Current tax treatment
When is interest expense tax deductible?
Under section 14(1)(a), only interest expenses incurred on capital employed in acquiring income chargeable with tax is allowable against the income earned.
Only interest expenses, incurred on loans that are used to buy assets that make income that are taxable by IRAS, are therefore tax-deductible.
Thus if you used company’s loan facilities to buy “Mona Lisa” for your own enjoyment, then the interest expenses are not tax deductible. But if you charge entrance fees on people who come and see the painting, it would deductible against the income you generated.
Are other borrowing costs tax deductible against chargeable income too?
Under current treatment, the answer is NO.
New tax treatment
What is the effective date?
From Year of Assessment 2008.
What has changed?
Besides interest expense, the other borrowing costs will also be granted tax deduction under section 14 (1) (a). Examples of such borrowing costs are listed below:-
- Guarantee fees
- Bank option fees
- Discounts on notes and bonds
- Premiums on redemption of notes or bonds
- Prepayment fees/ early redemption fees
- Extension fees
- Increased costs due to any upward interest rate adjustments when
certain event occurs as specified in the loan agreement
- Interest rate cap rate premiums
- Interest rate swap payments
- Conversion fees
- Cancellation fees
Why the change?
The people, who are “sufferring” from paying the bankers so many types of fees in different names all these years, have successfully persuaded the Authority to accept theses expenses as tax deductible.
On what basis?
The Authority now accepts the argument that all fees payable to the bank to secure a loan facility are part of “interest rate” payable. Without charging all these “miscellaneous” fees, the banks would ask for a higher interest rate from the borrowers anyway.
Last words – So the next time you are going to pay anything to the bank, please make sure they name the fees as one of the above 11 acceptable names above.