New e-Tax Guide issued on the treatment of certain expenses incurred prior to the commencement of business activities

On By taxsgIn Corporate Tax

7 October 2016

On 30 September 2016, the Inland Revenue Authority of Singapore (IRAS) issued an e-Tax Guide, “Income Tax: Treatment of certain expenses incurred prior to the commencement of a business activity”.

The e-Tax Guide provides guidance for income derived from business activities that are subject to tax at different tax rates in the Year of Assessment (YA) relating to the basis period in which the business activity commences or is deemed to have commenced (referred to as “first YA”).

Qualifying expenditure relating to intellectual property protection, research and development, renovation or refurbishment (R&R) and design incurred before the business activity commences (collectively, “pre-commencement expenses”) are deemed to be incurred on the first day on which the business activity commences (actual date of commencement). As such, the pre-commencement expenses are tax-deductible in the basis period in which the business activity commences.

In addition, under section 14U of the ITA, any person who carries on a business activity is considered to have commenced business on the first day of the accounting year in which the business earns its first dollar of business receip (the “deemed date of commencement”). Revenue expenses incurred on or after the deemed date of commencement but before the person derives the first dollar of business receipt as well as revenue expenses incurred up to 12 months prior to the deemed date of commencement (collectively, “s14U expenses”) are deductible for income tax purposes.

If income is derived from a business activity that is subject to tax at different tax rates in the first YA, the pre-commencement and s14U expenses that are directly attributable to normal income, concessionary income and tax-exempt income will be allowed deduction against the respective income streams.

The remaining pre-commencement and s14U expenses will be apportioned among the different streams of income based on the proportion of the income to the total income and allowed deduction against the respective streams of income accordingly. This takes effect for pre-commencement and s14U expenses incurred on or after 25 March 2016.

However, if only concessionary income or tax-exempt income is derived in the first YA, all pre-commencement and s14U expenses incurred on or after 25 March 2016 will be allowed as a deduction against the concessionary income or tax-exempt income.

The e-Tax Guide covers

  • Tax treatment before Budget 2016
  • New tax treatment for pre-commencement expenses and s14U expenses
  • Administrative procedure
  • Annex A – Examples illustrating the application of sections 14A and 14U prior to the Budget 2016 announcement
  • Annex B – Examples illustrating the application of sections 14A and 14U before and after the change in tax treatment

For full details, please refer to the e-Tax Guide on the IRAS website.

Source: This article was extracted from the Inland Revenue Authority of Singapore’s (IRAS) website. Visit http://www.iras.gov.sg/ for more information.