How To Reduce Income Tax In Singapore For Individuals And Businesses

The current corporate tax rate in Singapore is flat at 17%, and the tax rate on individual income is between 0% and 22%.

These rates are already appealing on their own because they are comparably low to those in other jurisdictions. However, the Singaporean government increased the benefit by introducing numerous schemes and incentives that let businesses pay even less tax.

This article will demonstrate how to use common tax relief methods and strategies to reduce your income tax in Singapore.

Understanding payable and non-payable tax income

You need to have a fundamental understanding of what is taxable and what is not before learning how to reduce your taxes.

All income earned in or derived from Singapore is subject to income tax. In contrast, overseas income received in Singapore is not taxable , except in certain circumstances, (e.g., income received through partnerships)

Taxable income for Singaporean taxation includes:

• profits or gains from any kind of business or trade
• investment income, including dividends, interest, and rental income
• royalties, premiums, and all other property-related earnings
• additional benefits that have a financial basis

Certain types of income are non-taxable under the Income Tax Act 1947, which are:

• capital gain, including gains derived by a company on the sale of equity investments, gains on the sale of fixed assets, and gains from currency exchange on capital transactions
• certain shipping income derived by a shipping company
• foreign-sourced dividends, branch profits, and service income received by a resident company
• winnings income (i.e., betting and lottery)
• medical and educational awards
• pensions
• inheritance

Your annual income tax is calculated by taking your taxable income and subtracting any tax reliefs. In other words, payable income = taxable income – tax relief.

The tax reliefs or tax-deductible help lower your annual chargeable income in Singapore and, subsequently, your tax burden. In the next section, let’s discover more about how to reduce your income tax.

How to reduce income tax in Singapore for businesses

To lower your tax bills, you can legally aim for the common tax reliefs below:

Tax exemption scheme for new start-up companies

New companies that satisfy all the below conditions are eligible for this scheme:

• The company must be incorporated in Singapore;
• The company is a tax resident in Singapore for that Year of Assessment (YA);
• The total share capital of the company for that YA is directly held by no more than 20 shareholders which:
  • all of them are individuals, or
  • at least one of them is an individual holding no less than 10% of the issued ordinary shares.
• The main business activity of the company is not investment holding;
• The company does not develop the property for either sale or investment.

Form YA 2020, the qualifying companies will be given the following tax exemption for the first 3 consecutive YAs:

All in all, under this scheme, an eligible start-up company is entitled to a maximum exemption amount of $125,000 for each YA.

Partial Tax Exemption (PTE) scheme for companies

Companies which have already used up 3 tax-exempt years under the tax exemption scheme for start-ups and all other companies are qualified for this scheme. Businesses will enjoy tax exemption described as below:

Under the PTE scheme, an eligible company is given a maximum exemption amount of $102,500 for each YA.

Corporate income tax rebate

Generally, all companies receive a corporate income tax rebate with a rate regulated differently each year. This policy has been consecutively extended each year from YA 2103 to 2020:

Tax exemption for foreign-sourced Income

There are three foreign-sourced incomes subject to tax exemption: foreign-sourced dividends, foreign-sourced service income, and foreign branch profits. Pursuant to Section 13(9) of the Income Tax Act, the tax imposed on these types of income can be exempted when all the following conditions are met:

• The income has been taxed in the foreign jurisdiction where the income arises.
• The headline tax rate of the foreign jurisdiction where the income arises is 15% at least at the time it is remitted to Singapore.
• The government is convinced that the tax exemption would benefit the resident in Singapore.

Tax incentive for specific industries

In addition to the corporate tax rate of 17%, existing companies in Singapore can greatly benefit from a wide range of tax incentives for many industries. Below are some of the most common examples:

For more information, refer to our guide on tax incentives in Singapore.

Deduction of expenses before the date of commencement

The date of commencement is the date when a business receives its first dollar of business. It is regulated that revenue expenses incurred within one year before the first day of the financial year in which a business receives its first dollar (date of commencement) will be tax-deductible.

Deductions on donations

From 1 January 2016 to 31 December 2021, corporations can claim a 250% tax deduction for qualifying donations made in the preceding year. The deductible donations are:

• Cash Donations
• Computer Donations
• Artifact Donations
• Public Art Tax Incentive Scheme Donations
• Land and Building Donations

The tax deductions will be automatically reflected in the tax assessments based on the information sent from the approved registered charities or institutions of a Public Character (IPC).

How to reduce income tax in Singapore for individual taxpayers

Individuals in Singapore, both local and foreign, are given many types of tax relief to reduce their payable income tax. It is very important to know that the maximum tax relief on personal income is $80,000 per Year of Assessment (YA).

Types of tax relief for Singapore tax residents

An individual is deemed a tax resident when that person is:

• A Singapore citizen
• A Singapore permanent resident
• A foreigner who is physically present in Singapore for no less than 183 days

With the status of a tax resident, one can legally make use of the following types of tax relief to lower their payable income tax:

Course fee relief

Individuals can claim relief for the current YA (2020) on fees of:

• Any attended course, seminar, or conference in the previous year(2019) that resulted in an approved academic, professional, or vocation qualification;
• Any attended course, seminar, or conference in the previous year(2019) which is relevant to the current employment, trade, business, profession, or vocation.

The maximum amount of claim is $5,500 each year regardless of the number of attended courses.

Earned income relief

An individual will be automatically given tax relief if his/her taxable earned income in the previous year comes from employment, pension, or carrying trade, business, profession, or vocation.

The relief amount varies depending on the age and taxable earned income in the previous year:

Life insurance relief

To be qualified for this type of relief in the current YA (2020), an individual must satisfy all the following conditions:

• The total sum of compulsory CPF contribution, self-employed Medisave or voluntary CPF contribution, and a voluntary cash contribution to the Medisave account in the previous year(2019) was no more than $5,000;
• That person must pay on his/her own life insurance policy in the previous year (2019) to an insurance company that has an office or branch in Singapore.

A qualifying individual can claim one of the following proportions, whichever is lower:

• The difference between $5,000 and the contribution to CPF; or
• Up to 7% of the insured value of his/her own life or his/her spouse’s life, or the number of insurance premiums paid.

Supplementary retirement scheme relief

The Supplementary Retirement Scheme (SRS) is designated to encourage individuals to voluntarily save for their retirements, along with the CPF. Being a tax resident for a current YA, an individual can automatically claim a relief amount that equals the amount contributed to SRS in the preceding year.

Other types of relief for tax-residents

Other available reliefs are:

Furthermore, Singapore Citizens and Permanent Residents can make use of reliefs relating to Central Provident Fund, including:

• CPF Cash Top-Up Relief
• CPF Reliefs, comprising CPF Relief for employees, CPF Relief for self-employed, and Compulsory and voluntary Medisave contributions.

Other methods to reduce income tax in Singapore

Allowable deductions and other available special schemes are great ways to reduce income tax for individuals in Singapore. Let’s find out how non-residents can make use of these methods.

Deductions

Some of the most common deductions are:

Deductions on employment expenses

Individual taxpayers can deduct allowable expenses from their taxable income if those expenses were:

• Incurred while carrying out official duties; and
• Not reimbursed by the employer; and
• Not capital or private in nature.

Deductions on donations

Taxpayers can also claim a 250% tax deduction for qualifying donations made in the preceding year, meaning a deduction of 2.5 times the donation amount. The following donations are deductible for individuals.

• Cash Donations
• Shares Donations
• Artefact Donations
• Public Art Tax Incentive Scheme Donations
• Land and Building Donations

Same as corporate, the tax deductions will be automatically reflected in the tax assessments based on the information sent from the approved registered charities or Institutions of Public Character (IPC).

Deductions on rental expenses

Property owners can deduct an amount of actual allowable rental expenses from rental income derived in Singapore when the two following conditions are met:

• The expense was incurred solely for the purpose of producing the rental income;
• The expense was incurred during the period of tenancy.

Deductions for sole-proprietor, self-employed person, and partners in a partnership

Taxpayers can deduct the following from their taxable income if they meet the conditions specified for each:

• Business Expenses
• Capital Expenditure incurred on Renovation or Refurbishment works (S14Q – R&R cost)
• Capital Allowances (CA) on fixed assets
• Medical expenses
• R&D Expenditure
• Land Intensification Allowance
• Expenses incurred before the commencement of business
• Business making losses and unabsorbed capital allowances
• Business and IPC Partnership Scheme (BIPS)
• Double Tax Deduction for Internationalization Scheme

The details for each deduction may be found on IRAS’s official website.

Special tax schemes

There are two tax schemes that can help to reduce income tax: Not Ordinarily Resident Scheme and Area Representative Scheme.

Not ordinarily resident scheme

Under this scheme, for 5 consecutive years, qualifying individuals may benefit from:

• Time Apportionment of Singapore Employment Income: employment income during the dates spent outside Singapore (at least 90 days) for business purposes will not be taxed.
• Tax Exemption of employer’s contribution to a non-mandatory overseas pension fund or social security scheme.

The general conditions for individuals to be eligible for the scheme are:

• Being tax resident for the current YA; and
• Being a non-resident for the 3 consecutive preceding YAs.

Nevertheless, the Not Ordinarily Resident Scheme will cease after YA 2020. Upon the end of the scheme, qualifying individuals will continue to enjoy the benefits until the 5 qualifying years expire.

Area representative scheme

Individuals are eligible for this scheme if they meet all the following conditions:

• Being employed by a non-resident or foreign employer;
• Being based in Singapore for geographical convenience;
• Being required to travel outside of Singapore due to duties;
• Receiving remuneration paid by the foreign employer that is not charged to the accounts of a Singapore permanent establishment.

Under this scheme, qualifying individuals can take advantage of Time Apportionment of Income. In particular, the employment income will be adjusted according to the duration of their physical presence in Singapore during the calendar year. The income will be later taxed based on the residency status of the taxpayers.

Should you have further questions, feel free to talk to our experts now! BBCIncorp is always willing to help!