A refreshing and bold step for Tharman

Business Times: Sat, Feb 18
  A KEY feature of Singapore’s tax system is that tax is payable only on income sourced in Singapore or received in Singapore from outside Singapore. In short, tax is payable only on income and not capital gains. Although Singapore does not have a ta…

A KEY feature of Singapore’s tax system is that tax is payable only on income sourced in Singapore or received in Singapore from outside Singapore. In short, tax is payable only on income and not capital gains.

Although Singapore does not have a tax on capital gains, the income tax treatment on the gains derived by taxpayers from the sales of investments has been far from clear. This is because the Singapore tax legislation does not define the terms ‘capital’ or ‘income’.

Without specific guidelines, the income tax treatment of the gain is decided based on case law which has, over time, developed the ‘badges of trade’ test, which is essentially a facts and circumstances test, to distinguish income and capital gains. The application of this test often produces uncertain outcomes.

Therefore, taxpayers selling shares as part of a restructuring exercise were often caught off-guard, when asked by the Inland Revenue Authority of Singapore (Iras) later to support assertions that gains from the disposals were capital and therefore not taxable. This often resulted in extensive and expensive exchanges of correspondence with Iras and sometimes, costly disputes for taxpayers which needed to be resolved in court.

Recognising this issue, Singapore had introduced measures in the past to allow companies with the International Headquarters (IHQ) status to apply to the Economic Development Board for the Approved Holding Company (AHC) status.

Under the AHC status, companies selling shares in approved subsidiaries could do so without the risk of being taxed on the gains. However, the AHC scheme has since been discontinued.

It was therefore refreshing to note that the minister of finance, recognising that the acquisition and sale of shares are a necessary part of restructuring for growth and consolidation and ultimately potentially productivity enhancing, announced new guidelines in Budget 2012 to provide certainty on the income tax treatment for gains from the disposal of equity investments.

As a result, companies will not be taxed on gains from equity investments disposed on or after June 1, 2012, if they meet certain conditions.

To qualify, the seller needs to own at least 20 per cent of the shareholding in the investment and must have maintained the minimum shareholding of 20 per cent for two years before the date of disposal. For other cases, the tax treatment will continue to be determined based on the facts and circumstances test.

In many ways, this is a refreshing and bold step in settling the contentious issue of income versus capital in many cases. For instance, while the period of ownership by the seller was one of the badges of trade in deciding if the gain was taxable, there were no clear-cut rules on the number of years of ownership.

Similarly, the 20 per cent minimum shareholding requirement announced by the minister sets a reasonably low threshold for corporate groups looking to realign their structure in keeping with these uncertain times.

Having said that, as the guidelines will apply only to companies meeting the conditions, the ‘badges of trade’ test will continue to apply to other instances falling outside the scope.

One can only hope that when the scheme is reviewed in five years’ time, it will be extended to include not only substantial equity investments but all other investments including portfolio equity investments and real estate.

 

  • The writers are, respectively, head of tax services, Deloitte South-east Asia and Singapore, and business tax senior manager, Deloitte Singapore 

     

    KEY POINT

     

     

  • Companies will not be taxed on gains from equity investments disposed on or after June1, 2012, if they meet certain conditions 

    Source: Business Times © Singapore Press Holdings Ltd.

About Propertyguru Expert

Website contend is hand picked and high demand. Marketing Manager at Huttons Asia Pte Ltd. Indonesian Focusing in Private Residential Singapore. *Service Quality Assured. *Top 300 producer in 2011.