August 2001 Income Tax (Amendment) Act 2001 The Income Tax (Amendment) Act, following this year s annual Budget, announced in Finance Minister Dr Richard Hu s Budget Statement on 23 February 2001, was passed by Parliament on 25 July 2001. It generally came into forc e on 10 August 2001. This Client Update notes the tax changes made, which include 7 amendments that were not part of the Budget Statement. Introduction...1 Supplementary Retirement Scheme...2 Taxation Of The Receipts Of A Self-Employed Woman In Respect Of A Third Child...4 Buyback Of Preferential Shares...4 Amendments To The Exemption Under The Entrepreneurial Stock Option Scheme...4 Tax Exemptions On The Gains And Profits From A Company Stock Option Scheme...5 Tax Exemptions On The Income Of A Charity...5 Writing-Down Allowance For Certain Expenditures On Intellectual Property...6 Taxation Of The Income Of Life Insurance Companies...7 Deductions Allowed For Gifts To Approved Institutions Of Public Character...7 Income Tax Reliefs For Non- Resident...7 Miscellaneous Amendments....8 Introduction The amendments to the Income Tax Act following this year s annual Budget, announced in Finance Minister Dr Richard Hu s Budget Statement on 23 February 2001, were passed by Parliament on 25 July 2001. The Income Tax (Amendment) Act 2001 ( Amendment Act ) generally came into force on 10 August 2001. This Client Update notes the tax changes made, which include 7 amendments that were not part of the Budget Statement. The key changes brought about by the Amendment Act are in the following areas: supplementary retirement scheme; taxation of the receipts of a self-employed woman in respect of a third child; buyback of preferential shares; amendments to the exemption under the entrepreneurial stock option scheme; tax exemptions on the gains and profits from a company stock option scheme; tax exemptions on the income of a charity; writing-down allowance for certain expenditures on intellectual property; taxation of the income of life insurance companies; deductions allowed for gifts to approved institutions of public character; income tax reliefs for nonresidents; and other miscellaneous amendments. For the convenience of our clients, we have provided an overview of the changes introduced by the Amendment Act in Table 1 on page 11 of this Client Update. The sections of the Amendment Act come into effect on different dates. For the convenience of our clients, Table 2 on page 12 of this Client Update sets out the commencement dates of the various provisions of the Amendment Act. Most of the above changes were announced in Dr Hu s Budget Statement for 2001. However, as mentioned above, the Amendment Act also brings about 7 additional changes to the Act. These include the changes in respect of the supplementary retirement scheme, buyback of preferential shares, exemptions on the income of charities, and certain amendments discussed here under the head Other Miscellaneous Amendments including the tax treatment of interest income from POSBank accounts, third child maternity leave payments, income and dividends of the Singapore Exchange Derivatives Trading Limited and annual limits on the general provisions made by finance companies. Page 1
Soon Choo Hock Executive Committee Contact Details Direct: (65) 62320656 Facsimile: (65) 64380248 E-mail: choo.hock.soon @rajahtann.com Sundareswara Sharma Contact Details Direct: (65) 62320453 Facsimile: (65) 64380248 E-mail: sundareswara.sharma @rajahtann.com Supplementary Retirement Scheme The tax incentives of the Supplementary Retirement Scheme ( SRS ) which was announced by the government on 31 January 2001 have been incorporated in the Amendment Act. The SRS was based on the recommendations of the Inter- Ministerial Committee on the Ageing Population in November 1999 to encourage permanent residents and citizens of Singapore to invest more of their income into funds that would be available for their retirement. Members of the SRS include individuals who are neither citizens nor permanent residents of Singapore. The contributions to this fund are tax deductible and only 50% of the funds are taxed on withdrawal upon maturity of the SRS account. These incentives are given effect by the introduction of a new section 10L, which also deems withdrawals to be income chargeable to tax under section 10(1)(g) of the Act. Tax On Withdrawal Upon Maturity As the withdrawals from the SRS account are made taxable under section 10(1)(g) of the Act, which deals with the taxation of gains and profits of an income nature not falling within any of the other categories of section 10(1), the legislative intent is not to treat SRS gains as income of any business, trade, profession, vocation or employment. Neither is it intended that SRS gains be taxed along with dividends or interest. Where the withdrawal is made upon maturity of the SRS account, only 50% of the withdrawal is subject to tax. The SRS account is considered to be matured in the following instances: withdrawal after the expiry of 10 years from the first contribution to the SRS account where the member is not a Singapore citizen or a permanent resident, as 10 years is the maturity period for the SRS account of persons who are not citizens or permanent residents of Singapore; withdrawals on or after the member has reached the age of retirement at the time he made his first contribution to the account, which is the maturity period of the SRS account of a citizen or a permanent resident of Singapore; withdrawal by a member on the grounds the member has become physically or mentally incapacitated and is unable to ever continue in employment, terminally ill or is found to be of unsound mind; or deemed withdrawals. Deemed withdrawals consist of circumstances in which the balance of the account is deemed to be withdrawn. Specifically, the SRS member is given a period of time after the maturity of the SRS account within which to withdraw the funds. After the expiry of this period, the balance in the SRS account is deemed to be withdrawn by the SRS member. These deemed withdrawals include: the balance standing in the SRS account at the end of 10 years from the age of retirement of the member prevailing either at the time he opened his account or at any other time; the balance standing in the SRS account 10 years from the first withdrawal by a member on the grounds the member has become physically or mentally Page 2
incapacitated from ever continuing in employment, terminally ill or is found to be of unsound mind; or the balance standing in the SRS account on the death of the member. In these situations as well, 50% of the balances standing in the SRS account are taxed as income of the member, whether or not they have actually been withdrawn. Taxation Of Withdrawals Before Maturity Other than the withdrawals on the maturity of the SRS account discussed, all other withdrawals from the SRS account before its maturity are referred to here as premature withdrawals, although this term is not used in the Amendment Act. Any excess of withdrawals over contributions to the SRS account made for the same year of is taxed as income under section 10(1)(g) of the Act. Other than such voluntary withdrawals, tax is also charged when the member contributes more than the maximum limit allowed to be contributed to the SRS account. In this situation, the Comptroller of Income Tax will ask him to withdraw the excess before the end of the year and this withdrawal will be taxed as income. When the funds standing in the SRS account are withdrawn before the SRS account is mature, not only is the entire withdrawal taxed, but also an additional 5% penalty is imposed on such premature withdrawals. Tax deducted at source on withdrawals from a nonresident s SRS account As withdrawals and deemed withdrawals from the SRS account are deemed to be income of the SRS members, tax is deducted at source on this deemed income of a non-resident. The Amendment Act provides that tax is deducted at source in respect of withdrawals from the SRS account of non-resident members at the tax rate of 24.5%, under a new section 45E(3)(a) read with section 43(1)(b). However, this withholding tax rate is reduced to 15% where the non-resident SRS member comes within the new Section 40C, which is addressed below under Income Tax Reliefs for Non-Residents. As with the SRS accounts of residents and citizens of Singapore, tax is only deducted on 50% of the withdrawal in situations where the SRS account is considered matured. Such withdrawals include: the balance of the SRS account which is deemed to be withdrawn by the expiry of 10 years from the retirement of the non-resident SRS member, the balance of the SRS account which is deemed to be withdrawn on the expiry of 10 years from the first withdrawal by a physically or mentally incapacitated nonresident SRS member, and withdrawals made by the legal representative of deceased non-resident SRS members. For premature withdrawals, this 15% tax is deducted at source in respect of the entire withdrawal. The 5% penalty on pre-mature withdrawals is also imposed and the entire amount of the penalty is also deducted at source and payable to the Comptroller of Income Tax. However, this deduction at source does not apply to withdrawals by a nonresident member which do not exceed his contributions to the SRS account in that year. The Amendment Act also incorporates certain other benefits and reliefs for non-resident SRS members. These will also be discussed below in the section entitled Income Tax Reliefs For Non-Residents. Investment Of The Funds In The SRS Account The funds in the SRS account can be used by an SRS member to purchase certain investment products and for savings. Withdrawals for these purposes are not treated as taxable withdrawals. Likewise, any income arising from these investments is also tax exempt. Accordingly, the Amendment Act amends section 13 of the Act, to exempt from tax, income arising from any investment products purchased and savings made using the funds in a member s SRS account, except where it was maintained for less than a year. However, where the income is in the form of dividends, tax is deducted on the dividends under section 44. Where the member has purchased life annuities, payments received from these after the maturity of the SRS account are treated as income at that point and only 50% of these payments are taxed. Although SRS gains are deemed as income under section 10(1)(g), the Amendment Act also amends section 10 of the Act by introducing a new subsection (6B) which states that section 10(6) shall not apply to any annunity purchased under the SRS. Section 10(6) itself states that it is for the purposes of section 10(1)(e) which charges to tax a pension, charge or annuity. Section 10(6) deems the income derived from an annuity to be 3% of the total consideration for the purchase of the annuity. However, if an annuity is purchased by the employer of the taxpayer and this annuity is in lieu of a pension or Page 3
other benefit, the income from the annuity is deemed to be the whole amount of the annuity (not the deemed 3%). Deduction for SRS contribution The Amendment Act includes a new subsection 39(o) under section 39 of the Act to allow deductions for contributions to the SRS account up to the contribution cap, unless the taxpayer s SRS account is suspended before 31 December in the year before the year of or the contribution is withdrawn from his SRS account before the same date. Another proviso to claiming this deduction is that where the income was earned abroad, the deduction should not exceed the amount that was remitted into Singapore. One of the deductions allowed in calculating the chargeable income of a taxpayer is a deduction for life insurance premiums and contributions to an approved pension, provident fund or society. However, a new section 39(2)(g)(viii) clarifies that this deduction is not allowed where the premium for the life insurance is paid out of the funds in the SRS account. Taxation Of The Receipts Of A Self- Employed Woman In Respect Of A Third Child A self-employed woman who has lost any income by reason of her ceasing to be actively engaged in her trade, business, profession or vocation due to pregnancy with a third child is entitled under section 9(2) of the Children Development (Co-Savings) Act 2001 (Act 13 of 2001) to claim this lost income from the government. The Amendment Act clarifies that any payment to a self-employed woman under section 9(2) of the Children Development (Co- Savings) Act are deemed to be income of the self-employed woman from her trade, business, profession or vocation and accordingly taxable under section 10(1)(a) of the Act. This is achieved through the insertion of a new section 10(16) to the Act. Buyback Of Preferential Shares Section 10K of the Act deals with the redemption by a company resident in Singapore from its shareholders of any redeemable shares issued after 6 July 1999. Under this section any payment made by a company to any shareholder from whom shares are redeemed is taxed as dividends where it is not paid out of the contributed capital of the company. Payments to shareholders in respect of redemption of shares which are paid out of the contributed capital of the company are not taxed as dividends. The Amendment Act includes a new section 10M, which provides for a similar tax treatment on the buyback of preferential stocks and shares from its shareholders. Section 10K is made applicable, mutatis mutandis, to such buybacks as well. Accordingly where the shareholder receives payments from the company in respect of a buyback of preferential shares and stock and where the payment is from the contributed capital of the company, this is not regarded as a payment of dividends. Where on the other hand, the money paid to the shareholder in respect of the preferential share or stock buybacks is not from the contributed capital of the company, this is considered as dividends and is taxed as such. The use of the word redemption under section 10K is to be read as including share buyback, and references to redeemable shares under section 10K are to be read as including preferential shares. It should be mentioned that such a provision already existed even before the amendment, for the taxation of payments in respect of ordinary share buybacks under section 10J of the Act. Amendments To The Exemption Under The Entrepreneurial Stock Option Scheme Section 13J(1) exempts from income tax the first 50% of the gains or profits from entrepreneurial employee stock options ( EESOS ), subject to certain conditions. Section 13J(2) determines the amount of gains or profits from EESOS in subsection (1). There are detailed provisions on the calculation of the gains or profits from EESOS, based on whether or not the price at which the options are exercised is equal to their market price. Whereas currently the threshold for the application of the different bases is the exercise price being equal to the market price, this is to the exercise price being equal to or exceeding the market price. Section 13J(3) limits the availability of the exemption on the taxation of profits or gains from the EESOS. Before the amendment, the availability of the exemption was limited based on the income of the employee (aggregate of S$10 million), or on the basis of the period for which he had had the exemption available to him (10 years). The Amendment Act adds a new limitation, namely that if an employee resigns or his employment is terminated by reason of misconduct and because of this he derives stock option gains arising from a release of a right or benefit to acquire the EESOS, this deemed Page 4
income is not eligible for the 50% exemption. Tax Exemptions For Gains And Profits From A Company Stock Option Scheme A new Company Stock Option Scheme ( CSOS ) was announced by the Ministry of Finance on 23 February 2001 with the aim of encouraging companies to extend their stock option schemes to employees at all levels. A new section 13L is included in the Act to provide for tax exemptions under this scheme. The exemption applies to gains or profits derived by a qualifying employee by the exercise, assignment or release after a minimum vesting period, of any stock options granted to him after 1 April 2001,under a CSOS, in any qualifying company or a holding company. The new section 13L(1) exempts from tax: the first S$2,000 of an employee s gains or profits from the exercise, assignment or release of CSOS in that year of, as calculated according to subsection (2); and 25% of the gains or profits above that amount, as calculated according to subsection (2). Subsection (2) provides the amount of gains or profits which can qualify for the exemption. If the shares have appreciated in value, and accordingly if the price at which the employee can dispose off these shares is higher than the market price or where it is not possible to calculate this, the net asset value of the shares, the income to be taxed is calculated in accordance with the formula provided by section 10(5) of the Act. According to section 10(5), the amount of gains or profits from the exercise, assignment or release of the stock options is the market price of the shares minus the amount paid for them. Where it is not possible to calculate the market price, the amount of gains or profits is the net asset value of the shares, less the amount paid for them. Where, on the other hand, the share price has fallen, and the price which the employee receives at the time of exercise of his options is less than the market price or the net asset value of the shares, the amount of gains or profits is calculated in the same way as provided in section 10(5), but the discount or fall in share price is deducted from the gains or profits so calculated. Similar to the new limitations to the EESOS in the amendments to section 13J, the Amendment Act also introduces limitations to the tax exemption for gains or profits under the CSOS. Accordingly, the exemption does not apply: where the total gains and profits of that employee that qualify for exemption have reached S$1 million; where the gains and profits are derived after 1 January on the 10th year after the employee first started getting exemptions under this section; or where the employee resigns or his employment is terminated by reason of misconduct and because of this derives stock option gains arising from the release to him of any right or benefit to acquire shares under the CSOS. To qualify for the exemption, the CSOS must satisfy the requirement of the minimum vesting period prescribed by the Singapore Exchange and must be made available to at least 50% of the employees of the company, including part-time employees. The company offering the CSOS must also carry on work in Singapore. Tax Exemptions On The Income Of A Charity Section 13(1)(g) and section 13(3) of the Act exempt from taxation, subject to certain limitations, the income of any charitable institution, body of persons or trust established solely for charitable purposes (referred to for convenience in this Client Update as a Charitable Organisation ). The Amendment Act deletes these provisions and re-enacts them to provide similar but more extensive exemptions under a new section 13M. The following income of a Charitable Organisation is exempted from tax: income from trade or business undertaken in the course of carrying out the primary purpose of the Charitable Organisation and applied solely for charitable purposes; and other income of the Charitable Organisation, subject to the conditions that it applies at least 80% of the donations made to it and of the other sums accrued to it in a year of to charities or charitable objects in Singapore. Further, a new subsection 13M(2)(c) states that any income that is used otherwise than in accordance with charitable objects, is liable to be taxed. The Amendment Act extends the exemption to the proceeds received by the Charitable Organisation from the disposal of property and securities. Accordingly, under the new Page 5
section 13M(3) of the Act, the amount of donations received by and other sums accrued to a Charitable Organisation (which are eligible for the exemption) include the aggregate of the following:?donations received in cash ; donations received by way of property ; donations received in the form of securities within the period from 31 January 2001 to 31 May 2001 for the year of 2002; the gains or profits from the disposal of properties or securities donated or acquired before 1 June 2001 and disposed off on or after 1 June 2001; the gains or profits from the disposal of properties or securities donated or acquired after 1 June 2001; proceeds from the disposal of securities donated on or after 1 June 2001; and all other donations to it and any other income not covered above. The income from the disposal of the properties and securities of a Charitable Organisation is calculated by deducting the price of the properties or securities at the date of donation or acquisition from the sale price. Brokerage, legal fees and other direct costs are to be deducted before reaching the amount of income from the sale of these properties and securities, which is liable to be taxed. However, any loss incurred in this regard cannot be set-off. The new section 13M also provides that any rights issues are deemed to have been acquired on the date on which the option was exercised. Bonus issues or share splits are deemed to have been acquired on the date of acquisition of the original shares if they were acquired after 31 May 2001 and on 1 June 2001 if they were acquired before this date. Writing-Down Allowance For Certain Expenditures On Intellectual Property Before the amendment, section 19B of the Act allowed a person carrying on a manufacturing trade or business an allowance to write down his capital expenditure on any approved know-how or patent rights over a period of 5 years. The Amendment Act deletes section 19B and re-enacts it as a new section 19B, which extends the writing-down allowance to any approved intellectual property. Intellectual property is defined in the new section 19B(7) as the right to do or authorise the doing of anything which would, but for that right, be an infringement of any patent, copyright, trademark, registered design, geographical indication, lay-out design of integrated circuit, trade secret or information that has commercial value. Although the definition of intellectual property specifically includes patents and would probably also include know-how, the Amendment Act clarifies that any allowance already made in respect of these under section 19B before the amendment will be saved by virtue of a new section 19B(9). However, the categories of taxpayers eligible for this allowance are limited to companies, rather than persons as was the case before the amendment. Therefore, individuals carrying on a manufacturing trade or business are no longer eligible for this writing-down allowance. Most of the other provisions of the previous section 19B are maintained mutatis mutandis under the new section 19B as well; accordingly, the writing down allowance is available for up to 20% of the capital expenditure of the company. The following events are substituted as the triggers for the termination of the allowance: : the approved intellectual property rights come to an end without being subsequently revived, which is identical to a condition that existed before the amendment; the sale, transfer or assignment of any part of those rights, which is also substantially similar to a condition that existed before the amendment; the company permanently ceases to carry on the trade or business, which is a new condition included by the Amendment Act; and the company breaches any of the conditions under which the approval for those rights was granted, which is a also new condition included by the Amendment Act. In all these situations, the writingdown allowance is not available to the company, either in that year of or for any subsequent year of. Further, all writing-down allowances allowed previously will be clawed back and charged to tax in the year the event occurs, in lieu of the normal rules on balancing allowance and balancing charge. Where all or any part of these rights are sold, assigned or transferred after the end of the writing-down period, the charge to be brought to tax under the new section 19B(5) is the lesser of the capital expenditure incurred in acquiring those rights and the price at which the rights were sold, assigned or transferred. Page 6
Taxation Of The Income Of Life Insurance Companies Section 26(3B) of the Act, which deals with the taxation of the income of life insurance companies is by substituting section 43(4) instead of section 43(3), presumably because it is section 43(4) under which the Minister for Finance can make the regulations alluded to in section 26(3B)(b) and specify the tax rate referred to in section 26(3B)(d), not section 43(3). In any case, section 43(3) has since been deleted by Income Ta X(Amendment) Act 2000 (Act No. 24 of 2000). Deductions Allowed For Gifts To Approved Institutions Of Public Character Section 37 deals with assessable income chargeable to tax under the Act. In calculating the assessable income of any person, certain deductions are allowed, including any loss incurred in the year of as well as certain gifts to museums and gifts of computers. The Amendment Act additionally allows a deduction on a gift of shares of any company listed on the Singapore Exchange or units in unit trusts traded in Singapore to any institution of a public character approved by the Minister for Finance. An institution of a public character includes certain institutions or funds in Singapore which do not operate or conduct business for profit. Some examples of such institutions and funds listed as institutions of public character include: a hospital; a public or benevolent institution; a public authority or society engaged in research in human diseases; a university or a public fund for a university; an educational institution or fund for an educational institution; a public or private fund for scholarships; a public fund for the relief of distress; a charitable institution established for charitable purposes; and an organisation which is engaged in the promotion of culture, the arts or sports. The Amendment Act clarifies that the amount in respect of these gifts that can be claimed as a deduction is the price of the shares in the open market or the bid price of the units as quoted by the manager of the unit trust immediately after the date of the gift. The date at which the shares or units are gifted is the date of legal transfer to the institution of public character. Income Tax Reliefs For Non-Residents Relief For Non-Resident Public Entertainer Section 40A of the Act reduces the rate of tax to 15% in respect of income derived as a public entertainer by any individual who, in any year of, is not resident in Singapore. Section 40A is to specify that this relief listed is available in respect of all income of the taxpayer derived as a public entertainer and income from any other source except by way of withdrawals from an SRS account and by the exercise of an employment in Singapore. Relief For Non-Resident Employee Section 40B of the Act provides non-resident employees with a reduction in the rate of tax to 15% of income derived from the exercise of an employment in Singapore. This is by specifying that the relief is available to the non-resident for his employment income as well as income from any other source but this does not include withdrawals from his SRS account that are deemed to be income under the new section 10L or income derived from public entertainment under section 40A of the Act. Relief For Non-Resident SRS Members Under a new section 40C, certain non-residents are also given a relief from tax upon withdrawals from their SRS accounts, which are deemed to be their income. Where the withdrawals from such a taxpayer s SRS account forms the only source of his income, he is allowed a reduction in the rate of tax to 15%. Where there is another source of income and the total assessable income exceeds the statutory income in respect of withdrawals from the SRS account, he is eligible for a reduction of his non-resident tax rate from what would otherwise be 24.5% to a rate of 15% on part of his chargeable income. This part of the non-resident s chargeable income is calculated based on the proportion it bears to the total chargeable income as the statutory income attributable to withdrawals from his SRS account bears to his total assessable income. Where there is income from another source and the nonresident s total assessable income does not exceed the deemed income from withdrawals from his SRS account, the non-resident is eligible for a reduction in his tax rate to 15% on his entire chargeable income. Page 7
A new section 40C(3) clarifies that if this relief brings the tax payable by the non-resident below the amount of tax which would be payable by a resident in the same circumstances, it is to be limited to prevent this effect. It is also clarified that where the non-resident eligible to relief under this section is also eligible for reliefs as a non-resident citizen of Singapore, or under a double taxation agreement, he is eligible to the higher of these reliefs available to him. Relief For Non-Resident With Income From Multiple Sources Under the new section 40D, where a non-resident earns income from two or more of the sources listed below, he is eligible to certain reliefs from taxation: income derived as a public entertainer; income from the exercise of an employment in Singapore; or withdrawals from his SRS account. Where the non-resident s entire income is from two or more of the three sources listed above, the reliefs available to him as a nonresident public entertainer, nonresident employee in Singapore or non-resident SRS member making withdrawals, whichever are applicable to him, respectively are made available to him. Where however, he derives income from other sources in Singapore in addition to those listed above, the reliefs available to him as a nonresident public entertainer, nonresident employee in Singapore or non-resident SRS member making withdrawals, whichever are applicable to him, respectively are made available to him. Where however, he derives income from other sources in Singapore in addition to those listed above, there are other methods for calculating the reliefs available to him, depending on whether the income from the other sources is more or less than the sources of income listed above. The new section 40D(3) clarifies that if this relief brings the ta Xpayable by the non-resident below the tax which would be payable by a resident in the same circumstances, it is to be limited to prevent this. It is also provided that where the non-resident eligible to relief under this section is also eligible for reliefs as a nonresident citizen of Singapore, or under a double taxation agreement, he is eligible to the higher of these reliefs available to him. Miscellaneous Amendments Income And Dividends Of The Singapore Exchange Derivatives Clearing Limited The Amendment Act amends section 13 of the Act to extend the exemption from tax on the income and dividends of the Singapore Exchange Derivatives Clearing Limited until 31 December 2003. Provision For Doubtful Debts And Diminution Of The Value Of Investment Section 14I of the Act allows for a bank or qualifying finance company to make provisions for doubtful debts and for the diminution in the value of its investments in securities. This is subject to annual limits on the amount that can be provided for doubtful debts and for the diminution in the value of the investments in securities of the bank or qualifying finance company. To see the economy through the recession, these annual limits had been lifted for qualifying finance companies for the years of 1999 and 2000. The Amendment Act reinstates these limits under an amendment to section 14I of the Act. Tax Rate Of Persons Other Than Individuals Section 42 of the Act which deals with the rate of tax for individuals is by deleting subsections (4) and (5) which provide that the tax rate on the income of persons other than individuals shall be 25.5% for the year of 2001 and 26% for the years of 1997-2000. The tax rate for persons other than individuals is calculated by dividing the tax chargeable on the chargeable income of the person by the chargeable income of the person for the year of and multiplying that with 100. However, where the effective ta rate of a person other than an individual is more than the tax rate of companies calculated under this formula, the rate applicable to the individual is the rate applicable to companies. Tax Rates And Rebates For Companies, Trustees And Executors Section 43 dealing with the tax rate of companies, trustees and executors is to reduce the rate from 25.5% to 24.5%. Further, for the year of 2002 and subsequent years of, only 25% of the first S$10,000 and 50% of the next S$190,000 (excluding dividend income) of a company shall be chargeable to tax. Exemption Of Interest From POSB Bank Accounts Held With DBS Under the Act, the interest from the deposit of moneys in a POSB savings account transferred to or Page 8
maintained with the Development Bank of Singapore was exempt from taxation. The Amendment Act limits this to provide that only the interest from deposits for the period from 1 January 2002 to 31 December 2004 derived by the depositor of up to $100,000 in one or more of his POSB savings accounts with the Development Bank of Singapore will be exempt from taxation. Increased Limits For CPF Contributions By Self- Employed Persons Section 39(2)(h) of the Act allows deductions for voluntary CPF contributions by self-employed resident individuals on his own account. Before the amendment, this deduction was limited to 20% of the individual s assessable income for that year of or S$14,400, whichever is the less. The Amendment Act increases this limit to 36% or such other rate as may be prescribed or S$25,920, or such amount as may be prescribed, whichever is less. Limits In The Third And Fourth Child Rebate The rebate for a third or fourth child under section 42A of the Act, available to a married woman and set at 15% of her earned income, is now limited to a maximum of S$20,000 and S$40,000 for the third or fourth child born on or after 1 April 2001, respectively. Tax Rate And Remission Of Tax For Resident Individuals The tax rate of individuals and Hindu Joint Families is reduced by between 2% and 5% for Year of Assessment 2002. The Amendment Act also gives a 10% tax remission on tax payable for the year of 2001 by a resident individual or Hindu Joint Family and after this remission, a further amount not exceeding S$500 as determined by the Comptroller of Income Tax. Change In The Rate Of Tax Deducted At Source Section 44 of the Act deals with the deduction of tax at source from dividends of companies at the rate of 25.5%. Section 44 is by reducing the rate of tax on dividends from 25.5% to 24.5%. Similarly, the rate of tax deducted at source in respect of interests to non-residents is to reduce it from 25.5% to 24.5%. Ta Xdeducted in respect in the income of nonresident directors is also so reduced. Table 1: The Amendment Act At A Glance Tax changes for individuals Amendment Effect Date of effect 10% personal income tax rebate Increased from 5% to 10% Year of 2001 Individual income tax rates Reduction in individual income tax rates reduced for all income bands by between 2% to 5% Year of 2002 Top marginal rate will be reduced from 28% to 26% Supplementary Retirement Scheme Taxation of funds in SRS accounts Year of 2002 Company Stock Option Scheme Tax exemption for up to $1 million worth of stock option gains over a 10-year period under a qualifying stock option plan for more established companies Central Provident Fund Increase in tax exemption limit for CPF contributions by self-employed to 36% of income, subject to a maximum income of $72,000 Tax deduction for shares donation Tax deduction will be granted to individuals who donate listed shares and readily tradeable unit trusts to institutions of a public character 6 April 2001 Year of 2002 Year of 2002 Page 9
Tax changes for companies and businesses Corporate income tax Reduced from 25.5% to 24.5% Year of 2002 Two-tier partial tax exemption for first $100,000 of chargeable income Writing-down allowances for intellectual property 5-year writing down allowances extended to cover a wider range of industries and types of intellectual property Buyback of preferential shares taxation of buyback of preferential shares and stocks as dividends in some cases Annual limits for general provisions Removal of the annual limits in the general provision for doubtful debts and diminution in the value of investments allowed as deduction for finance companies 23 February 2001 Year of 2001 Table 2: Coming Into Effect Of The Amendment Act No Section Of The Amendment Act Section of the Act Amended 1. Section 8(b) Section 13(1)(g) 2. Sections 10(a) and (c) Section 13J 3. Section 13 Section 141 4. Section 7(in relation to section 10L) New section 10L introduced 5. Section 8(d) Section 13(3) deleted 6. Section 11 New section 13M introduced 7. Section 14 Section 15 8. Section 18 New section 37(2)(e) inserted 9. Section 19 New section 39(2)(g) inserted 10. Section 20 Section 40A 11. Section 21 Section 40B Description Of The Amendment Tax exemption on the income of the Singapore Exchange Derivatives Clearing Limited from the commencement of its business to 31 December 2003. Limitation of the tax exemption on any gains or profits from EESOS where the resignation or termination of employment was due to misconduct. Reinstation of the annual limits on certain general provisions allowed as deduction for finance companies. Date Of Taking Effect 1 October 2002 Year of 2001 Year of 2001 Provisions for taxation under the SRS Year of 2002 Deletion of the old regime for the taxation of the income of charities. Provisions for the new regime for the taxation of the income of charities. Technical amendments in respect of taxation under the SRS. Deduction in respect of gifts of certain shares and units in unit trusts to a Charitable Organisation. Premiums for insurance paid with the funds in an SRS account not to be deductible. Provisions for the taxation of the income of a public entertainer. Tax treatment of the income of non-resident employee. Year of 2002 Year of 2002 Year of 2002 Year of 2002 Year of 2002 Year of 2002 Year of 2002 Page 10
12. Section 22 New sections 40C and 40D inserted 13. Section 23 Section 42(4) and (5) 14. Section 25(a) Section 43 Tax treatment of the income of certain nonresidents in the form of withdrawals from the SRS account and tax treatment of the income of a non-resident who derives income from 2 or more sources of income stated in sections 40A, 40B and 40C. Tax rate of persons other than individuals limited to the rate for companies. Tax rate of companies reduced from 25.5% to 24.5%. 15. Section 26(a) Section 44 Withholding tax rate on dividends reduced from 25.5% to 24.5%. 16. Section 27(a) Section 45 Withholding tax rate on interest to non-residents reduced from 25.5% to 24.5%. 17. Section 28 Section 45B Withholding tax rate on non-resident director s remuneration reduced from 25.5% to 24.5%. 18. Section 29 New section 45E introduced 19. Section 30(a) Section 46(1)(a) 20. Section 31 Part A of the second schedule Withholding tax on the deemed income of nonresident SRS members. Technical amendments to section 46 as a result of the new section on withholding tax in respect of deemed income of non-resident SRS members. Rate of tax for individuals and Joint Hindu Families reduced. Year of 2002 Year of 2002 Year of 2002 Year of 2002 Year of 2002 Year of 2002 Year of 2002 Year of 2002 Year of 2002 Rajah & Tann is one of the largest law firms in Singapore. It is a full service firm and given its alliances, including US premier firm Weil, Gotshal & Manges, is able to tap into resources in a number of countries. Rajah & Tann is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealings with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The information contained in this Update is correct to the best of our knowledge and belief at the time of writing. The contents of the above are intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as the information above may not necessarily suit your specific business and operational requirements. It is to your advantage to seek specific legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann or e-mail the Knowledge & Risk Management Group at eoasis@rajahtann.com. Page 11