I have summarised the article by Mr Clement Tan Kai Guan entitled “Order of Claiming Qualifying Deductions – Maximising Tax Benefits” published in Singapore Accountant, June 2010.
Question – When a taxpayer incurs a trade loss for the current year and has current year unabsorbed Capital Allowances (CA) and approved donations, what options does he have with regard to the utilisation of these qualifying deductions?
1. Prior to YA2003, you can ONLY carry forward the current year unabsorbed CA, losses and donations for setoff against his future years’ taxable profits.
2. With effect from YA2003, group relief option was introduced.
Loss making Singapore incorporated companies are allowed to transfer their current year qualifying deductions to other profitable member companies of the same group.
3. From YA2006, the carry-back clause was introduced.
Any person carrying on a trade, business, profession or vocation may carry back his current year unabsorbed CA and losses, subject to a maximum of $100,000, for setoff against his Assessable Income (AI) for the immediate preceding year of assessment.
Note – Donations cannot be carried back under the loss carry-back option.
(Edgar – In the case of carry-back, there is the possibility of tax refund by IRAS on tax paid on previous year’s profit.)
4. In February 2009, the carry-back option was enhanced.
The amount allowed to be carried back is increased to to $200,000 and extending the period of
carry-back from the current 1-year period to a 3-year period.
The enhanced carry-back relief system is only applicable to unabsorbed CA and unabsorbed losses relating to the YA2009 and YA2010.
Rule – Which to apply first?
Group relief first, then carry-back and carry-forward.
CA first, then trade loss.
– Transferred out CA to group companies
– Then transferred out trade loss to group companies
– Lastly transferred out Approved Donations to group companies” height
– Assume Company A first, the Company B
– Any leftovers from Group Relief, then Carry-back.
– Any leftovers from Carry-back, then Carry forward.
Clement made a simple but interesting observation.
He asked us to ensure that the trade loss be used to offset profit before exemption in excess of $300,000 first, if possible. This is due to the partial exemption.
Example – For YA2009 (ie. 18% tax rate), we have Company A with $200,000 profit and Company B with $380,000 profit. Both companies have $80,000 trade loss carried forward. Compare tax payable before and after applying the trade loss of $80,000 for the two companies.
- Company A to pay $10,350 after deducting trade loss or pays $17,550 without deducting trade loss. The trade loss of $80,000 would save $7,200 for Company A.
- Company B to pay $26,550 after deducting trade loss or pays $40,950 without deducting trade loss. The trade loss of $80,000 would save $14,400 for Company B.
Moral of story – use the deductions for entity with profit in excess of $300,000 in the current year of assessment or keep for use in future years instead.