Current Tax Treatment
Due to the COVID-19 pandemic, many employees are required to work from home as a result of office closures. To facilitate their employees to work from home, some employers have instructed their employees to purchase work-related equipment (such as work desks and IT equipment). In some cases, the employer would provide a reimbursement to the employee to purchase the work-related equipment, with the employer retaining ownership of the asset.
As these expenses were incurred to purchase capital assets for the employer’s trade, the employer may claim capital allowance on these assets. If the asset is subsequently transferred to the employee (e.g. at the end of the work-from-home arrangement or upon cessation of employment), the employer is required to compute the balancing allowance or charge (BA/ BC) based on the open market price of the asset.
Simplified Tax Treatment
To reduce the compliance burden of employers and address the difficulties they may face in determining the open-market price for these assets at the point of transfer to the employee, the current tax treatment will be simplified by deeming the open-market price of qualifying assets as follows:
Where the cost of asset is less than or equal to $2,500: Open market price deemed to be zero regardless of YA of transfer
Where the cost of asset is more than $2,500: Taking the year of acquisition as the first YA, the open market price will be deemed to be:
- 50% of original cost if the asset is transferred within the second YA
- 25% of original cost if the asset is transferred in the third YA
- Zero if the asset is transferred in the fourth or subsequent YA
This measure is intended to be a temporary measure for qualifying expenses incurred in YAs 2021 and 2022, and will be limited to qualifying assets that fall within the following scope:
Qualifying assets are defined as follows:
- The sole purpose^ of purchasing the asset is to facilitate employees to work from home; and
- Meets one of the following two conditions:
- Asset falls within the Income Tax (Automation Equipment) Rules 2004; or
- Asset is a low-value asset, i.e. does not cost more than $5,000.
^The following assets do not qualify for the simplified tax treatment:
- Assets purchased with the intention of serving dual purposes (i.e. for work and for personal use by the employee); and
- Assets purchased with the intention of allowing employees to use them in office, even if these assets were subsequently used by employees when working from home. These assets would have been purchased regardless of the Covid-19 situation, and hence do not qualify for the simplified tax treatment. If the employer decides to transfer ownership of the asset to the employee subsequently, the employer should calculate BA/BC based on the open market price of the asset, per the existing tax treatment.
Existing capital allowance rules will still apply i.e. employers can claim 100% capital allowance write-off on low-value assets (costing not more than $5,000 each) subject to the existing cap of $30,000 per YA, as well as on prescribed IT and automation equipment. If the amount claimed on low-value assets exceeds $30,000 per YA, the employer can claim capital allowance on the remaining low-value assets based on existing capital allowance rules.
An asset which cost $3,000 was purchased in YA 2021, and the employer chooses to claim capital allowance over 3 YAs. The employer subsequently transfers the asset to the employee in YA 2022, i.e. the tax written down value of the asset is $2,000. Under the simplified tax treatment, the open-market price is $1,500 (50% x $3,000). Hence, the balancing allowance of $500 ($2,000 - $1,500) will be tax deductible in the YA of transfer.
Employers who wish to use the actual open market price of a qualifying asset to compute the BA/ BC may continue to do so but must provide records or documentation to substantiate the price if requested by IRAS.
The simplified tax treatment will apply to qualifying assets purchased during YAs 2021 and 2022.