INCOME TAX (AMENDMENT) BILL

Order for Second Reading read. 6.00 pm

The Minister for Finance and Minister for Trade and Industry (Dr Tony Tan Keng Yam): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time.'

The Income Tax (Amendment) Bill seeks to give legislative authority to the income tax concessions announced in the 1984 Budget Statement. Opportunity is also taken to include seven other amendments to the Act.

Sir, it was announced in the 1984 Budget Statement that with effect from Year of Assessment 1985, the option of a three-year accelerated depreciation allowance will be extended to all now plant and equipment in all trades and businesses. Unclaimed residual allowances in respect of existing equipment will also be allowed full set-off in three years. Clauses 4 and 5 of the Bill provide for this.

The present tax exemption scheme for offshore syndicated loans, first announced in my 1983 Budget Statement, will now be extended to cover other syndicated credit facilities made during the five years from 1st April 1983. Specifically, the tax exemption scheme will now include syndication of guarantees, performance bonds and certain underwriting facilities, such as the underwriting of bonds, floating rate notes and revolving underwriting facilities. Clauses 3 and 11 amend sections 13 and 43A of the Act to provide for this.

In order to provide the financial futures market, the Singapore International Monetary Exchange (SIMEX) will be given exemption on its income derived from futures activities for five years. Income of corporate and individual members which arises from transactions with non-residents, Asian Currency Units and other SIMEX members will be taxed at the offshore concessionary rate of 10%. Clauses 3 and 12 make the necessary amendments to sections 13 and 43D of the Act.

With effect from Year of Assessment 1985, the personal income tax rates of an individual or Hindu joint family will be reduced, ranging from 8.4% to 13.5%. A tax rebate of 10% will be given on the tax payable in respect of the first $10,000 of chargeable income. Clauses 10 and 13 provide for this.

The enhanced child relief is now increased to include the normal child relief plus 5%, 10% or 15% of annual earned income for the first, second and third qualifying child respectively. This is, however, subject to a maximum allowable deduction of $10,000 in respect of each of the three eligible children. The relief is also extended for married women who have successfully completed their secondary school education with at least five 'O' level passes or who possess equivalent or higher qualification. The concession takes effect from Year of Assessment 1985. Clauses 14 amends the Fifth Schedule to the Act to provide for this.

I now move to the other amendments to the Act.

The Act, as it stands, is unclear whether an individual who is in Singapore for any part of the day is considered to be in Singapore for one day, for purposes of determining whether that person is a resident or not. Clause 2 amends section 2 of the Act to remove this doubt.

Presently, only sums withdrawn from CPF balances on retirement are exempt from tax. Clause 3 amends section 13(l)(j) of the Act to exempt from tax any sums, including interest, standing to the credit of an individual in any approved pension or provident fund or withdrawn whether before retirement for approved purposes or after retirement.

Clause 3 also makes a drafting amendment to section 13(3) of the Act to make clear that the section applies only to individuals and not companies.

Clause 6 amends section 21 of the Act to ensure that the maximum amount of depreciation allowances which can be claimed for a new car registered as a business service passenger vehicle does not exceed $35,000. It also disallows the balancing charge on the sale of an old car to be set off against the cost of a new car unless the new car is registered as a business service passenger vehicle.

Clause 7, which amends section 23 of the Act, is a technical amendment to allow the carry forward of industrial -building allowance to a person who derives income from the letting-out of an industrial building or structure but does not carry on the business in respect of such letting.

Section 24 of the Act allows a company to sell equipment to a related company at the written down value instead of at market value. By an election under this section, undue tax advantage can accrue to a seller and a buyer of machinery or plant which has been leased by the seller to the buyer before the sale. Clause 8 amends section 24 of the Act to deny related companies involved in a lease agreement from exploiting the tax advantage that may arise from such an election.

In the case of life insurance companies, the gains or profits on which tax is payable is based on its investment income and the gains or profits realized on the sale of investment. The intention is not to discriminate between companies receiving premiums from outside Singapore and those receiving from within. Clause 9 amends section 26(3) of the Act to make clear that premiums received by the company from outside Singapore are taxable.

Sir, I beg to move.

Question proposed.

Mr P. Selvadurai (Kuo Chuan): Mr Speaker, Sir, as the Explanatory Statement to this Bill states, this Bill seeks to implement the income tax changes announced in the 1980 Budget Statement and to make certain other amendments to the Income Tax Act.

A closer consideration of certain provisions of this Bill as it stands reveals that their drafting may lead to unforeseen or anomalous results. I should like to draw attention to those anomalies relating to:-

(1) the Central Provident Fund Contributions.

(2) Foreign Source Income.

(3) Accelerated Capital Allowances.

(4) Industrial Robots.

CPF Contributions

There is currently a discrepancy between the rates of Employer's CPF contributions payable under the CPF Act and the corresponding sums ranking for deduction in the Employer's income tax computation. The Bill is silent on this point. Section 14(l)(e) of the principal Act governs the deductibility of the Employer's CPF contributions up to the various specified percentages of the relevant employee's remuneration. Proviso (i)(E) to section 14(l)(e) of the principal Act limits the level of allowable Employer's CPF contributions on or after 1st July, 1982, to a maximum of 22% of the relevant employee's remuneration. Other sub-paragraphs provide for lower percentage limits for earlier periods.

It is clear that the said percentage limits and the dates of changes as set out in section 14 of the principal Act correspond precisely to the relevant percentages specified under the CPF Act for periods up to and including 1st July 1982. Since that date, however, the percentages specified under the CPF Act were increased from 22% to 23% on 1st July 1983 and from 23% to 25% on 1st July 1984. It is anomalous that only a proportion of the current percentage of the current percentage of the Employer's CPF contribution should rank for income tax deduction. I am sure that this must be an oversight on the part of the legal draftsman. Foreign Source Income

Section 10 of the principal Act is the primary charging section and subsection (1) thereof imposes a charge to tax on income accruing in or derived from Singapore and on income received in Singapore from outside Singapore in respect of a series of types of income more specifically enumerated in paragraphs (a) to (g) of that subsection.

The charging section refers to the income of a "person" which term is defined by section 2 of the principal Act to include a company, body of persons and a Hindu joint family in addition to an individual.

The scheme of the charging section is that all income sourced in Singapore is to be chargeable to Singapore tax irrespective of where the monies may be received, but that foreign source income should be subject to Singapore tax only if the monies are received in Singapore.

Section 13(3) of the principal Act exempts from Singapore tax foreign source income received in Singapore by a "non-resident person".

Clause 3(d) of this Bill proposes to delete entirely the existing section 13(3) and substitute therefor the following:

There shall be exempt from tax for any year of assessment any income arising from sources outside Singapore and received by any individual who is not resident in Singapore in that year of assessment.'

This amendment was envisaged In the Budget Statement. The question here is, if any change in policy is intended.

Sir, the implications of the proposed amendment are far-reaching. There would henceforth be no statutory protection from a charge to Singapore tax on a foreign source income received in Singapore by, say, a foreign company regardless of whether such a company had any connection with Singapore or whether the Income in question was in any way related to Singapore. The mere receipt of income into a bank account operated in Singapore, for example, an ACU account, would be sufficient to establish a liability to Singapore tax. So, a foreign company contem- plating the opening or operation of an ACU account in Singapore must clearly demonstrate that the funds remitted to its bank account in Singapore were from capital and not income sources; otherwise, it would be liable to Singapore tax on the whole of the money remitted irrespective of the fact that the company may have earned such income entirely outside Singapore with no connection with Singapore except the operation of its bank account.

The principal Act, as it now stands, without the proposed amendment, provides a logical and administratively workable code. Income sourced in Singapore is to be taxed here, irrespective of the residence of the recipient. Income sourced outside of Singapore is to be taxed here if remitted here by a tax resident. Income of a non-resident from sources unconnected with Singapore are not to be taxed here, irrespective of whether or not that resident chooses to take advantage of Singapore's banking and financial facilities.

I would suggest that the aforesaid implications of the proposed amendment are not intended. If so, section 13(3) of the principal Act should be left unamended.

Capital Allowances on Plant and Machinery

Broadly, there are two separate and distinct codes for the granting of capital allowances in respect of expenditure incurred by a taxpayer on plant and machinery. They are the section 19 code and the section 19A code.

Under section 19 of the principal Act, an initial allowance of 20% of the expenditure incurred during the taxpayer's basis period for the Year of Assessment concerned is allowed. Thereafter, annual allowances are granted over a number of years varying according to the nature of the plant or machinery asset concerned.

Under section 19A of the principal Act, the full cost of the qualifying asset may be written off for tax purposes over three years, one-third of the cost in each year. Capital expenditure incurred in a particular basis period first ranks for allowances in the Year of Assessment relating to that basis period.

As it now stands in the principal Act, section 19A restricts the range of plant and machinery assets eligible for section 19A allowances by reference to a variety of criteria set out in subsection (1) of the section. Certain specific categories of assets will qualify for section 19A allowances irrespective of the nature of the business of the taxpayer (favoured assets) or the plant and machinery assets of specific categories of taxpayers will qualify for section 19A allowances (favoured businesses). Certain categories of assets like computers and office automation equipment qualify for a 100% write-off in the Year of Assessment relating to the basis period in which the expenditure is incurred.

These provisions were introduced with effect from Year of Assessment 1984, but the amended section 19(1A) in introducing these provisions did not refer to any specific date on or after which the relevant expenditure should have been incurred but to expenditure incurred during or after the basis period for the Year of Assessment 1984.

Further, section 19(1 B) as amended provides that any capital expenditure incurred in earlier periods on computer and office automation equipment assets should rank for 100% write-off in Year of Assessment 1984 to the extent that there remained a balance of expenditure not fully allowed in earlier periods.

Under section 35 of the principal Act, the income assessable to tax for any Year of Assessment is normally the income of the preceding calendar year. In the case of a business, however, subsection 2 authorizes the Revenue to accept as the basis period for any particular Year of Assessment the accounting period of the taxpayer ending in the preceding calendar year. In practice, therefore, it is very common to find that the basis period, for example, Year of Assessment 1985, in relation to a company or other unincorporated business will not be the calendar year 1984 but the 12-month accounting period ending on date 31st March 1984.

The 1984 Budget Statement announced a substantial extension of section 19A allowances to the previously unfavoured business sectors. Section III of the Budget Statement provides that with effect from Year of Assessment 1985 all new equipment would be allowed to claim an accelerated depreciation allowance of 33 1/3 % over three years. Effectively, this means that expenditure on all new equipment could be written off against taxable profits in the three years following the year of purchase. In order not to penalize those who have already purchased their equipment, unclaimed residual allowances in respect of existing equipment are also to be allowed full set-off in three years.

Clause 4 of the Bill contains proposals to amend section 19A of the Act in line with the Budget Statement. Clause 4(a), which is intended to take effect from Year of Assessment 1985 onwards, provides that section 19A allowances will be available in respect of plant and machinery expenditure of all businesses but only in relation to capital expenditure incurred on or after 1st January 1984. However, for the reasons I have referred to earlier, it will commonly be the case that taxpayers incurred capital expenditure during their basis periods for Year of Assessment 1985 but prior to 1st January 1984.

Clause 4(f) provides for the section 19A system to be applied to existing assets to the extent that they have not been written off for tax purposes under section 19 system. However, a pre-condition for such expenditure to qualify for this treatment is that it must have attracted allowances under the section 19 system at some period in the past. Capital expenditure incurred by a taxpayer during his basis period for Year of Assessment but prior to the 1st January 1984 will not have attracted any section 19 allowances for any earlier period and therefore will not be covered by the wording of the proposed amendments. This would be at odds with the drafting of clause 4(d) which I must now turn to.

Assuming that it was the Hon. Minister's intention to restrict the extension of section 19A allowances only to expenditure incurred on or after the 1st January 1984, there still remains a potential anomaly in the proposed amendment as presently drafted. It would be open to the taxpayer to claim section 19 allowances in the normal way in respect of pre-1st January 1984 expenditure in his Year of Assessment 1985 tax computation. One would then expect the unallowed balance of expenditure to be dealt with under the section 19A allowance system for subsequent Years of Assessment. For this to happen, the taxpayer must make an election to that effect and in accordance with the present wording of clause 4(f) of the Bill, that election must be made before the end of Year of Assessment 1985. The problem, however, is that in the circumstances I have set out, the election would not be effective for Year of Assessment 1985 tax purposes but would rather take effect from Year of Assessment 1986. A substantial proportion of taxpayers may overlook this somewhat subtle point and defer making an election until the submission of the Year of Assessment 1986 tax return, by which time, any such election would no longer be valid. I venture to say that it is unlikely that the Hon. Minister intended any such complex hurdles to be placed in the path of taxpayers seeking to avail themselves of the more generous allowances now available. It may therefore be appropriate for a more generous time scale for this election to be embodied in the legislation. If not, there is a clear danger of penalizing inadvertently a large body of taxpayers who do not devote undue time or effort to the detailed scrutiny of complex and somewhat obscure income tax legislation.

Industrial Robots

Clause 4(d) of the Bill envisages an extension of the special 100% write-offs for specially favoured assets like "Robots". The Bill, however, does not provide any guidance as to what exactly is meant by a "robot". Guidance is to some extent available from the 1984 Budget Statement in the light of which I would suggest that since the"robot" when used in this context is not a term with a generally understood and familiar meaning in ordinary language, it would be appropriate for some guidance to its correct Interpretation to be included in the legislation.

I should also point out, Sir, that in introducing these particular provisions in the Bill the draftsman has referred specifically to expenditure incurred "during or after the basis period for the year of assessment 1985" as opposed to expenditure incurred on or after 1st January 1984. He has not, however, included any provision along the lines of the existing section 19A(lB) to permit an immediate 100% write-off of unallowed balances brought forward from previous Years of Assessment.

Sir, there are also some problems centred around section 6 of the Bill which provides that with effect from Year of Assessment 1985, the provisions of section 21 of the principal Act will no longer apply to the replacement of one motor-car by another motor-car unless the new motor-car is registered as a business service passenger vehicle for the purposes of the Road Traffic Act and the Rules made thereunder. The said amendment appears to be at odds with other provisions with apparently similar legislative intent already existing in the principal Act. On this, I could perhaps write to the Hon. Minister separately.

Dr Tony Tan Keng Yam: Mr Speaker, Sir, I would like to thank the Member for Kuo Chuan for the care he has taken in going through the Bill and for his pertinent comments which give me the opportunity to clarify a number of points.

First, the Member is correct in noting that the increases in the rate of CPF from 22% to 23% on 1st July 1983 and from 23% to 25% on 1st July 1984 have not yet been reflected in the Income Tax Act. However, I would like to assure the Member that the contributions by employers have been allowed appropriate deductions. A suitable amendment to the Income Tax Act is being finalized and will be included in the next Amendment Bill.

On the question of foreign source income, I wish to inform the Member that the provisions of section 13(3) have never been applied to companies. This is apparent from the existing provision which gives the exemption to "any person who is in Singapore for some temporary purpose only and not with any intent to establish his residence therein and who has not actually resided in Singapore at one or more times for a period equal in the whole to six months in the Year of Assessment". As the term "person" in the Act includes a company, the proposed amendment is to make clear that section 13(3) applies only to individuals. The amendment was introduced merely to remove any misinterpretation. No change in policy is intended.

With regard to accelerated depreciation allowance, it is not intended to deny such allowance to taxpayers who have incurred capital expenditure on plant and machinery which qualify for the allowance. Therefore, any purchase made during the basis period for Year of Assessment 1985 would qualify for the three-year write-off. I thank the Member for pointing out that there is an anomaly in the drafting, and I shall arrange for the anomaly to be rectified.

The question of what is meant by a "robot" has been carefully examined. It is difficult to have a precise definition. However, for administrative purposes, the Inland Revenue Department will accept any manipulator which can be programmed to perform various operations in a prescribed sequence without any human assistance as a robot which qualifies for the one-year write-off. There have been go identifiable records to show that depreciation allowance has been allowed to indus- trial robots. However, if there are claims for residual balance to be written off, the Inland Revenue Department will allow the balance to be written off in full.

The Member mentioned that he will be writing to me separately on the apparent conflict on the amendment to section 21 relating to depreciation allowance for a new car registered as a business service passenger vehicle. I would welcome his comments and I assure him that they will be considered seriously.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - (Dr Tony Tan Keng Yam).

Bill considered in Committee; reported without amendment; read a Third time and passed.