IRAS has observed that the commonly made mistakes by self-employed taxpayers are:
1. Incorrect categorisation of income
- Taxpayers who carry on a trade, business, profession or vocation need to declare their income under “Trade” (instead of “Employment” or “Other Income”). Where the turnover of the trade is more than $100,000, taxpayers need to prepare a 4-line statement summarising their business performance by showing the following:
- Gross Profit/Loss
- Allowable Business Expenses
- Adjusted Profit/Loss
2. Incorrect claim of expenses
- Incorrect claims of private & domestic expenses such as traveling expenses of personal trips, private entertainment, holiday expenses of family etc.
- Claims of motor vehicle expenses in respect of private vehicles e.g. Petrol, repair & maintenance, parking fees, CBD charges, hire purchase interest
- Such expenses are not deductible even if they are incurred in the course of business.
3. Poor record keeping
- Claiming of expenses based on estimations:
- Claims of expenses should be based on actual amount incurred, with supporting receipts & invoice. Sketchy records and estimated expenses without valid basis are not acceptable
- Keeping of incomplete records:
- Claims on public transport & entertainment should be supported with complete records and proper receipts.
- Claims of payments in money or gifts to related parties or introducers:
- These payments are usually grossly excessive and do not commensurate with the level of services rendered by the recipients. There is usually also a lack of supporting documents to substantiate these payments. A good practice is to issue payment vouchers to recipients for their endorsements.
- Failure to maintain business records for a period of 5 years:
- Some taxpayers have failed to keep and retain sufficient records to enable us to ascertain their income and allowable business expenses.
- Some have the misconception that they do not need to keep records or could discard their records once a Notice of Assessment is received. This is incorrect.
- Records should be retained for the requisite period of 5 years whether or not an assessment has been raised. The Comptroller may request for these documents in the course of audits.
Taxpayers are reminded to declare their income and expenses accurately. Under the law, IRAS may issue penalties for making errors in your tax return and investigate taxpayers for suspected of potential tax offences.