23 December 2016

On 16 December 2016, the Inland Revenue Authority of Singapore (IRAS) issued the e-Tax Guide, “Income tax: Total asset method for interest adjustment”.

The e-Tax Guide sets out the application of the total asset method (TAM) of attributing common interest expense to income producing and non-income producing assets and is relevant to taxpayers who claim deductions of interest expense and borrowing costs akin to interest, incurred on loans or borrowings, under section 14(1)(a) of the Income Tax Act (ITA).

Interest expense and borrowing costs incurred on loans specifically taken up to finance income-producing assets or assets that are employed in acquiring income are deductible against the income produced. If the asset does not produce income, the interest expense and borrowing costs are not tax deductible.

If a taxpayer cannot identify and track the use of an interest-bearing loan to specific assets financed by the loan and not all the assets are income producing, the TAM may be adopted to attribute the common interest expense to the assets.

The formula in the TAM attributes an amount of common interest expense incurred to each asset in the total asset base as at the financial year end, other than the assets financed by specific interest bearing loans.

IRAS has stated that taxpayers will need to provide their interest restriction computations in their tax computations but they need not submit any supporting documents with their Income Tax Return. However, sufficient documentation must be maintained for submission to the CIT if called upon to do.

Taxpayers who use the TAM are to align their methodology from the date of the e-Tax Guide (i.e. 16 December 2016).

For full details, please refer 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.