Four common mistakes that small and family-owned businesses can avoid making when filing for corporate income tax.
Filing for corporate income tax is mandatory for all businesses in Singapore and many small and family-owned business owners may think of taxes only in the weeks leading to the deadline, causing a struggle to submit the necessary forms to the Inland Revenue Authority of Singapore (IRAS) on time. Here, we briefly introduce the corporate income tax rate and the four common mistakes that small and family-owned businesses can avoid making when filing for corporate income tax.
Corporate income tax
Under the Income Tax Act, every company in Singapore is required to pay corporate tax. Starting from 2010, Singapore’s corporate income tax rate is fixed at 17%. That said, there is a partial tax exemption scheme, which makes the effective tax rate lower than 17% for companies with certain levels of taxable income as demonstrated below. For example, a Singapore resident company which qualifies for the start-up exemption with an annual taxable income in excess of S$200,000 will be taxed as follows:
Income tax rate for newly incorporated companies in the first three years of assessment:
Income tax rate after the first three years of assessment:
Common corporate income tax mistakes made by small and family owned businesses
A common mistake is providing significant but unjustified salary to related parties such as parents, children, spouses or siblings. For example:
Situation 1: Remuneration is paid to the director’s family members even though they are not working for the company;
Situation 2: A director’s family members are performing the same job functions as other employees but the family members are paid much more compared to the other employees.
Both of the situations above would raise red flags. Businesses have to ensure that remuneration paid to related parties is of a reasonable amount relative to an independent employee performing the same service and possessing the same qualifications and experience.
Underpaying remuneration will also raise red flags. For example, a doctor who owns and operates medical clinics in Singapore and chooses to pay themselves a lower salary, leaving the additional income in the company to be taxed at the corporate tax rate of 17% instead of a potential 22% tax rate raises issues. Businesses have to ensure that salary paid is reasonable given the roles and the responsibilities of the individuals involved.
Calculating expenses incorrectly
Mixing private and personal expenses
Business expenses are expenses that are incurred to run the business. Some examples are CPF contributions, wages, advertising etc. Business expenses may be deductible or non-deductible.
Generally, deductible business expenses are those ‘wholly and exclusively incurred in the production of income.’ In other words, they must satisfy all these conditions:
• Expenses are solely incurred in the production of income.
• Expenses are not a contingent liability, i.e. expenses must be incurred. An expense is ‘incurred’ when the legal liability to pay the expenses have arisen, regardless of the date of actual payment of the money.
• Expenses are revenue, and not capital, in nature.
• Expenses are not prohibited from deduction under the Income Tax Act.
When deductible, they reduce your taxable income and the amount of tax you need to pay.
Trade income $80,000
Business expenses comprising: $10,000
– Salaries (deductible) $8,000
– Depreciation (non-deductible) $2,000
Net profit before tax $70,000
– Depreciation (non-deductible) $2,000
Income subject to tax (“Taxable Income”) $72,000 ($70,000 + $2,000)
Non-deductible expenses are those that do not fulfil the conditions above. This includes personal expenses such as travel or entertainment which are not related to the running of the business, and capital expenses such as expenses incurred to incorporate a company and purchase of fixed assets.
Personal expenses include entertainment expenses or gifts for family, personal membership, entrance fee and club subscription fees to gym, country and other clubs, wedding gifts for director’s family etc. Avoid mixing private/personal expenses with the company’s business expenses. In the event that such amounts are charged to the company’s accounts, businesses have to make tax adjustments.
It is incorrect to claim capital allowance for assets not meant for business use. For example, smart phones and tablets used by relatives not for the company’s business purposes but the costs are charged to the company’s account and the company claims capital allowance on the assets.
Also, capital allowances are not claimable on all capital items. Capital allowance can only be claimed on items that can be defined as plant and machinery.
Insufficient and incomplete records
Businesses are expected to keep proper records and accounts so that the income earned and expenses claimed can be readily determined and supported. IRAS requires income tax declarations to be duly supported with the required records and accounts such as invoices, receipts, vouchers and other supporting documents. Business records must be stored for a period of five years. For example, businesses have to keep records pertaining to the basis period ended in 2019 up until 31 December 2024.
Businesses should ensure that the supporting documents remain legible within the 5 year period. Where there is a risk that the details may fade over time, they should consider alternative storage for example scanning the documents and saving them as electronic records.
Corporate income tax services
While filing your company’s corporate tax return by yourself may make economic sense for sole proprietors with small earnings, but businesses are better off engaging the help of a professional tax consultant because they can help to maximize the company’s tax efficiency by identifying the right business tax deductibles, applying the appropriate tax incentive schemes and corporate tax rebates. Making mistakes in your tax return may be costly and lead to serious consequences. IRAS may impose penalties when there are errors, omissions and discrepancies in tax returns whether intentional or not. Engaging a professional tax consultant is beneficial for businesses in this instance as they have the necessary expertise to help with any tax audits and investigation initiated by the authorities.
If you want to review your situation to see if you are maximizing your tax efficiencies or have any concerns, speak to us!
For more information, please contact:
Director, Head of Tax