the working life of the asset. The working life is in accordance to the prescribed life of the asset based on the Sixth Schedule of the Income Tax Act. If you employ this method of claim, you must note that the CA is claimed based on the concept of Initial Allowance (IA) and Annual Allowance (AA).
For assets purchased by cash, in the first YA of CA claim, the CA is computed based on:
CA = IA + AA
20% x Cost of Asset + (80% x Cost of Asset) / Working Life of Asset
In subsequent YAs, the CA = AA which is (80% x Cost of Asset) / Working Life of Asset
For assets purchased under Hire Purchase Arrangement, you will need to compute IA and AA for each year where instalments were paid based on:
CA = IA + AA
20% x Principal paid in the Year + (80% x Principal Paid in the Year) / Working Life of Asset
If there are no payments in a year, there will be no IA computation for that particular YA.
Unutilised Losses, Capital Allowances and Donations
Unutilised losses – Insufficient or no income from other sources to offset business losses incurred during that YA.
Unutilised capital allowances – Capital allowances claimed in that YA cannot be fully utilised due to insufficiency of income or business losses incurred during that YA.
Unutilised donations – Allowable donations made during the YA is more than the income for that YA.
|Unutilised Losses and Donations
|Unutilised Capital Allowances
|Relevant Date:Last day of the year in which the losses and donations were incurred and First day of the YA in which the losses and donations are to be deducted
|Relevant Date:Last day of the YA in which the capital allowances arose and First day of the YA in which the capital allowances are to be deducted
So long as the common shareholders at the TWO relevant dates are holding on to percentage of shares equaling or in excess of 50% of all the shares, there is no change in substantial shareholders.
If there is a substantial change in shareholders and their shareholdings, you may write to IRAS to apply for waiver of the above shareholding test. The applications for waiver of the shareholding test will be considered based on the merits of each case and granted if the substantial change in shareholders is not tax-motivated.
Order of Deductions
In claiming for unutilised deductions, the following order of deductions must be followed:
1. Unutilised capital allowances (starting with the CA from the earliest YA)
2. Current year capital allowance
3. Unutilised losses from previous years (starting with the losses from the earliest YA)
4. Unutilised donations from previous years (starting with the donations from the earliest YA, subject to a maximum of 5 years before the current year)
5. Current year donations
Section 14Q Deduction for Refurbishment and Renovation costs
Section 14Q Deduction for Refurbishment and Renovation costs is granted for costs incurred from 16 Feb 2008 onwards. These eligible costs for deduction are also called R & R costs for short.
Examples of qualifying R & R costs include:
- General electrical installation and wiring to supply electricity
- General lighting
- Hot/cold water system (pipes, water tanks etc)
- Gas system
- Kitchen fittings (sinks, pipes etc)
- Sanitary fittings (toilet bowls, urinals, plumbing, toilet cubicles, vanity tops, wash basins etc.)
- Doors, gates and roller shutters (manual or automated)
- Fixed partitions (glass or otherwise)
- Wall coverings (such as paint, wall-paper etc.)
- Floorings (marble, tiles, laminated wood, parquet etc.)
- False ceilings and cornices
- Ornamental features or decorations that are not fine art (mirrors, drawings, pictures, decorative columns etc.)
- Retractable or non-retractable Canopies or Awnings
- Windows including the grilles etc.
- Fitting rooms in retail outlets
Examples of Non-Qualifying R & R costs include:
- Any designer fees or professional fees
- Any antique
- Any type of fine art including painting, drawing, print, calligraphy, mosaic, sculpture, pottery or art installation
- Any works carried out in relation to a place of residence provided or to be provided to the company’s employees
The Section 14Q deduction MUST BE CLAIMED over 3 continuous years of assessment, incepting from the Year of Assessment relating to the basis period in which the R & R costs are incurred.
Remember: You must claim in the YA relating to the basis period or else the right to deductions will be lost.
The amount deductible is simply 1/3 of the qualifying R & R costs for each year. However, please note that there is a $300,000 expenditure cap for every three relevant year period.
Productivity and Innovation Credit (The PIC scheme will lapse after YA 2018)
The productivity and innovation credit scheme is implemented to encourage entrepreneurs to invest in efficiency and innovation.
PIC Activities covered include:
- Acquisition and leasing of PIC Information Technology (IT) and Automation Equipment
- Training of employees
- Acquisition and In-licensing of Intellectual Property Rights
- Registration of patents, trademarks, designs and plant varieties
- Research and development activities
- Design projects approved by DesignSingapore Council
How does PIC works?
There are 2 options available to businesses, subject to qualifying conditions being met.
Option 1 – 400% Deduction/Allowance
400% Tax Deductions on up to $400,000 of expenditure per year for YA2013/YA2014.
400% Tax Deductions on up to $600,000 of expenditure per year from YAs 2015 to 2018
The 400% deduction/allowance method will be reflected by your tax agent in your tax return and be used to reduce your chargeable income.
Option 2 – 60% (40% for purchases after 1 Aug 2016) PIC Cash Payout
Cash payout on up to $100,000 of expenditure per year. Under this option, businesses can claim 60% (40%) payout from IRAS based on the qualifying expenditure amount. The cap to the annual expenditure amount is $100,000, which implies that the maximum cash payout available for your claim each year is $60,000 ($40,000).
Conditions to be met before you qualify for the 60% (40%) Cash Payout:
- You incurred qualifying expenditure and are entitled to PIC during the basis period for the qualifying YA
- There is active business operations in Singapore
- You have at least 3 employees with CPF contributions, excluding sole-proprietors, partners under contract for service and shareholders who are directors of the company. A business is considered to have met the 3-local-employees condition if it contributes CPF on the payroll of at least 3 local employees in the relevant months.
Notes on PIC Coverage for the 2 most common qualifying activities
A. Acquisition and leasing of PIC Information Technology (IT) and Automation Equipment
|Qualify for PIC
|Do Not Qualify for PIC
B. Training of employees
|Qualify for PIC
|Do Not Qualify for PIC
|Training costs incurred to train employees for the purposes of the trade and business. Training refers to:
Mistakes to Avoid when claiming for PIC
- Duplicate claim for both PIC cash payout and 400% tax deductions/allowances on the same expenditure under any of the six PIC activities. Please note that you can only opt for either the cash payout or the 400% tax deduction/allowance.
- Claiming 500% instead of 400% tax deductions/allowances under any of the six PIC activities. Please note that the 400% claim comprise of 100% normal deduction and 300% additional tax deduction
- Claiming PIC on non-qualifying expenditure:
- Course fees on training attended by the business owners
- GST paid by a GST-registered business on an item qualifying for PIC. This is because the GST paid will be refunded during your GST returns.
- Cost of PIC IT and Automation Equipment not incurred during the relevant accounting period of the Year of Assessment (YA) of claim.
- Cost that is not applicable to the PIC IT and Automation Equipment such as warranty fee, service maintenance fee or consumable
- Consulting fees unrelated to the development of the PIC IT and Automation Equipment
- Expenses that have been subsidized by a Government/Statutory Board grant or subsidy. Expenses qualifying for PIC benefits must be net of such grant or subsidy.
The authority takes a serious view of taxpayers who abuse the PIC scheme. Offenders convicted of PIC fraud will have to pay a penalty of up to four times the amount of cash payout obtained, and a fine of up to $50,000 and/or imprisonment of up to five years.
Tax deduction for medical expenses is capped at 1% of total employee remuneration accrued for the year.
Example: Total remuneration for the year is $100,000. This means that based on the 1% rule, the company can claim up to $1,000 of the medical expenses it incurred during the year as deductible expenses. If the company incurred $500 medical expenses, the amount will be fully deductible against your income. Otherwise, if the company incurred $2,500 medical expenses, $1,000 will be deductible against your income, and $1,500 will be considered non-deductible.
In some instances, the cap on medical expenses is at 2% of total employee remuneration accrued for the year if the company has implemented any of the following portable medical benefits options:
- Portable Medical Benefits Scheme (PMBS);
- Transferable Medical Insurance Scheme (TMIS);
- Provided employees with inpatient medical insurance benefits in the form of portable medical shield plans; or
- Made ad-hoc contributions to employees’ Medisave accounts (subject to a cap of $1,500 per employee per year) during the relevant basis period.
Please refer to the MOM website for details on the aforementioned medical benefits options.