With effect from 1 Jan 2005, companies are required to comply with FRS 39 - Financial Instruments: Recognition & Measurement. The objective of the FRS 39 tax treatment is to minimise tax adjustments that taxpayers have to make and reduce their compliance costs.
Under the FRS 39 tax treatment, the income tax treatment of financial instruments on revenue account is aligned with the accounting treatment under FRS 39. Gains or losses recognised in the profit or loss account will be taxed or allowed notwithstanding that such gains or losses are not realised.
As the FRS 39 tax treatment is the default tax treatment for all taxpayers that adopt FRS 39 for accounting purposes, a taxpayer who wishes to be subject to tax on a realisation basis (i.e. remain on pre-FRS 39 tax treatment) for its financial instruments on revenue account must elect in writing at the time of submission of its tax return in the first YA that FRS 39 is adopted for accounting purposes. The taxpayer may elect for the FRS 39 tax treatment thereafter and this election for the FRS 39 tax treatment is irrevocable once it is exercised.
The following example compares the income tax implications of adopting FRS 39 tax treatment and pre-FRS 39 tax treatment.
Example
Taxpayer holds shares in Co XYZ on revenue account. The shares were acquired for $500,000 on 15 Jun 2010 and YA 2011 is the first YA that taxpayer is required to file a tax return.
Market value of shares as at 31 Dec 2010 - $700,000
On 30 Nov 2011, the shares in Co XYZ were disposed of for $300,000 and taxpayer was liquidated shortly thereafter during the basis period for YA 2012.
The tax computations for the relevant YAs are as follows:
(i) Under FRS 39 tax treatment
Taxpayer did not elect to opt out of FRS 39 tax treatment at the time of submission of its YA 2011 tax return.
| Tax Computation for YA 2011 |
$
|
Taxable gain / chargeable income
(700,000 - 500,000) |
200,000
=======
|
| Tax payable |
Yes
|
| Tax Computation for YA 2012 |
$
|
Adjusted loss
(300,000 - 700,000) |
400,000
|
| Less: Loss carried back to YA 2011 (restricted) |
100,000
-----------
|
| Unabsorbed loss c/f |
300,000
=======
|
| Tax payable |
No
|
| Revised Tax Computation for YA 2011 |
$
|
| Chargeable income |
200,000
|
| Less: Loss carried back from YA 2012 |
100,000
-----------
|
| Revised chargeable income |
100,000
=======
|
| Revised tax payable |
Yes
|
(ii) Under pre-FRS 39 tax treatment
Taxpayer elects to remain on pre-FRS 39 tax treatment at the time of submission of its YA 2011 tax return.
Tax Computation
|
YA 2011
|
YA 2012
|
Taxable gain / chargeable income
|
NIL
|
NIL
|
Unabsorbed loss c/f
(300,000 - 500,000)
|
NIL
|
$200,000
|
Tax payable*
|
No
|
No
|
* Under pre-FRS 39 tax treatment, taxpayer has no tax payable for both YAs.
For details, please refer to the e-Tax Guide “Income Tax Implications Arising from the Adoption of FRS 39 - Financial Instruments: Recognition & Measurement".