Fundamentals Level Skills Module Taxation (Singapore) Tuesday 6 December 2011 Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FIVE questions are compulsory and MUST be attempted. Tax rates and allowances are printed on pages 2 3. Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall. Paper F6 (SGP) The Association of Chartered Certified Accountants The Institute of Certified Public Accountants of Singapore
SUPPLEMENTARY INSTRUCTIONS 1. Calculations and workings need only be made to the nearest $. 2. All apportionments should be made to the nearest month. 3. All workings should be shown. 4. All computations should indicate by the use of 0 any item of income or expense that is tax exempt, not taxable or does not require adjustment, as appropriate. TAX RATES AND ALLOWANCES The following tax rates and allowances are to be used in answering the questions Goods and services tax Standard rate 7% Registration threshold $1 million Corporate income tax rate Year of assessment 2011 17% Partial tax exemption $ First $10,000 of chargeable income is 75% exempt 7,500 Next $290,000 of chargeable income is 50% exempt 145,000 Total 152,500 Full tax exemption for new start-up companies $ First $100,000 of chargeable income is 100% exempt 100,000 Next $200,000 of chargeable income is 50% exempt 100,000 Total 200,000 Central Provident Fund (CPF) Contributions for individuals below the age of 50 years and earning more than $1,500 Employee Employer Rates of CPF contributions (from 1 July 2007 to 31 August 2010) 20% 14 5% Rates of CPF contributions (from 1 September 2010 to 28 February 2011) 20% 15 0% Rates of CPF contributions (from 1 March 2011) 20% 15 5% Maximum annual ordinary wages (OW) attracting CPF $54,000 Maximum annual additional wages (AW) attracting CPF $76,500 less OW subject to CPF 2
Personal income tax For the year of assessment 2011 Chargeable income Tax rate Tax $ % $ On the first 20,000 0 0 On the next 10,000 3 5 350 On the first 30,000 350 On the next 10,000 5 5 550 On the first 40,000 900 On the next 40,000 8 5 3,400 On the first 80,000 4,300 On the next 80,000 14 0 11,200 On the first 160,000 15,500 On the next 160,000 17 0 27,200 On the first 320,000 42,700 Above 320,000 20 0 Personal income tax reliefs For the year of assessment 2011 Earned income Normal (max) Handicapped (max) Below 55 years $1,000 $2,000 55 to 59 years $3,000 $5,000 60 years and above $4,000 $6,000 Spouse relief $2,000 (max) Qualifying child relief (per child) $4,000 Handicapped child relief (per child) $5,500 Working mother s child relief (WMCR) (% of mother s earned income) First child 15% Second child 20% Third and subsequent child 25% Maximum WMCR 100% Maximum relief per child $50,000 Grandparent caregiver relief $3,000 Life assurance Voluntary CPF contribution of self-employed Course fees $5,000 (max) Capped at $26,775 or 35% of s.10(1)(a) assessable income whichever is lower $5,500 (max) NSman Normal appointment Key appointment holder holder Active NSman $3,000 $5,000 Non-active NSman $1,500 $3,500 Wife/widow/parent of NSman $750 $750 Foreign maid levy $6,360 (max) 3 [P.T.O.
ALL FIVE questions are compulsory and MUST be attempted 1 High Three Pte Ltd (HTPL) was incorporated in Singapore on 1 March 2008 with three shareholders, Agnes, Brian and Chloe. Each shareholder owns 10,000 shares in HTPL. Since incorporation, HTPL has held all of its board meetings in Singapore and will continue to do so in 2011. HTPL manufactures and sells electrical components and for the year ended 31 December 2010 has a net profit before tax of $600,000, after crediting/charging the following: Other income 1 $100,000 grant received from the government. The grant was awarded to HTPL to defray its marketing expenses. 2 $18,000 interest accrued from a six-month fixed deposit placed with an approved bank in Singapore on 1 October 2010. 3 $8,300 one-tier tax exempt dividend received from a Singapore tax resident company. 4 $30,000 recovered from an interest-free car loan granted to an ex-employee. The loan had been completely written off in the year ended 31 December 2009. Cost of sales 5 $50,000 provision for warranty expense set aside for sales to a strategic client. 6 $10,000 obsolete stocks written off. 7 $250,000 depreciation expense. Employment costs 8 $855,000 salaries and CPF costs for non-director employees, which included staff welfare of $5,000 and commission of $250,000 paid to the company s salesmen. 9 $400,000 directors salaries and $120,000 directors fees. 10 $28,000 medical expenses. HTPL has implemented a portable medical benefit scheme for its employees since December 2009. Legal and professional fees 11 $45,000 valuation fees paid to carry out an independent valuation of HTPL s old factory prior to its disposal (see also items 18 and 23). 12 $1,000 legal fees paid to a legal firm to contest a suit by a rival firm on the infringement of trademark. 13 $5,000 consultant fee paid to an accredited tax advisor to conduct a review of the company s tax affairs so as to identify errors in tax filing, if any. Finance costs 14 $2,000 hire purchase interest on a loan taken up to purchase a company van (see also item 20). 15 $30,000 guarantee fees, being part of the borrowing costs incurred in respect of a bank loan, which was concluded with the objective of reducing the company s overall interest cost. The loan was to fund the working capital requirements of HTPL. Donations to approved institutions of public character 16 $12,000 cheque issued to Handicaps Welfare Association in response to an appeal for donations to buy wheelchairs for patients. 17 $8,000 of new computer hardware and software, approved by the Infocomm Development Authority of Singapore, made to Boys Town, Singapore. Other expenses 18 $400,000 loss on disposal of HTPL s old factory (see also items 11 and 23). 4
19 $10,000 training expenses incurred for HTPL s accounting staff, who had been sent on professional courses conducted by an external training institution in the month of July 2010. Capital expenditure 20 $30,000 down payment and principal repayments (excluding hire purchase interest) paid for the period from 1 May 2010 to 31 December 2010 for the purchase of a company van on hire purchase terms. The cash purchase price of the van was $40,000. 21 $7,200 in total for eight executive chairs of equal value. 22 $20,000 in total for laptops purchased in August 2010 for use by management staff. 23 On 31 January 2010, HTPL sold its old factory at Tuas for $2,400,000, comprising $1,000,000 and $1,400,000 for the land and factory building respectively. The factory had been bought in 2008 for $3,000,000 and the company was granted industrial building allowances on the qualifying cost of $2,000,000, being the total cost of the factory building. On 1 April 2010 HTPL bought a new factory at Tuas for $3,000,000. The company continues to use the new factory for its manufacturing activities. 24 All of HTPL s other fixed assets in use at 31 December 2010 had a nil tax written down value. (a) (b) Compute the tax liability of High Three Pte Ltd (HTPL) for the year of assessment 2011, claiming the maximum deductions and capital allowances. (27 marks) State ANY THREE of the options available to a company where the qualifying deduction/allowance given under the Productivity and Innovation Credit scheme cannot be fully utilised in the year of assessment 2011. You should assume that all applicable qualifying conditions for these options are met. (3 marks) (30 marks) 5 [P.T.O.
2 (a) Michael Lee, aged 42, is a Singapore citizen and an inactive operationally ready national serviceman. He is married to Jill and they have two children, aged six and nine. Michael is a much sought after stock analyst. On 1 January 2010, he accepted a three-month sign-on bonus to join his current employer at a monthly salary of $15,000. He performed well and the company rewarded him with an additional two-month bonus in January 2011. Michael was provided with a new car on his first day of work and he bore all of the running expenses for the car, including petrol. The cost of the car, including the certificate of entitlement (COE) was $140,000 and it had a residual value of $35,000. For the year 2010, it was estimated that only two-thirds of the total 21,000 km of travel was clocked for official duties. At the close of 31 December 2010, the company transferred the car to Michael as a further reward for his outstanding performance. On that day, the open market value of the car was $30,000 higher than the original purchase price as the price of COE for a similar car had increased. Jill is a sleeping partner in a partnership carried on together with three other partners. All the partners have agreed to share profits and losses equally. During the year 2010, the partnership s divisible profit was $96,000 and the capital allowances that can be claimed totalled $20,000. Besides the trading profit, the partnership also derived net rental income of $2,500 per month from sub-letting part of the business premises. Michael and Jill also derived rental income from a condominium unit that was let out at $6,000 per month. This unit was purchased in 2007 under their joint names, although Michael contributed the initial 20% of the purchase price and was fully responsible for the mortgage payments. The monthly mortgage payment was $3,200 of which $1,500 was the interest charge. Annual maintenance expenses for the condominium amounted to $20,000. On 31 December 2010, Michael donated his used laptop worth $1,000 to the National University of Singapore. To take care of their two children, Jill hired a foreign maid and Michael paid the foreign maid levy of $170 per month. Compute the minimum Singapore chargeable income of Michael and his wife, Jill, for the year of assessment 2011. (18 marks) (b) John Lee, Michael Lee s brother, won a grand lucky draw prize of a condominium. The condominium was valued at $1 5 million when he claimed it on 1 July 2010. As John needed funds to expand his business, he immediately appointed a few property agents to actively sell the condominium for $1 8 million or more. On 30 September 2010, he accepted the best offer of $1 7 million. This is John s first property sale. Discuss whether John will or will not be subject to tax on the sale of the condominium, clearly identifying the relevant determining factors; and if taxable, state the likely quantum of taxable income. (7 marks) (25 marks) 6
3 Multi Kingdom Ltd (MKL), an investment holding company, was incorporated in Singapore in the year 2007. On 1 January 2008, MKL set up a wholly-owned subsidiary in Singapore, Multi One Pte Ltd (MOPL), which started trading immediately and has continued with the same activities ever since its incorporation. The financial year end of MKL and MOPL is 31 December. MKL, in turn is a wholly owned subsidiary of Listed Multi Kingdom Ltd (LMKL), a company incorporated in Bermuda and listed on the London Stock Exchange in 2005. LMKL has never been the target of a takeover or merger since 2005. $ MOPL Year of assessment 2009 Chargeable income 400,000 MOPL Year of assessment 2010 Chargeable income 0 Unabsorbed trade loss carried forward 20,000 Unabsorbed capital allowances carried forward 40,000 Unabsorbed donations carried forward 60,000 MOPL Year of assessment 2011 Chargeable income 0 Current year trade loss 10,000 Prior year s unabsorbed trade loss brought forward 20,000 Unabsorbed trade loss carried forward 30,000 Current year unabsorbed capital allowances 30,000 Prior year s unabsorbed capital allowances brought forward 40,000 Unabsorbed capital allowances carried forward 70,000 Current year unabsorbed donation 50,000 Prior year s unabsorbed donation brought forward 60,000 Unabsorbed donations carried forward 110,000 Answer each of the two parts to this question independently. (a) Assuming Multi One Pte Ltd s (MOPL s) chargeable income for the year of assessment 2012 before taking into account its prior years loss items is $130,000, compute MOPL s chargeable income for the year of assessment 2012 after taking into account the prior years loss items. Show clearly the order of claim and the amount of each loss item to be carried forward, if any. (6 marks) (b) (i) Explain why it is possible for Multi One Pte Ltd (MOPL) to transfer its loss items to set off against the chargeable income of Multi Kingdom Ltd (MKL) in the year of assessment 2011; (3 marks) (ii) Assuming that MKL has a chargeable income of $80,000 for the year of assessment 2011, compute MKL s revised chargeable income for the year of assessment 2011 after taking into account the maximum loss items that can be transferred from MOPL. Show clearly the amount of each loss item remaining to be carried forward in MOPL, if any. (6 marks) (15 marks) 7 [P.T.O.
4 Additive Energy Pte Ltd (AEPL) is a company incorporated and tax resident in Singapore. On 1 July 2010 AEPL made a gross interest payment of $100,000 to Additive Ventures HK Ltd (AVHKL), a company incorporated and tax resident in Hong Kong, a country which has not concluded any comprehensive tax treaty with Singapore. AVHKL does not have a permanent establishment in Singapore. To fulfil AEPL s withholding tax obligations, Helen Goh, the accountant of AEPL, remitted withholding tax of $15,000 to the Inland Revenue Authority of Singapore on 31 August 2010. Subsequently, Helen checked the loan agreement and discovered that the interest was to be paid annually within 30 days from the end of each year and that the withholding tax, if any, was to be borne by AEPL. She had earlier accrued the interest expense in AEPL s accounts on 31 December 2009. (a) (i) State, giving reasons, by when Additive Energy Pte Ltd (AEPL) should have accounted for the withholding tax payable on the interest to the Inland Revenue Authority of Singapore (IRAS); (4 marks) (ii) State the penalties for the late payment of withholding tax and compute the total penalty and additional withholding tax, if any, that will be payable by AEPL. (5 marks) (b) (i) Explain why upon the discovery of an error(s) that resulted in the under-payment of withholding tax, a company should voluntarily disclose such errors to the IRAS; (2 marks) (ii) Explain why upon the discovery of an error(s) that resulted in the under-payment of corporate tax, a company should voluntarily disclose such errors to the IRAS. (4 marks) (15 marks) 8
5 Technoplex Pte Ltd (TPL) was incorporated in Singapore on 1 September 2009 and on the same day it was registered for goods and services tax (GST). For the quarter ended 31 December 2010, export sales amounted to $800,000 whilst sales of goods to Singapore customers amounted to $900,000, one-third of which were made to non-gst registered traders. TPL also incurred the following expenses, in monetary values before GST, all of which (except for the imports of purchases) were paid to GST registered traders: $ Imports of purchases on behalf of a related company 200,000 Local purchases 300,000 Freight costs relating to goods exported overseas 100,000 Rental of office premises 450,000 Recreational club subscription fees 3,000 Rental of apartment which was provided to a member of expatriate staff, unfurnished 60,000 Donations to an approved institution of public character 50,000 (a) Compute the amount of goods and services tax (GST) payable by or refundable to Technoplex Pte Ltd for the quarter ended 31 December 2010. For each item, clearly identify the type of supply together with the amount of output/input tax chargeable/payable. (9 marks) (b) (i) State the rules which determine the time of supply for GST purposes; (3 marks) (ii) State, giving reasons, on what date and in which quarter the supplier must account for the output GST in the following scenarios: (1) Goods were delivered to a customer on 30 September 2010, a tax invoice was issued on 15 October 2010 and payment was received on 30 October 2010. (2) Goods were delivered to a customer on 30 September 2010, a tax invoice was issued on 5 October 2010 but advance full payment was received on 29 September 2010. (3 marks) (15 marks) End of Question Paper 9