In general, a company’s taxable income is not the same as net income (accounting income). The calculation of taxable income for a company begins with net profit/loss in the company’s accounts and then making various adjustments to arrive at the chargeable income subjected to tax during the accounting period. Adjustments are made because some of the expenses incurred by your company may not be deductible for tax purposes. Similarly, some of the income received by your company may not be taxable or it may be taxed separately as a non-trade source income.
From net income to taxable income
A Singapore company is taxed on its income accruing in or derived from Singapore and income received in Singapore from outside Singapore subject to applicable exemptions and tax reliefs. Income includes:
- gains or profits from any trade or business
- income from investment e.g. interest and rental
- royalties, premiums and any other profits from property
- other gains of an income nature
In order to calculate the taxable income, the following adjustments are made to the Singapore company’s net profit/loss data:
- Deduct Non-Taxable Income. Income of non-taxable nature is deducted from the chargeable income. Examples include capital gains, sale of fixed assets, gains on foreign exchange on capital transactions, exempt shipping income derived by a shipping company, foreign-sourced dividends, branch profits & service income received by a resident company that satisfies the qualifying conditions, and other income exempted from tax under the provisions of the Singapore Income Tax Act.
- Adjust Net Investment Income. Investment income is non-trade income that includes interest income, dividend income, and rental income. Investment income for income tax calculation purpose is assessed separately because excess of expenses over the income received from one source of investment cannot be claimed against the surplus arising from another source of investment. For example, any excess of expenses attributable to rental income cannot be deducted against dividend or interest income.
Net investment income is then calculated as a) first deduct all the investment income from chargeable income b) deduct the investment related qualified expenses from the investment income for each type of investment income c) add the balance net investment income for each type of investment.
- Deduct Qualified Business Expenses. Expenses that are wholly and exclusively incurred in the production of trade income are deductible. Examples of deductible expenses include wages, office rent, services fees, R&D expenses, and so on. Examples of non-deductible expenses include fines, fixed assets write-off, income tax, private and domestic expenses, motor vehicle expenses incurred in respect of private passenger cars, etc.
The list of deductible and non-deductible business expenses is rather large cannot be discussed comprehensively in the context of this article.
- Deduct Capital Allowances. Expenditure incurred on the purchase of fixed assets is not deductible for tax purposes as it is capital in nature. Depreciation on fixed assets is also not deductible for tax purposes. However, in place of the depreciation, the company can claim for a deduction for the wear and tear of the fixed asset known as “capital allowance”. Unutilized capital allowances from previous accounting periods as well as from the current account period on fixed assets can be deducted.
- Deduct Unutilized Losses. Qualified losses incurred can be deducted against the income in Singapore. Qualified loss means a) the loss must arise from the carrying of a business; b) it has not been utilized previously. The deduction of losses follows the “preceding year” basis i.e. deduction is allowed in the year(s) subsequent to the year in which the loss incurred. If the losses cannot be fully adjusted in the relevant year of assessment, the remaining portion can be carried forward to the next year of assessment. Losses can be carried forwarded indefinitely.
- Deduct Unutilized Donations. Only donations that are made to approved institutions of a public character can be deducted for the company’s income tax calculation purpose.
A company is still required to prepare and submit a tax computation even if it does not need to make any adjustment to its net profit/loss.