Revenue derived by construction companies usually arises from long-term contracts and is recognised progressively over a period of time – this is commonly known in the industry as the Percentage of Completion ('POC') method of income recognition.
For income tax purposes, IRAS accepts the accounting recognition of income over time as it is consistent with the tax rule of taxing income when it is accrued*. Similarly, expenses charged to the accounts are generally deductible unless they are of a capital nature or specifically disallowed for deduction.
Common Scenarios Relating to Income and Expense Items
The tables below set out common scenarios relating to income and expense items and the corresponding tax treatment to determine the taxable profits of your construction company.
Income
| Scenarios | Tax Treatment |
|---|---|
Early Stages of a Contract Profit is not recognised until a certain minimum percentage of completion (commonly 20%) for the project is attained. Consequently, the tax payable in the early stages of a construction contract is deferred to a later Year of Assessment. | Generally, IRAS expects your construction company to recognise contract revenue over time for tax reporting purposes. IRAS will accept income recognition based on a minimum percentage threshold only if there is evidence to show the reasonableness of the threshold adopted. Examples of supporting evidence are:
|
Income Recognition over Time Different methods are used to compute the POC to recognise contract revenue and contract costs respectively for the same project. | This is acceptable for tax purposes only if under the relevant accounting standard, contract revenue and contract costs are allowed to be recognised on different bases. |
Income Recognition at a Point in Time Profit is recognised only when the project is 100% completed – this is commonly known in the industry as the Completed Contract Method ('CCM') of income recognition. Consequently, the tax payable on the construction contract is deferred to the Year of Assessment in which the project is completed. | Income recognition under CCM is not acceptable as contract revenue is to be recognised over time for tax reporting purposes. |
Retention Sum Receivable Retention sum receivable is not recognised as contract revenue. | Retention sum is part of the contract revenue which is to be brought to tax based on POC. Where there is a payment default by the customer, the defaulted amount may be allowable as bad debts. |
Expenses
| Scenarios | Tax Treatment |
|---|---|
| Retention Sum Payable | Retention sum payable, which is part of the contract value awarded to sub-contractors, is tax-deductible when incurred. |
| Provision for Foreseeable Losses on Project and Similar Provisions | Provisions made under the accounting standards are not tax-deductible as they are anticipatory in nature. |
| Provision for Defects/ Warranty/ Liquidated Damages | Provisions for expenses are not tax-deductible as no expenses have been incurred. However, deductions are allowable when defective works are rectified and expenses are incurred or when the liquidated damages are due and payable. |
Private Car Expenses Expenses such as petrol, insurance, road tax, parking and ERP charges. | All private car expenses are not tax-deductible, regardless of whether the car is used for business purposes. |
Private and Personal Expenses Examples
| Private and personal expenses should not be mixed with the company’s expenses as the former expenses are not deductible. Companies must make tax adjustments to exclude such deductions if these expenses are charged to the company’s accounts. |
Record Keeping
Your construction company is required to keep proper records and accounts of its business transactions for submission upon IRAS' request. Learn more about your company's record keeping requirements.
Your company is also required to keep records of the profit/ (loss) from construction contracts on a project-by-project basis and provide them upon IRAS' request. For this purpose, you may use the Format of Computation of Attributable Profit/ (Loss) for Construction Company (XLS, 18KB).