e-Tax Guide: Qualifying conditions for pension/ provident funds to be approved under section 5 of the Income Tax Act

15 July 2011

A new e-Tax Guide has been issued by IRAS on the qualifying conditions for pension/provident funds to be approved under section 5 of the Income Tax Act.

The qualifying conditions are as follows:

  • contributions to the fund must be alienated to a third party, ie trustee(s) of the fund. This effectively means that the employer must make cash contribution for his or her employees to a fund which is set up under a trust;
  • benefits provided under the fund must be made available to all employees, both bargainable and executive;
  • the same formula for computing the benefits under the fund must be applied to all employees;
  • the level of benefits payable to each employee must not exceed the following formula (referred to as the “benefit limit formula”): (2.25 x last drawn salary x number of years of service) less total employer contributions to the CPF account of that employee;
  • employees cannot contribute to the fund; and
  • the trustee(s) of the fund must exercise statutory duty of care in accordance with the provisions of the prevailing Trustees Act (Cap. 337) with regard to the management and investment of monies in the fund.

Once approved, the trustee(s) must comply with certain requirements, including but not limited to the following:

  •  submit an annual actuary’s certification confirming that the rate of contribution or benefits provided under the fund does not exceed the benefit limit formula mentioned in paragraph above. If the stipulated level of benefits has been exceeded, the trustee(s) of the fund must inform the Comptroller of this immediately;
  • furnish in the case where the fund is a defined benefit fund, a valuation report determining the amount of contributions required. Such valuation must be done at least once every 3 years;
  • seek tax clearance from the Comptroller before paying any benefits to members who are not residents of Singapore for income tax purposes;
  • obtain approval from the Comptroller before making any alteration or amendment to the Trust Deed and rules of the fund;
  • file returns on the investments made by the fund to the Comptroller on a semi-annual basis based on the format required by IRAS (provided in Annex 1 of the e-Tax Guide); and
  • file annual income tax return, Form P1 with the fund’s audited statements of accounts by 15 April each year.

The above qualifying conditions are imposed to reinforce the use of approved section 5 funds by employers to strengthen employee retention. Therefore only employers should make contributions to approved section 5 funds.  An approved section 5 fund must also be a fund applicable to all employees in the organisation.

An employer whose pension/provident fund is an approved section 5 fund is allowed a tax deduction on his or her contribution to the fund. Any investment income derived by the fund is tax exempt. All benefits paid out of the fund to his or her employees, other than the amount of tax-exempt benefits accrued up to 31 December 1992 paid upon retirement, are taxable at the time of their entitlement to such benefits.

Full details of the e-Tax Guide can be found here (Ref 2011/IT/5).

Source: IRAS