What Businesses Must Know About
Tax Exemptions vs Tax Deductions
When reading about the various financial benefits provided by the Singaporean government, you may have come across terms such as “reliefs”, “rebates”, “deductions”, or “allowances”. Despite referring to different concepts, affecting the tax bill in different ways, and applying to different taxpayers, these words are sometimes used interchangeably as if they are synonyms by even the most trusted sources.
This is especially true for tax deductions and tax exemptions, making it difficult for businesses to understand how they help to reduce tax liabilities. In this article, we will explore what tax exemptions and tax deductions are, clarify the differences between them, and what they mean to businesses.
Read more: Ways to Reduce Personal Income Tax in Singapore
Tax Deductions
Tax deductions lowers the total income by subtracting certain expenses that qualify from it. These qualifying expenses are generally those that are wholly and exclusively incurred in the production of income. You may visit the Inland Revenue Authority of Singapore’s (IRAS) for a detailed list of deductible business expenses.
Additionally, certain tax allowances are also considered tax deductible expenses. This includes the capital allowance, which is the cost of the wear and tear of qualifying fixed assets bought and used in its trade or business. They are generally claimed on assets that are considered as “plant and machinery” used in the company’s trade, business, or profession. IRAS defines the term as a fixed asset that functions as an apparatus used for carrying out the business or trade activities of your company and is not part of the setting or part of the premises where your business is conducted.
Tax Exemptions
After calculating tax deductions, the remaining amount is the chargeable income. But before that amount goes through the flat 17% corporate income tax rate, tax exemptions are applied to lower the chargeable income by removing a portion of it from the tax calculations.
Tax exemptions are available to companies through the Start-up Tax Exemption (SUTE) scheme, which is designed to support new businesses in Singapore. Under this scheme, eligible companies enjoy tax exemptions for their first three consecutive Years of Assessment (YAs).
Specifically, 75% of the first $100,000 of chargeable income is exempt from taxation, followed by a further 50% exemption on the next $100,000. This means up to $125,000 of income can be exempted under this scheme.
To qualify, the company must be incorporated and a tax resident in Singapore, have fewer than 20 shareholders, and at least one individual shareholder holding 10% or more of ordinary shares.
If a company does not meet the conditions of claiming SUTE, they can apply for the Partial Tax Exemption (PTE) instead. It still provides a significant amount of tax benefits at 75% exemption on the first $10,000 of chargeable income and a further 50% exemption on the next $190,000 of chargeable income. The total amount of income that can be exempted under PTE is $102,500. All Singaporean companies, including private companies limited by guarantee, are eligible for the exemption.
Differences in the Calculation
While the two concepts may function similarly in reducing the chargeable income, tax deductions reduce the taxable income itself by subtracting qualifying expenses from calculations, while tax exemptions remove a portion of the income subjected to tax entirely. They mainly differ in the order they are applied to calculate the tax payable, as shown in the table below:
Total Income | - Tax Deductions | = Adjusted Income |
Adjsuted Income | - Tax Exemptions | = Chargeable Income |
Chargeable Income | x Tax Rate (2 - 24%) | = Tax Payable |
This may not seem significant at first, since changing the order of two subtraction operations does not change the final value. However, the SUTE is a percentage-based adjustment when under the maximum income threshold. In other words, when the total unadjusted income is less than the maximum amount of $200,000, the order at which tax exemption and tax deduction are applied will significantly affect the final chargeable income, which can be seen below.
Total Income | Deductions First | SUTE First |
Chargeable Income | 70,000 | 70,000 |
Tax Payable | - Tax Rebates | = Final Tax Payable |
Consequences of Error
The wrong order of calculations will not only lead to an incorrect tax return, but will also lead to compliance issues. If the error is done without reasonable excuse or through negligence, companies and individuals may face penalty up to 200% of the amount of tax undercharged, fine up to $5,000, and/or imprisonment up to three years. However, if it is done with a wilful intention to evade taxes, the punishment will become much more severe.
Fortunately, the IRAS’ Voluntary Disclosure Programme (VDP) allows taxpaying individuals and companies who have made errors in their tax returns to come forward voluntarily and correct their errors in a timely manner. Upon disclosing the error to IRAS, taxpayers will have their penalties reduced or waivered.
Final Thoughts
The Singaporean government has introduced a variety of financial support to both individuals and corporations. As a side effect, the numerous names for these benefits has led to an overlap in terminology and confusion among taxpayers.
However, that is no problem to our expert accountants, who are here to guide you and your business through the complexities of income tax returns while ensuring compliance with IRAS guidelines. So feel free to contact us at Accounting Superhero.