Tax Treatment of Business Expenses (I - P)

Deductibility of specific expenses such as impairment loss on trade debts, intellectual property (IP) licensing expenditure, interest adjustment, interest incurred on refinanced loans, late CPF contributions and late payment fees to MCST, medical expenses, motor vehicle expenses and private hire car expenses.

Impairment Loss on Trade Debts

Impairment losses or losses on debts incurred on financial assets are tax-deductible as long as the debts are relating to the trade or business and are revenue in nature.

Impairment Loss on Trade Debts under Financial Reporting Standard (FRS) 39

Under the accounting standard FRS 39 which sets out the principles for recognising and measuring financial instruments, general and specific provisions for bad and doubtful debts will no longer be made .

For income tax purposes, impairment losses on trade debts that are revenue in nature will be allowed deduction. Similarly, any reversal of such losses will be taxed.

However, for companies that opted for pre-FRS 39 tax treatment, only specific provision for doubtful debts will be deductible for tax purposes.

General provision for doubtful debts is still not tax-deductible.

Companies claiming tax deduction do not need to submit any supporting documents with their Income Tax Return. They must, however, keep the following documents and submit these to IRAS upon request:

  • Details of debts (name and amount owing by each debtor) which were not incurred in respect of the trade or business such as loans and advances;
  • Details of debts which were taken over in the case of a transfer or merger of business;
  • Details of debts in respect of a trade that had ceased, including any activity granted with pioneer incentive that had ceased; and
  • Segregation of debts relating to the different tax rate categories.

The following additional information is required for trade debts owing by related parties, where the amount of impairment loss exceeds $250,000 :

  • Relationship between the company and the trade debtor;
  • Whether normal credit policy and terms were extended to the related party. If not, please provide the reasons for the extended credit policy and terms;
  • Whether steps were taken to recover and enforce the debts. If not, please provide the reasons for not enforcing the debts; and
  • Reasons the related party was unable to repay the trade debt.

Please note that the FRS 109 replaces the existing FRS 39 and it applies to companies for financial years beginning on or after 1 Jan 2018. Companies that adopt FRS 109 will have to apply the FRS 109 accounting treatment for tax purposes.

For more information on the FRS 109 tax treatment, please refer to Adopting Financial Reporting Standard (FRS) 39 and 109 and its Tax Implications.

Intellectual Property (IP) Licensing Expenditure

IP licensing expenditure incurred by companies to license intellectual property rights (IPRs) for use in their trade or business is allowable as a deduction under Section 14 or Section 14D of the Income Tax Act (ITA) if it is used for the purpose of a qualifying R&D project.

Under the PIC scheme, expenditure incurred on the licensing of qualifying IPRs for use in trade or business qualifies for PIC benefits from Years of Assessment (YA) 2013 to 2018. Refer to Acquisition and Licensing of Intellectual Property Rights (IPR) for more details.

The expiry of the PIC scheme after YA 2018 will mean that only 100% tax deduction will be allowable to a company who has incurred qualifying IP licensing expenditure from YA 2019.

To support businesses to buy and use new solutions, the Minister for Finance announced in Budget 2018 that the tax deduction will be enhanced from 100% to 200% on up to $100,000 of qualifying IP licensing expenditure incurred by a company for each YA from YA 2019 to 2025. 100% tax deduction will continue to be allowed on qualifying IP licensing expenditure incurred in excess of $100,000 for each YA.

The enhancement will not apply to:

  1. IP licensing expenditure not allowable as a deduction under Section 14 or Section 14D of the ITA;
  2. All related party licensing arrangement; or
  3. Any IPRs where a writing-down allowance has been previously made to the person under Section 19B of the ITA.

Qualifying IP Licensing Expenditure 

This refers to the license fees incurred on the licensing of qualifying IPRs from another person but excludes:

  1. Any part of the expenditure that is subsidised by grants or subsidies from the Government or a statutory board; 
  2. Expenditure on the transfer of ownership of the rights; and
  3.  Legal fees and other costs related to the licensing of each right.

 Qualifying IPRs for IP licensing covers:

  1.  Patents
  2.  Copyrights (excluding any rights to the use of software)
  3.  Registered designs
  4. Geographical indications
  5.  Lay-out designs of integrated circuit
  6. Trade secrets or information that has commercial value; and 
  7. Plant varieties.

Exclusions from the scope of IP licensing

Payments made for the Use of Trademarks

Such payments do not qualify for the enhanced deduction of 200%. A 100% tax deduction is allowable under Section 14 if the trademarks are used for the purpose of trade or business.

Exclusions from the Expressions “Trade Secret”, “Information that has Commercial Value” and “Copyright”

In line with the policy intent of Section 19B, in the definition of IPR, the expressions “trade secret” and “information that has commercial value”, and any work or subject matter to which the expression “copyright” relates, exclude the following:

  1. Information of customers of a trade or business, such as a list of those customers and requirements of those customers, gathered in the course of carrying on that trade or business;
  2. Information on work processes (such as standard operating procedures), other than industrial information, or technique, that is likely to assist in the manufacture or processing of goods or materials;
  3. Compilation of any information as described in (a) or (b) above; and
  4. Such other matter as the Minister may by regulations prescribe.

Interest Adjustment

Interest expenses relating to non-income producing assets are not tax-deductible. Interest expenses normally accrue on a liability (e.g. loans, bank overdraft, etc.) until fully paid.

When a company has any interest expenses applicable to non-income producing assets, it has to make interest adjustments in its tax computation.

Examples of assets that do not produce any income are:

  1. Vacant properties acquired for long-term investment;
  2. Investments in shares/ securities which have not yielded dividends;
  3. Interest-free loan or amount owing by non-trade/ sundry debtors; and
  4. Interest-free loan or amount owing by related companies (non-trade)/ shareholders.

IRAS computes interest adjustments using the total asset method (TAM). 

Under the total asset method, interest adjustment (disallowable interest expense) =

Cost of non-income producing assets* x Interest expenses
Cost of total assets*

For more information, please refer to the e-Tax Guide on Total Asset Method for Interest Adjustment (135KB).

* Before the introduction of FRS 39 on 1 Jan 2005, assets were valued using the historical cost or the original cost of the asset without taking into account any depreciation or valuation surpluses and deficits.

With the adoption of the FRS 39 for accounting purposes, financial assets and liabilities are now shown at fair value, cost or amortised cost.
The FRS 109 replaces the existing FRS 39 and it applies to companies for financial years beginning on or after 1 Jan 2018. Companies that adopt FRS 109 will have to apply the FRS 109 accounting treatment for tax purposes. For more information on the FRS 109 tax treatment, please refer to the e-Tax Guide on Income Tax Treatment Arising from Adoption of FRS 109- Financial Instruments (Para 7 of Page 18) (679KB).  

For information on the income tax implication arising from the adoption of FRS 39 and FRS 109, please refer to Adopting Financial Reporting Standard (FRS) 39 and 109 and its Tax Implications

Interest-free Loan or Amount Owing by Directors

Interest adjustment is not required for interest-free loans or amounts owing by directors as it constitutes staff cost. The interest-free benefits are taxable as employment benefits of the directors. (Note: Interest benefits must be included in directors' Form IR8A).

The interest-free benefits can be computed by multiplying the interest-free loan due from each director as at the balance sheet date with the average prime lending rates.

Find out more on the prime lending rates at the Monetary Authority of Singapore website.

Interest Incurred on Late CPF Contributions

The CPF Board may impose interest if the CPF contributions are not paid to the Board on time. As the CPF Act stipulates that the omission to pay CPF contribution on time is an offence, the late interest payment is a penalty and is not deductible for income tax purposes.

 

Interest Incurred on Late Payment of Fees to a Management Corporation for a Strata Title Plan (MCST)

Late payment interest may be imposed if contributions (including management fees) are not paid to the MCST on time. As the late interest payment is a contractual interest and not a penalty for committing an offence, it is deductible if it is incurred in the production of income.

 

Interest Incurred on Loans to Re-finance Prior Loans or Borrowings

Where a re-financing loan is taken out and the money from the loan is used solely to repay a prior loan, the characterisation of the re-financing loan (i.e. whether it is a revenue or capital loan) will follow that of the prior loan which had been re-financed. The tax treatment of interest incurred will correspondingly follow the nature of the prior loan. See the examples below for illustration:

  • Where the prior loan is a revenue loan

A re-financing loan would be regarded as a revenue loan if it is taken solely to repay a prior loan borrowed previously for a revenue purpose e.g. the prior loan was taken to fund the purchase of stock-in-trade or inventories of a business. The interest expense incurred on the re-financing loan would be allowed deduction under section 14(1) of the Income Tax Act.

  • Where the prior loan is a capital loan

A re-financing loan would be regarded as a capital loan if it is taken solely to repay a prior loan borrowed previously for a capital purpose e.g. the prior loan was taken to fund the purchase of fixed assets or long term investments of a business or to augment the capital structure of a business.

The deductibility of the interest expense incurred on the re-financing loan would follow that of the prior loan based on the direct link test under section 14(1)(a) of the Income Tax Act.

This means that if interest deductions were previously allowed on the prior loan based on the direct link test, the interest expense incurred on the re-financing loan would be accorded similar interest deductions. In the case where the interest expense incurred on the prior loan had been subject to adjustments under the Total Assets Method (TAM), the TAM would similarly apply to the re-financing loan.

On the other hand, the interest expense on re-financing loan would not be allowed any deduction if the interest expense on the prior loan was not granted any interest deduction under the direct link test or the TAM.

There may be instances where a re-financing loan is NOT used solely to repay a prior loan. For example, the principal amount of the re-financing loan obtained is higher than the prior loan and the balance of the loan is used for other purposes. In such cases, the deductibility of the interest expense on the portion of re-financing loan not used to repay the prior loan would be determined based on its own merits i.e. whether the purpose of the additional loan amount is for a revenue or capital use. 

    Medical Expenses

    Medical expenses of employees are tax-deductible as long as these are capped at 1% of total employee remuneration accrued for the year. Please refer to Example 1 for an illustration of how the medical expense capping is applied.

    However, the cap increases to 2% if the company implements any of the following:

    • Portable Medical Benefits Scheme (PMBS);
    • Transferable Medical Insurance Scheme (TMIS); or
    • Provision of inpatient medical insurance benefits in the form of portable medical shield plans (additional deduction will exclude premiums for riders that cover deductibles and co-payments^).

    In addition, if the company makes ad-hoc contributions to its employees' Medisave accounts (subject to a cap of $2,730* per employee per year), it will also enjoy the additional tax deduction beyond the 1% limit on the amount of ad-hoc Medisave contributions made, even if the company did not adopt any of the portable medical benefits arrangements, up to the overall medical expenses tax deduction limit of 2%. Please refer to Example 2 for an illustration of the tax deduction allowable in such a scenario.

    ^ If the medical expenses (including rider premiums) do not exceed 1% of the total remuneration of the employees for the relevant basis period, the full amount of medical expenses will be deductible.

    If the medical expenses (including rider premiums) exceed 1% of the total remuneration of the employees for the relevant basis period, any excess amount which does not relate to rider premiums, will be deductible up to another 1% of the total remuneration of the employees for the relevant basis period.

    *With effect from 1 January 2018, the cap has been been raised from $1,500 to $2,730 per employee per year. This is to encourage companies to make more contributions to their employees’ Medisave accounts for their medical needs.

    Find out more about the above portable medical benefits and qualifying conditions in the Ministry of Manpower website.

    Example 1

    Total employee remuneration*Medical expenses incurred **Company did not implement portable medical benefitsCompany implemented portable medical benefits

     

     

    Amount deductible (capped at 1% of total employee remuneration. Hence, cap is 1% X $100,000 = $1,000)

    Amount not deductible

    Amount deductible (capped at 2% of total employee remuneration)

    Amount not deductible

    100,000

    2,500

    1,000

    1,500

    2,000

    500

     

    Example 2

    Assumption:
    Total employee remuneration* of the company is $3,000,000 in a relevant financial year. Company did not adopt portable medical benefits arrangements but made ad-hoc contributions to its employees’ Medisave accounts (subject to a cap of $2,730 per employee per year#). The total deduction is capped at 2% of the total employee remuneration, which is $60,000 (2% x $3,000,000).

     Scenario(A)
    Medical expenses incurred** (excluding ad-hoc Medisave contributions

    (B)
    Amount deductible
    (capped at 1% of total employee remuneration. Hence, cap is 1% X $3,000,000 = $30,000)

    (C)
    Ad-hoc Medisave contributions

    (D)
    Additional deduction with ad-hoc Medisave contributions

    Lower of:
    (C) or
    [$60,000-(B)]          

    (B) + (D)
    Total tax deduction claimable in Income Tax Return

     1 $27,000$27,000 $15,000 $15,000

    Lower of $15,000 or $33,000 ($60,000-$27,000) 

    $42,000
    2 $45,000$30,000 $15,000 $15,000

    Lower of $15,000 or $30,000($60,000-$30,000)

    $45,000
    3 $82,000 $30,000$45,000 $30,000

    Lower of $45,000 or $30,000 ($60,000-$30,000)

     $60,000
    4$27,000 $27,000 $45,000 $33,000

    Lower of $45,000 or $33,000 ($60,000-$27,000)

     $60,000

    *Total employee remuneration includes:

    • employees' salaries, allowances & bonuses;
    • directors' remuneration;
    • CPF contributions.

    It excludes:

    • directors' fees;
    • medical expenses;
    • cash allowances in lieu of medical expenses;
    • benefits-in-kind (e.g. accommodation, home leave passage, employee stock options provided by the employer, actual income tax borne by the employer Updated!);
    • skills development levy (SDL);
    • foreign worker levy (FWL).

     

    #With effect from 1 January 2018, the cap has been raised from $1,500 to $2,730 per employee per year.

     

    Note:

    To arrive at the "total employee remuneration" for the purpose of computing the medical expense capping, companies do not need to reduce the remuneration amount by the amount of payouts it receives from the government such as Wage Credit, Jobs Credit, Special Employment Credit (SEC), absentee payroll and government-paid child care/ maternity/ paternity leave.

    Illustration: Company incurred $100,000 in employees' salaries, allowances, bonuses and CPF contributions and received $5,000 from the government for government-paid maternity leave for its affected employees. Assuming the company implemented portable medical benefits, the medical expenses cap should be computed as follows: 2% x $100,000#= $2,000.

    # The full $100,000 should be used in computing the cap and not $95,000 (i.e. $100,000 - $5,000).

    • maternity health care;
    • natal care;
    • preventive and therapeutic treatment expenses;
    • provision of a medical clinic by the employer;
    • cash allowance in lieu of medical expenses;
    • dental expenses;
    • premium incurred on medical and dental insurance@; and
    • contributions made by a company to the employees' CPF medisave accounts, subject to a maximum deduction of $2,730# for that year for each employee (does not include employees who are holding a professional visit pass, an employment pass or a work permit).

    @ For information on the tax treatment of premium paid for Group Medical Insurance, please refer to Tax Treatment of Insurance Policy Premium

    #With effect from 1 January 2018, the cap has been raised from $1,500 to $2,730 per employee per year.

    Medical expenses in excess of the maximum allowable amount, i.e. 1% or 2% of total employee remuneration, are treated as income and taxed at the prevailing Corporate Tax rate when the company:

    1. derives trade income that is exempt from tax or subject to tax at a concessionary rate (e.g. pioneer companies, companies awarded with certain incentives and are taxed at a concessionary tax rate, etc); and
    2. incurs medical expenses that exceed the maximum allowable amount (i.e. 1% or 2% of total employee remuneration),

    The excess shall be deemed as income which needs to be included in your company's tax computation and is subject to the prevailing corporate tax rate.

    Motor Vehicle Expenses

    Motor vehicle expenses incurred on goods and commercial vehicles such as vans, lorries and buses are deductible. Some examples of motor vehicle expenses are repairs, maintenance, parking fees and petrol costs.

    No deduction is allowed on motor vehicle expenses incurred on S-plated cars, RU-plated cars and company cars (excluding Q-plated cars registered before 1 Apr 1998), whether they are directly incurred or paid in the form of reimbursement. This is so even if these cars are being used for business purposes.

    The tax treatment of motor vehicle expenses incurred by a company is summarised as follows:

    Private cars (S-plated cars), and company cars (Q-plated and RU-plated cars registered on or after 1 Apr 1998 and S-plated cars)

    Reimbursement of employees' S-plated car expenses

    Transport allowance to staff

    Foreign registered cars used exclusively outside Singapore

    Q-plated and RU-plated business cars that were registered before 1 Apr 1998

    Non-deductible

    Non-deductible

    Deductible
    Note that the transport allowance is taxable as part of the employment income of employees

    From YA 2014:
    Deductible in full


    Before YA 2014:
    Deductible subject to following cap:
    $35,000/cost of vehicle x motor vehicle expenses relating to that vehicle

     

    Deductible subject to following cap:
    $35,000/cost of vehicle x motor vehicle expenses relating to that vehicle

    Transportation Services

    Expenses incurred on transportation services are to be distinguished from expenses to hire a motor car. The former is a payment for services to commute from one place to another without the passenger having any control or possession of the motor car whereas in the latter scenario, the motor car would be at the disposal of the hirer. 

    Such payment for transportation services (e.g. bookings for SZ-plated or S-plated car via mobile applications) will qualify for tax deduction, if such expenses were incurred for business purposes. On the other hand, the hiring charges for SZ-plated or S-plated cars used in Singapore will not qualify for tax deduction.

    Private Hire Car Expenses

    Private hire car expenses and hiring charges (SZ-plated or S-plated cars) are not tax-deductible, except where the company is carrying on business of hiring out cars or providing driving instruction.

    From YA 2014, motor vehicle expenses for foreign rental cars used exclusively outside Singapore (e.g. rental car in Malaysia) are fully deductible if the cars are used for business purposes.

    Prior to YA 2014, such expenses are subject to the following cap for deduction:

            35,000       ­­­­­­­   x Motor Vehicle Expenses Relating to that Vehicle
    Cost of Vehicle

    RATE THIS PAGE

    • Strongly Disagree
    • Strongly Agree

    Information is easy to understand.

    Information is useful.

    Information is easy to find.

     
    Please email us if you would like us to respond to your enquiries.