17 th LEGAL PRACTICE MANAGEMENT COURSE TAX IMPLICATIONS FOR NEW PARTNERS AND SOLE PROPRIETORS

Transcription

1 17 th LEGAL PRACTICE MANAGEMENT COURSE TAX IMPLICATIONS FOR NEW PARTNERS AND SOLE PROPRIETORS 4 Feb

2 Outline Who is a Self-Employed Individual? Obligations as a Self-Employed Individual Productivity & Innovation Credit Scheme Avoiding Common Errors About Partnerships General partnership, LLP and LP Filing Income Tax Returns Template for Computation of Adjusted Profit / Loss Seeking Assistance Keeping Proper Records Penalties Voluntary Disclosure 2

3 17 th LEGAL PRACTICE MANAGEMENT COURSE Who is a Self-Employed Individual? The Law Society Of Singapore 3 3

4 Who is a Self-Employed Individual? Sole proprietor of registered businesses & individual exercising profession or vocation Partner of a partnership business (i.e. general partnership, limited liability partnership, limited partnership) 4

5 Who is a Self-Employed Individual? Self-employed or Employee? Self-Employed Employee Contract for service Contract of service You work for yourself and you are in the position to realise a business profit or loss (i.e. you are the owner of the business) You are working for someone (your employer) 5

6 Who is a Self-Employed Individual? Tax Treatment Self-Employed Income assessable as Trade Income Employee Income assessable as Employment Income Can claim business expenses incurred against the trade income (subject to deductibility rules) Can claim employment expenses if incurred in carrying out official duties not reimbursed by employer not private or capital expense Trade losses can be offset against other income (e.g. employment, rental) Not applicable 6

7 17 th LEGAL PRACTICE MANAGEMENT COURSE Obligations as a Self-Employed Individual The Law Society Of Singapore 7 7

8 Obligation as a Self-Employed Individual Comply with income tax law Report complete & accurate business income Keep proper records & accounts for 5 years File form B / P on time Register for GST if your business revenue exceeds $1 million a year or if you expect your revenue to exceed $1 million a year. 8

9 Obligation as a Self-Employed Individual Contribute to Medisave account Self-employed Singapore Citizen or Singapore Permanent Resident Earn yearly net trade income > $6,000 Net trade income refers to your gross trade income less all allowable business expenses, capital allowances, and trade losses as determined by IRAS IRAS will issue a Notice of Computation (NOC) to inform you of your Medisave contributions 9

10 17 th LEGAL PRACTICE MANAGEMENT COURSE About Partnerships 10

11 About Partnerships A partnership is a relationship between two or more persons who carry on a business with the objective of making profit and sharing it between them. Different types of partnerships General Partnership Limited Liability Partnership (LLP) Limited Partnership (LP) 11

12 About Partnerships General Partnership LLP LP Not a separate legal entity A separate legal entity Not a separate legal entity Partners have unlimited liability Partners have limited liability up to their contributed capital For income tax purposes, an LLP will be treated as a partnership and not as a separate legal entity Consist of: one or more general partner(s) who have unlimited liability, and one or more limited partners who enjoy limited liability up to their contributed capital Partners pay tax on their share of partnership income Partners pay tax on their share of income from the LLP Partners pay tax on their share of income from the LP 12

13 About Partnerships Contributed Capital (applicable to limited partners of LLP & LP) Amount contributed in cash or in kind as capital (not including any loan to the LLP / LP) and has not been directly or indirectly withdrawn or received back by the partner; plus Amount of profits or gains from past Years of Assessment that the partner is entitled but which he has not received. 13

14 About Partnerships Relevant deduction The amount of a partner s share of capital allowance and trade loss allowed against his income from other sources. Past relevant deduction The aggregate of any relevant deduction allowed in all past Years of Assessment. The Rule Relevant deduction for a Year of Assessment together with all of the past relevant deduction of the partner shall not exceed his contributed capital. 14

15 Comparison between General Partnership, LLP &LP General Partnership LLP LP Tax rate Individual partners taxed according to their personal income tax rate Liability of Partners Unlimited liability Limited to the extent of partner s contributed capital General partner Unlimited liability Contributed Capital (CC) CC is irrelevant in determining the capital allowances & loss available for offset against other sources of income. Limited partner Liability limited to the extent of his contributed capital CC is necessary for application of relevant deduction restriction. 15

16 17 th LEGAL PRACTICE MANAGEMENT COURSE Filing Income Tax Returns 16

17 Filing Income Tax Returns You will need to report your business income in a summarised 2 or 4-line statement in your Form B or Form P 17

18 Filing Income Tax Returns The precedent partner has to report the business income in the Form P. He / she is also required to inform all the partners of their share of income from the partnership. The precedent partner is: The partner who, among all the partners present in Singapore, is the first named in the partnership agreement. If there is no partnership agreement, the precedent partner is a partner who is agreed upon and appointed by the other partners to be the precedent partner. For an LP, the precedent partner must be the general partner. 18

19 Filing Income Tax Returns If you are a partner, you would have to check with your precedent partner on your share of income from the partnership. Your share of partnership income = Your share of divisible profit / loss + Your salary, bonus, CPF & benefits from the partnership + Your share of other income from the partnership (interest, rent, other Singapore income and foreign income) Report your share of partnership income in the Form B under Trade, Business, Profession or Vocation > Partnership. 19

20 Filing Income Tax Returns Type of engagement* Contract of service Contract for service Tax treatment of income Employment income [Section10(1)(b) of ITA] Trade income [Section 10(1)(a) of ITA] Reporting of partner s income in Form P Precedent partner is to exclude the partner s income in the partnership allocation Precedent partner is to include the partner s income in the partnership allocation Reporting of partner s income in Form B Partner is to report the income in the Employment section Partner is to report the income in the Partnership section *The type of engagement is dependent on the terms of contract. 20

21 Filing Income Tax Returns REVENUE < $100,000 2-Line Statement 1 st line Revenue 2 nd line Adjusted Profit/Loss REVENUE < $500,000 4-Line Statement 1 st line - Revenue 2 nd line - Gross Profit/Loss 3 rd line - Allowable Business Expenses 4 th line - Adjusted Profit/Loss REVENUE > $500,000 4-Line Statement + Submit Certified Statement of Accounts (i.e. Trading, Profit & Loss Account and Balance Sheet ) To be signed by the sole-proprietor / precedent partner certifying that accounts are true and correct 21

22 Filing Income Tax Returns The 4-Line Statement 1. Revenue Total payments / fees / commissions received or receivable for services provided before deducting any expenses 2. Gross Profit / Loss For a service business: Same as Revenue 3. Allowable Business Expenses Expenses incurred wholly and exclusively in the production of your income 4. Adjusted Profit / Loss Gross Profit Allowable Business Expenses 22

23 Filing Income Tax Returns Allowable Expenses Must be related to your business Must be incurred in the production of income ALLOWABLE EXPENSES Allowed by tax law 23

24 Filing Income Tax Returns Examples of Allowable Expenses Business running costs (e.g. rental, utilities, book-keeping fees) Stationery, printing & postage fees Repair & maintenance of assets for business use Subscription to professional bodies & trade associations Cost of hiring (e.g. employee s salary, bonus & compulsory CPF contribution by employer) Public transport incurred in the course of business Business entertainment (e.g. for suppliers & customers) Capital allowances on fixed assets Renovation & refurbishment of business premises Pre-commencement revenue expenses 24

25 Filing Income Tax Returns Calculating Capital Allowance 3-year write-off All assets 1-year write-off Computers and automation equipments Assets costing not more than $5,000 each*,capped at $30,000 per Year of Assessment * With effect from Year of Assessment 2013 Alternatively, you may choose to write-off assets over the working life of the assets. 25

26 Filing Income Tax Returns Renovation & Refurbishment of Business Premises (R&R Cost) Objectives: To help businesses, particularly small and medium enterprises, reduce their business costs, tax deduction will be granted on all qualifying renovation & refurbishment costs incurred. The amount of renovation and refurbishment costs that will qualify for tax deduction is subject to an expenditure cap of $300,000* for each taxpayer over every relevant 3-year period. *With effect from Year of Assessment

27 Filing Income Tax Returns Examples of Qualifying R&R cost Renovation & Refurbishment of Business Premises (R&R Cost) 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.) Canopies or awnings (retractable or non-retractable) Windows (including the grilles etc.) Fitting rooms in retail outlets 27

28 Filing Income Tax Returns Pre-commencement Revenue Expenses Known as Concession for Enterprise Development You can claim pre-commencement revenue expenses incurred 1 year prior to the deemed date of commencement of business Deemed date of commencement of business = first day of the accounting year in which it earns its first dollar of business receipt 28

29 Filing Income Tax Returns Pre-commencement Revenue Expenses Example: Your business was set up on 1 Dec 2012 Accounting year ends on 31 Dec The first dollar of business receipt was earned on 1 Feb 2014 (deemed to have commenced business on 1 Jan 2014) Business set up Deemed date of commencement 1 st dollar of business receipt Accounting year-end 1 Dec Jan Jan Feb Dec 2014 Revenue expenses deductible (Without concession) Revenue expenses deductible (With Budget 2011 enhancement to concession) 29

30 Filing Income Tax Returns Disallowable Expense Capital in nature Personal and private in nature DISALLOWABLE EXPENSES Prohibited by tax law 30

31 Filing Income Tax Returns Examples of Disallowable Expenses Donations to charities & gifts to non-customers Capital costs (e.g. purchase of fixed assets, hire-purchase instalments) Private expenses (e.g. own medical expenses) Fines for breach of law (e.g. CPF late payment, interest, fines) Sole-proprietor s & partner s salary, bonus, CPF & medisave contributions All expenses in respect of private vehicles (even if it is incurred in the course of business) Entertainment of family members & friends 31

32 Filing Income Tax Returns Adjusted Profit VS Net Profit? Why the need to compute adjusted profit? The following may have been included in the profit and loss account: Non-trade income Expenses that are not deductible for income tax purposes Therefore, adjustments have to be made to the accounting net profit / loss to: Exclude the non-trade income Add back disallowable expenses to arrive at the adjusted profit / loss 32

33 Filing Income Tax Returns Examples of non-trade income Bank interest from deposits with approved banks or licensed finance companies in Singapore (i.e. exempt) Gain / profit on sale of fixed assets (i.e. not taxable) Rental income to be declared under Rent from Property in the income tax return (i.e. separate income source) 33

34 17 th LEGAL PRACTICE MANAGEMENT COURSE Template for Computation of Adjusted Profit / Loss 34

35 Template for Computation of Adjusted Profit / Loss IRAS website: > For sole-proprietors / self-employed 35

36 Template for Computation of Adjusted Profit / Loss 36

37 Template for Computation of Adjusted Profit / Loss The template on computation of adjusted profit / loss is also available at the centre page of the Guide on Filing of Income Tax Return Can be detached and submitted together with Form B and the certified Statement of Accounts 37

38 Personal & Business details To exclude non-trade receipts To add back nondeductible expenses and claim for capital allowances 38 Adjusted profit / loss for 4-line statement 38

39 Productivity and Innovation Credit (PIC) 17 th LEGAL PRACTICE MANAGEMENT COURSE PIC Cash conversion option: How to apply for the cash conversion? Productivity & Innovation Credit Scheme Option is one-time and irrevocable Once amount of qualifying deduction is converted to cash, can no longer qualify for enhanced deduction. Submit PIC Cash Payout Application Form and relevant annexes Submit anytime after accounting year-end but no later than income tax filing due date. Submit certified statement of accounts together with income tax returns. 39 IRAS All Rights Reserved

40 Productivity & Innovation Credit (PIC) Scheme Introduced in Budget 2010 and enhanced in Budget 2011, 2012, 2013 and 2014 Encourage businesses to invest in productivity and innovation All businesses benefit, especially SME (i.e. either get a cash payout or claim tax deduction) 40

41 Productivity & Innovation Credit (PIC) Scheme 6 activities covered under the scheme Purchase / Lease of PIC Automation Equipment Training of Employees Registration of Intellectual Property Acquisition & In-licensing of Intellectual Property Research & Development Approved Design Project 41

42 Productivity & Innovation Credit (PIC) Scheme Tax Benefits under PIC 400% tax deduction / allowances on up to $400,000 expenditure per year in each of the 6 activities (Years of Assessment (YA) 2011 to 2014) Capping for tax deduction / allowances increased to $600,000 for YA 2015 to 2018 Convert expenditure of up to $100,000 in all 6 activities per Year of Assessment into a non-taxable cash payout (YAs 2011 to 2018). Conversion rate is at 30% for the YAs 2011 to With effect from the YA 2013, the conversion rate is 60%. PIC Bonus of up to $15,000 A dollar-for-dollar matching cash bonus for YAs 2013 to 2015 (Budget 2013 enhancement). 42

43 Productivity & Innovation Credit (PIC) Scheme 400% tax deduction Cash payout PIC bonus Applicable YA YAs 2011 to 2018 YAs 2011 to 2018 YAs 2013 to 2015 How Include tax deduction in Allowable Business Expenses of the 4-line statement in Income Tax Return (Form B/P) Submit PIC Enhanced Allowances/Deductions Declaration Form for Sole-proprietors & Partnerships (available on IRAS website) Submit PIC Cash Payout Application Form (Online) New! and Hire Purchase Template (where applicable) (available on IRAS website) Need not make separate application Automatically processed based on information declared in the Income Tax Return and PIC forms Claim tax deduction/allowances in Income Tax Return (for Companies) When Submit Income Tax Return and PIC declaration form by 15 April Submit Income Tax Return by 30 Nov (for Companies) For YA 2014 to YA2018 After the end of each quarter or combined quarters in the accounting year but no later than income tax filing due date Submission dates for 400% tax deduction or cash payout apply 43

44 17 th LEGAL PRACTICE MANAGEMENT COURSE Avoiding Common Errors 44

45 Avoiding Common Errors Income Category Common error The right way Gross consultation fees Understatement of income Maintain proper records of all fees received 45

46 Avoiding Common Errors Expense category Entertainment Common errors Not keeping complete records of expenses Claiming estimated expenses Claiming personal and private expenses The right way Record all expenses Record the following details: Date and place of entertainment Name of the person(s) entertained Purpose of entertainment Identity of person incurring it Amount incurred Keep receipts Claim actual expenses incurred in the production of income Exclude personal and private expenses 46

47 Avoiding Common Errors Expense category Transport Common errors Claiming private car expenses Not keeping sufficient or complete records to substantiate claim for public transport The right way Not to claim expenses on private car usage, as it is prohibited from deduction under the Income Tax Act, even if the expenses are incurred for business purposes Record details like: Date of expense incurred and destination Mode of transport Identity of the person incurring it Purpose of travel Amount incurred Keep taxi receipts for verification 47

48 Avoiding Common Errors Expense category Personal and private expenses Common errors Claiming personal and private expenses as business expenses Examples are: Insurance premiums for policies taken on the soleproprietor / partners lives Club subscriptions and entrance fees paid for the sole-proprietor / partners membership Medical expenses incurred for the sole-proprietor / partners Income tax of sole-proprietor / partners The right way Exclude personal and private expenses not incurred in the production of income 48

49 Avoiding Common Errors Expense category Payments to related parties Common errors Making unsubstantiated claims to related parties The right way Claim expenses incurred for your business and based on actual amounts Miscellaneous / General expenses Not keeping complete records of expenses Claiming estimated expenses Record details like: Date incurred Name of the payee Purpose of payment Amount incurred Keep receipts Claim actual expenses incurred (not estimated) 49

50 Avoiding Common Errors Expense category Depreciation Common error Charging depreciation to the profit and loss account The right way Depreciation is not an allowable business expense and must be added back to the net profit Capital allowances can be claimed instead on plant & machinery used in the business 50

51 Expense category Partner s expenses in Form B Avoiding Common Errors Common error Claiming the partnership business expenses as your own expenses Claiming personal expenses incurred on the usage of private vehicles (not allowable even if trips are for business purposes) The right way Not to claim expenses that are charged to the partnership s Profit and Loss Account (in Form P) as your own expenses as a partner in Form B Not to claim personal and private expenses Claiming subscription / entrance fees to private social clubs May claim: Interest expenses on monies borrowed to invest in partnership Subscription to professional bodies not reimbursed by the partnership business Public transport for business purposes (e.g. taxi fare) not reimbursed by the partnership business 51

52 17 th LEGAL PRACTICE MANAGEMENT COURSE Seeking Assistance 52

53 Help Channels Self help (Record keeping guide) mytax Mail (a secure system) Income Tax Integrated Phone Service Operating Hours: Mondays to Fridays, 8am to 5pm SMS Return My Call Service Send an SMS Call <followed by your name> (Example Call John Tan ) to PIC Helpline for Self-employed / Partnership (+65) Our officer will contact you by the next working day. Goods & Services Tax Integrated Phone Service Taxpayer Services Centre 1st Storey, Revenue House 55 Newton Road, Singapore (Located opposite Novena MRT Station) Operating Hours: 8am to 5pm (Mon to Fri) 8am to 1pm (Sat) 53

54 IRAS Website 54

55 Productivity and Innovation Credit (PIC) 17 th LEGAL PRACTICE MANAGEMENT COURSE PIC Cash conversion option: How to apply for the cash conversion? Keeping Proper Records Option is one-time and irrevocable Once amount of qualifying deduction is converted to cash, can no longer qualify for enhanced deduction. Submit PIC Cash Payout Application Form and relevant annexes Submit anytime after accounting year-end but no later than income tax filing due date. Submit certified statement of accounts together with income tax returns. 55 IRAS All Rights Reserved

56 Keeping Proper Records Revenue amount being incorrect & under - declared Penalties being imposed Failure to keep proper Records Expenses claimed being disallowed 56

57 Keeping Proper Records Hmmm I wonder what kind of business records do I need to keep?? A record of receipts and payments, or income and expenditure Source documents substantiating entries in your records e.g. Vouchers, invoices, receipts A record of the assets and liabilities of your business, including listings of your business debtors, creditors and cash/bank account balances 57

58 Keeping Proper Records Manual Records Electronic Records Recording of your business transactions in a physical form Through the use of a computer and/or accounting software Such transactions to be supported by source documents Source documents must be kept to substantiate the business transactions 58

59 Keeping Proper Records For professional fees received You need to issue serially printed receipts However, you need not issue serially printed receipts if you input all professional fees from services provided into an accounting software and invoices generated for all income transactions and a duplicate retained For GST-registered business, to issue tax invoices as required by GST legislation 59

60 Keeping Proper Records 60

61 Keeping Proper Records Set up good filing system for your paperwork from the start of your business Make sure records can be understood by anyone Obtain the necessary source documents at time of transaction Enter transactions accurately & regularly to keep records up to date Record business expenses separately from personal expenses 61

62 Keeping Proper Records Source Documents Record Type Item No Documents Required Category of taxpayers for Record Keeping Requirements GST-Registered Businesses Non-GST Registered Businesses INCOME RECORDS (Records of each sales transaction) BUSINESS EXPENSE RECORDS (Records of each business expense transaction) 1 Serially numbered receipts issued or cash register tapes or invoices issued 2 Tax invoice/simplified tax invoice issued 3 Rental Agreement signed by both landlord and tenant 4 Books to record goods taken for private usage 5 Credit notes for returned goods 6 Documents relating to exports 7 Evidence that payment have been received (e.g. bank statement) 8 Invoice received or Receipt received 9 Payment made to individuals/companies for services rendered and the relevant contracts/agreements on the provision of services 10 Payment vouchers for staff remuneration 11 Employer s CPF contributions 12 Payment evidence (e.g. bank statement) PURCHASE RECORDS (Records of each purchase transaction) 13 Tax invoices received, Invoices received or Receipt received 14 Documents relating to imports 15 Payment evidence (e.g. bank statement) 16 Business goods which were put to non-business use OTHER RECORDS (FOR GST PURPOSES) 17 Disposals of business goods, whether or not for a consideration 18 Removal of goods from customs-licensed warehouse 62

63 Keeping Proper Records ACCOUNTING RECORDS AND SCHEDULES Record Type Item No Documents Required Category of taxpayers for Record Keeping Requirements GST-Registered Businesses Non-GST Registered Businesses 1 Stock List 2 Sales Record Book/ Sales Listing ACCOUNTING RECORDS AND SCHEDULES 3 Purchase Record Book/ Purchase Listing 4 General Ledgers 5 Balance Sheet, Profit and Loss Statement 6 GST account summary of input and output tax, including GST refunded to tourists BANK STATEMENT 7 Bank statements; with separate bank accounts for personal and business purposes (Recommended) Record Type Item No Documents Recommended GST-Registered Businesses Non-GST Registered Businesses 1 Detailed schedules of Public Transport expenses ACCOUNTING RECORDS AND SCHEDULES 2 Detailed schedules of Travelling expenses 3 Detailed schedules of Entertainment expenses 4 Fixed asset Schedules 5 Records of Capital Allowances Note: The required records are mandatory records that businesses must keep for tax purposes. The recommended records are records that the businesses are advised to keep as good practices, and these should be available, or able to reproduce upon request by the Comptroller of Income Tax or/ GST 63

64 Keeping Proper Records Simplified Record Keeping (SRK) introduced on 1 Jan 2014 assist small business to make record keeping easier Small business* that qualify only need to keep business records (register, listing) and not source documents. *Terms & conditions apply. 64

65 Keeping Proper Records Conditions for a glance: Revenue < $100,000 for past 2 FY Business assets < end of latest FY Must not be investment holding or property development business Business is a sole-proprietorship or partnership that is not GST-registered. 65

66 Keeping Proper Records These information can be found in our website Visit our website at Follow the link : Home > About IRAS > Taxpayer Compliance > Record Keeping Essentials for Businesses 66

67 Keeping Proper Records 1. Use Accounting Software SMEs can get a subsidy of up to 70% of the cost of using accounting software (capped at $2,000 wef 1 Jul 2012 per SME) under IDA s isprint (Packaged Solutions) scheme 2. For more information, please contact IDA at : or ida_isprint@ida.gov.sg 67

68 Offences and Penalties Failure to keep proper records Liable to: A fine up to $1,000 and in default of payment to imprisonment for a term up to 6 months Records cannot be discarded once Notice of Assessment is received Need to retain records for 5 years whether or not an assessment was finalized The Comptroller may request documents in the course of audit 68

69 Offences and Penalties Failure to submit an income tax return A fine up to $1,000 and in default of payment imprisonment for a term up to 6 months Not submitted after conviction, a further penalty of $50 for each day return is outstanding Penalties can amount to two times the tax undercharged if returns outstanding for 2 years or more 69

70 Offences and Penalties Furnishing an incorrect return Penalties amount to two times tax undercharged, for errors made due to negligence or without reasonable excuse Serious cases of omissions or errors may result in prosecution 70

71 Offences and Penalties Tax evasion Wilfully evades, or assists others to evade Penalty of 3 times the amount of tax evaded and fine up to $10,000; OR Imprisonment for a term up to 3 years ; OR Fine and imprisonment 71

72 Voluntary Disclosure of Past Mistakes The IRAS Voluntary Disclosure Program help taxpayers to come forward to disclose errors or omissions made Timely voluntary disclosures made within a grace period of 1 year from statutory filing date Waiver of penalty Voluntary disclosures made after grace period Reduced penalty of 5% p.a. on the tax undercharged 72

73 Voluntary Disclosure of Past Mistakes For cases already under IRAS's query, audit or investigation, taxpayers' disclosure must NOT be under the scope of query, audit or investigation Cooperation received from taxpayers to correct mistakes made in the past returns Qualifying Conditions Disclosures must be made BEFORE IRAS s commencement of audit / investigation or letter of query relating to his assessment 73

74 Voluntary Disclosure of Past Mistakes > About IRAS > IRAS Voluntary disclosure program Tel : / Fax : iit_compliance@iras.gov. sg 74

75 THANK YOU! This information aims to provide a better general understanding of IRAS practices and is not intended to comprehensively address all possible tax issues that may arise. This information is correct as at 4 Feb While every effort has been made to ensure that this information is consistent with existing law and practice, should there be any changes, IRAS reserves the right to vary our position accordingly. 75