Taxable and Non-taxable Income

Deductions such as capital allowances, business expenses and reliefs can be claimed to reduce the overall taxable income, which leads to lower taxes.

What is Taxable Income?

For Singapore tax purposes, taxable income refers to the following:

• Gains or profits from any trade or business
• Income from investment such as dividends, interest and property rental
• Royalties, premiums and any other profits from property; and
• Other gains that is revenue in nature.

Deductions such as capital allowances, business expenses and reliefs can be claimed to reduce the overall taxable income, which leads to lower taxes.

When Income is Taxable?

A company is liable to pay tax in Singapore on income that is:

• Accrued in or derived from Singapore
• Received in Singapore from outside of Singapore

Income Received from Abroad

Income from outside Singapore is considered received in Singapore when it is:

• Remitted to, transmitted or brought into Singapore
• Used to pay off debt incurred in respect of a trade or business carried on in Singapore
• Used to purchase any moveable property brought into Singapore, for example raw materials or equipment linked to your business

Section 10(25) (IRAS) will be applied to tax foreign income received in Singapore only if the income belongs to an individual who is resident in Singapore or an entity, which is located in Singapore.  Hence, non-resident individuals and foreign businesses, which are not operating in or from Singapore, can remit their foreign income to Singapore without being taxed on the income.

As an administrative concession, foreign income, which is applied towards overseas investments without being repatriated to Singapore, will not be treated as having been received in Singapore under section 10(25).  In such an instance, the foreign income will not be taxable.

If you are subject to tax on foreign-sourced income, you will continue to be entitled to claim tax reliefs or credits.

What is Non-Taxable Income?

Capital Gains

Capital gains are not taxable. Below are two occasions where income is non-taxable;

• Gains on sale of fixed assets
• Gains on foreign exchange on capital transactions

What Income types are Exempt from Tax?

There are certain types of income are specifically exempted from tax under the Income Tax Act, subject to conditions;

• Certain shipping income derived by a shipping company
• Foreign-sourced dividends, branch profits & service income received by a resident company under section 13(8)
• Company's gains on disposal of equity investments under Section 13Z.

Non-taxation of Companies' Gains on Disposal of Equity Investments under Section 13Z

Section 13Z (this is new) of the Income Tax Act exempts from tax, the gains derived by a company ("divesting company") from the disposal of ordinary shares in another company which are legally and beneficially owned by the divesting company, if immediately prior to the date of the share disposal:

• The divesting company holds a minimum shareholding of at least 20% in the investee company whose shares are being disposed; and
• The divesting company maintains the minimum 20% shareholding in the investee company for a continuous minimum period of 24 months prior to the disposal.

In other scenarios for share disposals, the tax treatment of the gains or losses arising from share disposals will be determined based on an evaluation of the facts and circumstances of the case under the ‘Badges of Trade’. These can be found at the IRAS website.

What is Section 13Z?

Section 13Z applies to companies' disposal of ordinary shares from 1 June 2012 to 31 May 2017. It is applicable whether the investee company is incorporated in Singapore or elsewhere and listed or non-listed.

Examples where section 13Z does not apply:

• A divesting company whose gains or profits from the disposal of shares are included as part of its income based on the provisions of Section 26* of the Income Tax Act
• Disposal of shares in an unlisted investee company that is in the business of trading or holding Singapore immoveable properties (other than the business of property development)
• Disposal of shares by a partnership, limited partnership or limited liability partnership where one or more of the partners is a company or are companies.

Examples of the types of companies covered under Section 26 of the Income Tax Act include:

• Insurers other than life insurers;
• Life insurers
• Composite insurers.  

Business expenses

What counts as deductible or non-deductible business expenses?

Business expenses are expenses you have paid in order to run the business. Some examples are CPF contributions, wages, renovation, web design etc.

Business expenses may be deductible or non-deductible. When deductible, they reduce your taxable income and the amount of tax you need to pay.

Business expenses example

Income	$90,000
Business Expenses	$20,000
- Deductible Business Expenses	$7,000
- Non-Deductible Business Expenses	$13,000
Income Subject to Tax ("Taxable Income")	$90,000 - $7,000 = $83,000 (Income minus deductible expenses)

Deductible Business Expenses

Generally, deductible business expenses are those 'wholly and exclusively incurred in the production of income'. In order to apply they must meet the following criteria;

• Expenses are solely incurred in the production of income.
• Expenses are not a contingent liability, i.e. it does not depend on an event that may or may not occur in the future. In other words, the legal liability to pay the expenses must have arisen, regardless of the date of actual payment of the money. 
• Expenses are revenue, and not capital, in nature.
• Expenses are not prohibited from deduction under the Income Tax Act.

Non-Deductible Business Expenses

Non-deductible business expenses are activities you or your employees pay for that do not fulfil the conditions above. This includes personal expenses such as travel or entertainment not related to the running of the business, and capital expenses such as expenses incurred to incorporate a company and purchase of fixed assets.

Examples of Deductible and Non-Deductible Business expenses can be found at the IRAS Website.

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