Singapore Budget - Cash flow relief measures

The Singapore Finance Minister, Heng Swee Keat presented Budget 2020 on 18 February 2020. Some of the measures were aimed at cash-flow enhancement in anticipation of projected economic speed-bumps ahead and in view of the likely disruption that will be created by COVID-19. These largely revolved around enhancements of the corporate tax rebate scheme and in the area of losses and capital allowances. We take a closer look at these below

Measures introduced for Year of Assessment (YA) 2020 (Accounting periods ending in 2019) on Corporate Income Tax Rebate

A Corporate income tax rebate of 25% of tax payable was introduced. However, this is capped at S$15,000. 

There is no change in the corporate tax rate of 17%, nor in the partial tax exemption for normal chargeable income of up to $200,000. This is still as follows:

1. first $10,000 of chargeable income: 75% exempt
2. next $190,000 of chargeable income: 50% exempt

The granting of a corporate tax rebate is certainly a welcome move as it should help relieve, in some measure, cash-flow difficulties that some companies may be facing. A company with income taxable at the normal income tax rate would need to have chargeable income of over $456,000 to enjoy the full S$15,000 rebate as illustrated in Table 1.

Table 1: YA 2020 - Effective tax rate

That is fine if you are a profitable company. It means you will have less tax to pay when your YA 2020 Estimate of Chargeable Income (ECI) is assessed, probably around the second quarter of the year if you have a December year-end; or you will get a refund if you have an earlier one and have already paid the tax.

However, all this means little to loss-making businesses which are probably more in need of the cash than a profitable one…. But loss-makers were not entirely forgotten. Well, not entirely…

Enhancement of loss carry-back relief scheme

Tax losses and unabsorbed capital allowances incurred in the basis period for YA 2020 can be carried back to the last three years of assessment, instead of the standard one.  However, there is no change to the cap on the carry-back allowed, which stays at S$100,000 – in aggregate.  A company may carry back the losses and allowances based on an estimated amount available and before filing of the YA 2020 tax return. 

This enhancement will give companies the opportunity to obtain refunds from the IRAS on tax previously paid to relieve cash-flow pressure in FY 2020. 

What does this all mean?

While the recent Budget 2020 announcement on carry back seems helpful on the face of it, you may still want to consider the interaction of your tax profile with the enhancement, to determine if it actually does provide an advantage in your particular circumstances.  

• Are you estimating a tax payable position for YA 2021 but losses in YA 2020? If so, would it be administratively simpler to set off the YA 2020 losses against the YA 2021 estimated chargeable income instead of the carrying back the YA 2020 losses?
• Given that the carry back is limited to S$100,000 chargeable income and the effective tax rate (due to partial tax exemption and corporate rebate) can be much lower than the headline tax rate of 17%, the value of a carry back (which is a maximum of S$17,000) may be diluted if your effective tax rate is low. You may be better off to carry forward the losses or capital allowances for utilisation in the future.

Measures introduced for FY 2020 and 2021

As a further cash-flow pressure tweak, companies that have tax payable in 2020 and 2021 will be given an additional two-months interest-free grace period for settlement of tax payable based on their ECI:

• between 19 February 2020 and 31 December 2020 (both dates inclusive); or
• before 19 February 2020 and the company has an ongoing instalment payment to be made in March 2020.

The revised instalment plan is as follows:

The IRAS will update the extension plan automatically for eligible companies. The extra two months should provide marginal relief for the cash-flow pressure on companies in FY 2020 and FY 2021.

• Measures introduced for YA 2021 (FY 2020) only
• Acceleration of capital allowance claims on certain plant and machinery additions

This measure accelerates capital allowance claims for plant and machinery that do not qualify for a one-year claim (e.g. computers and low value additions of less than $5,000).

The company may make an irrevocable election to claim accelerated capital allowances (instead of over the usual 3 years or the working life per the 6^th schedule of the Income Tax Act) as follows:

1. 75% of the cost incurred in YA 2021
2. 25% of the cost incurred in YA 2022

The accelerated claim is only a timing difference, and will only have an impact when the company comes to submit its YA 2021 ECI. 

As explained in 1c) above, a company thinking about accelerating its YA 2021 capital allowance claim in order to carry back unutilised capital allowances to YA 2020 may need to assess the value of such carry back against carrying it forward for future utilisation by reference to the effective tax rate applicable to the profits relieved from tax.

Further, section 10E companies considering adopting this option must be mindful of the fact that the option is irrevocable, and it runs the risk of forfeiting its unutilised capital allowances in YA 2022 (on the basis that the capital allowances are fully utilised in YA 2021).

Accelerate deduction of expenses incurred on renovation and refurbishment (“R&R”)

In YA 2021, companies that incur qualifying R&R expenses can claim a 100% write-off of those expenses in a year instead of deducting them over 3 years. The cap of $300,000 on qualifying R&R claims over 3 consecutive YAs continues to apply.

Similar to the accelerated capital allowance claim, this change is only a timing difference.  Further, without any change to the cap or the 3 consecutive YAs condition, companies who have maximised the $300,000 over the 3 consecutive YAs (including YA 2021) would not be able to benefit from this change.

Other cash flow relieving measure – wishful thinking?

All tax assessed has to be settled within 1 month of the date of the notice of assessment, notwithstanding any objection. By way of background, in the absence of fraud, the statutory time limit given to the IRAS to raise any assessment or additional assessment is within 4 years of the end of the relevant year of assessment. After that, they are “time-barred” from doing so. In practice, especially in last year where the assessment or additional assessment may be raised, typically referred to as the “time-barred year”, the IRAS tends to raise protective assessments on unresolved or uncertain issues.  If no assessment is raised before the time-barred year, the IRAS will not be able to raise the assessment in the future. Any protective assessment raised has to be settled within 1 month of the date of assessment notwithstanding any objection. 

It is understandable that the IRAS needs to raise a protective assessment in the time barred year should there be any unresolved issues. However, the way it is handled in practice raises some concerns.

In general, a company may apply for a stand-over of the payment of tax assessed pending the resolution of the objection.  Where a stand-over is allowed, the company does not have to settle the tax by the due date, and is only required to settle it upon resolution of the issues with the IRAS.  However, a stand-over request is usually only granted on the basis that late payment penalties will ensue if the company is not successful with the objection. That will add to the cost of objecting to what might be a purely speculative assessment - particularly in cases where the assessment is a protective assessment.

To relieve the cash flow of taxpayers finding themselves in this situation, it would be good if the IRAS could allow a stand-over of tax payment without penalties in cases where the issues are contentious and may result in a favourable outcome for the taxpayer. As Singapore does not have a scheme allowing a taxpayer to be paid interest on early payments of tax, it seems only reasonable that taxpayers should not be penalised if they have a genuine basis for objecting to a notice of assessment.