Construction Companies

This section sets out common scenarios of income and expense items, and the corresponding tax treatment to determine the taxable profits of construction companies. It also covers the record-keeping requirements for these companies.

Construction Companies

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.

* The recognition of revenue from construction contracts was governed by Financial Reporting Standard (FRS) 11 Construction Contracts. The standard has been superseded by FRS 115 or Singapore Financial Reporting Standards (International) (SFRS(I) 15) – Revenue from Contracts with Customers (as the case may be). FRS 115 and SFRS(I)15 are effective from annual periods beginning on or after 1 January 2018. Earlier application is permitted. IRAS will continue to accept the accounting revenue determined in accordance with the new accounting standards unless the accounting treatment deviates significantly from tax principles.

The table sets out common scenarios relating to income and expense items and the corresponding tax treatment to determine the taxable profits of construction companies.

ScenariosTax Treatment
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:

  • Internal reviews carried out to arrive at the threshold

  • Independent party evidence, such as those from professional engineer/surveyor, on project uncertainties which make it impractical to assess the percentage of completion.

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.

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 PayableRetention 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 ProvisionsProvisions made under the accounting standards are not tax deductible as they are anticipatory in nature.
Provision for Defects/ Warranty/ Liquidated DamagesProvisions 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

  • Vacation expenses for family

  • Entertainment expenses / gifts for family, friends or relatives

  • Personal membership / entrance fee and monthly club subscription fees to gym / country and other clubs

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. 

 

 

Business Records and Computation of Attributable Profit/ (Loss) from Construction Projects

Companies are required to keep proper records and accounts of their business transactions for submission to IRAS, upon request. Business Records That Companies Must Keep provide information on record-keeping requirements, namely types of record and duration for records and accounts keeping.

In addition, construction companies are also required to keep record of the profit/ (loss) from construction contracts on a project-by-project basis and provide them to IRAS, upon request. For this purpose, companies may use the Format of Computation of Attributable Profit/ (Loss) for Construction Company (XLS, 76KB).