Scenarios | Tax Treatment |
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Basis of Income Recognition |
Early Stages of a Contract Some companies do not recognise profits until a
certain minimum percentage of completion (commonly 20%) for their projects 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 construction companies to recognise
contract revenue over time for tax reporting purpose. 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:
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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 where
contract revenue is to be recognised over time.
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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 payment default by the customer, the defaulted amount may be allowable
as bad debts. |
Deductible Expenses |
Retention Sum Payable | Retention sum payable, which is part of the contract value awarded to
sub-contractors, is tax deductible when incurred. |
Provisions and Non-Deductible Expenses |
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 was used for
business purposes. |
Private and Personal Expenses Examples | Private and personal expenses should not be mixed with
company’s expenses as the former expenses are not deductible. Companies will need to make tax adjustments
to exclude such deductions if these expenses are charged to the company’s
accounts. |