INCOME TAX (AMENDMENT) BILL

Order for Second Reading read.

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment) Bill, 1986, gives legislative effect to three income tax concessions announced in the 1986 Budget Statement. Opportunity is also taken to include other amendments, necessitated by the cut in income tax rates, as well as to extend certain provisions of the Act.

An across-the-board once-off rebate of 25% to resident individual taxpayers for the Year of Assessment 1986 only was announced in the 1986 Budget Statement. Clause 17 of the Bill provides for this. Clauses 8 and 16 further amend the legislation to effect the reduction in individual tax rates, and the increase in the existing rebate from 10% to 15% on the tax payable on the first $10,000 of chargeable income. This will take effect from the Year of Assessment 1987.

The second Budget concession on the reduction in the company tax rate from 40% to 33% with effect from the Year of Assessment 1987, is made by the amendment to section 43 in clause 9.

The third concession in the 1986 Budget Statement was an extension of the existing tax incentive for fund management. The original scheme, which took effect in 1983, confers exemption from Singapore tax on investment gains from funds of non-resident investors managed by approved ACU fund managers in offshore assets. In addition, fund manager's fees are taxed at 10%.

The concession extends the scheme to include fund managers who do not have ACU licences but are approved for the scheme by the Monetary Authority, and to investments in local stocks and shares. Clause 3 introduces a new section 13C which empowers the Minister to prescribe the income of the non-resident which will be exempt from tax under the scheme. Clause 10 of the Bill amends section 43A to extend the application of the 10% concessionary tax under that section to any approved fund manager.

I now move to the other amendments. In line with the company and individual tax reductions, the rate of tax withheld on dividends declared by a resident company is reduced from 40% to 33%, with effect from 1st January 1986. As companies could only be informed of this after the announcement of the company tax reduction, an adjustment is necessary for those dividends declared before the Budget Statement and in the early part of 1986, on which 40% tax had been withheld.

In making the adjustment, the net dividend received by the shareholder is regarded for tax computation purposes as carrying a credit of 33% only. The difference between tax deducted computed in this manner (ie at 33%) and that on the original gross dividends (ie at 40%) is credited to the dividend franking credit account of the company paying the dividend. Clauses 12 and 14 of the Bill provide for this.

A transitional measure is also needed to ensure that dividends which are declared before 1st January 1986 but, under present arrangements, are assessed in the shareholders' hands in 1987, are instead assessed in Year of Assessment 1986. Clause 5 inserts a new subsection (2A) to section 35 of the Act to provide for this.

Following the reduction in the maximum individual and company tax rates from 40% to 33%, the tax rate for non-resident taxpayers will be similarly reduced with effect from Year of Assessment 1987. In line with this, the rate of tax withheld on certain payments, such as interest, royalties and rents, to non-residents is accordingly reduced to 33%. This reduction only applies to payments of income which become assessable in 1987. Clause 9 amends section 43 of the Act to reduce the non -resident's tax rate whilst clause 13 reduces the withholding tax rates in section 45.

Under our tax regime, the rate of tax on the trustees of a trust and the executors of an estate is essentially set by the rate of tax on companies. Thus, with the reduction in the company tax rate, the rate of tax on trustees and executors is similarly reduced from 40% to 33% from Year of Assessment 1987 onwards. The legislation is amended by clause 9 of the Bill.

At present, the maximum tax credit given to a resident taxpayer under double taxation arrangements is 40% of his foreign assessable income, ie, the maximum Singapore tax payable on such income. With the reduction in income tax rates, it is now necessary to limit this maximum credit to 33%. Clause 15 amends section 50(3) for the new limitation to take effect from Year of Assessment 1987.

The tax incentive for operational headquarters was announced in June this year to encourage companies to use Singapore as a regional base. The incentive essentially consists of two parts. One, a 10% concessionary tax rate on income derived from the provision of headquarter type services, such as management, technical or other supporting services, to related companies outside Singapore; and the other, an effective exemption for foreign dividend income.

Clause 11 inserts a new section 43E to apply the 10% concessionary tax to prescribed income of the approved headquarters company. No new legislation is required for the second part of the incentive as the existing legislation, section 13(7) of the Act, already enables the Minister to grant the exemption on foreign income on a case-by-case basis.

Presently, only cash donations to the National Museum are deductible against the donor's assessable income for tax purposes. In order to encourage private collectors to contribute art pieces and artifacts of historical and cultural value, I have decided that gifts-in-kind to the National Museum should also qualify for income tax deduction. Clause 6 amends section 37(2) of the Act to effect this from Year of Assessment 1987 onwards.

Earlier this year, it was announced that voluntary contributions to the CPF by self-employed individuals are to be tax deductible, subject to a maximum of 10% of the individual's assessable income, or $7,200, whichever is less. Clause 7 of the Bill provides for this. It also imposes certain conditions limiting the maximum amount of deduction, in the event that the self -employed individual also makes compulsory CPF contributions, and payments for life insurance premiums. This applies to contributions made on or after 1st August 1986 only.

Employers' CPF contributions are presently tax deductible. As the rate of employers' statutory CPF contributions was reduced from 25% to 10% with effect from 1st April 1986, an amendment is required to section 14(1)(e) of the Income Tax Act, so as to limit the tax deductibility of employers' contributions to 10% only. Clause 4 of the Bill provides for this.

Clause 2 is a technical amendment to bring up to date the definition of the term "prescribed" in section 2 of the Act. This will reflect the current practice by which the Minister can prescribe rules or regulations under various sections of the Income Tax Act, and is not confined to any one section.

Sir, I beg to move.

Question proposed. 12.08 pm

Dr Augustine H.H. Tan (Whampoa): Mr Speaker, Sir, some of these tax measures, particularly the income and corporate tax reductions, were introduced in the Budget earlier this year as part of a package of incentives designed to stimulate our economy. The Hon. Minister for Finance together with his colleagues must be very pleased to note the recovery we have had in our economy as a result of these measures. But during the Budget debate, several Members in this House, including myself, questioned the reduction from 40% to 33% in corporate tax rate and marginal income tax rate as to whether this was a sufficient reduction. At that time, the Minister replied that he thought this was sufficient but that a review would be made in the event that other countries, which are competing with us for investments, reduce their tax rates further. We now know that countries like the US have reduced their tax rates or reformed their tax structures. In the light of these changes, is the Minister considering further reductions? Of course, he can only say so in principle. He cannot tell us anything in detail until the next Budget.

Another question I have is in regard to the treatment of capital gains. I understand that any sale of property or shares or any assets would not normally attract any tax because we do not have a capital gains tax. But if the Income Tax Department should so rule that the gain is really an income because trading activity is involved, then that capital gain becomes subject to income tax. I think this has dissuaded a number of people and fund managers and so on from engaging in the buying and selling of certain assets, like stocks and shares, and even property. Perhaps a more definite ruling by the Income Tax Department may be helpful in this regard because I know of people who got caught in the income tax net as a result of such transactions in the past.

As to the provision for tax deductions in respect of gifts-in-kind to the National Museum, I do not recall seeing any limitation or limit placed upon the amount. I wonder also whether any safeguards have been drawn up in respect of the valuation of such donations. In the US, as in other advanced countries where such deductions are allowed, this has proven to be an excellent tax loophole and arbitrary valuations have been made even for Presidential papers of no consequence which have been valued at such a high rate for income tax deduction purposes. Perhaps the Minister could inform this House what safeguards are envisaged, particularly when one comes to value antiques and ceramics and so on. In the first place, there are antiques which are not genuine antiques and valuation can differ from one market to another.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, on the first point raised by the Member for Whampoa on the possibility of reviewing the corporate tax rate, I would like to point out that the effective rate does not apply until the Year of Assessment 1987. We are, of course, always reviewing our corporate tax rate to ensure that we remain competitive and we will continue to do so. As the Member quite rightly pointed out, I am unable to give him a specific response at this time.

As to the second question on capital gains versus trading income, this is a problem which has been raised for many, many years. I think it will have to remain an issue which has to be decided on a case-by-case basis. It will be nearly impossible to lay down simple and clear guidelines. I recognize that some of the complaints are from fund managers who would prefer a simple system. Unfortunately, this is not easy and I do not think any tax authority in the world has, in fact, arrived at such a simple solution. In principle, it is difficult to grant non-taxable capital gains for a company which is operating a fund or a business which deals in the transaction of securities. The fund manager obviously would like to treat all transactions of this nature as capital gains and therefore not subject to tax. If the Inland Revenue Department, ie, the income tax people, agree to such a proposal, then we will be treating this class of business differently from other businesses which pay normal corporate tax. Why should a company dealing specifically in securities be granted zero tax or concessional tax while the same privilege is not granted to, say, a manufacturing company? The question of equity arises and that is why it is not feasible to lay down guidelines which tend to favour this sort of operation.

On the third question of donations to the Museum and the safeguards which might be necessary to ensure that generous or wealthy donors do not use this as a means of avoiding tax, I can assure the Member that the Revenue Department who oversees the assessment of these gifts, in consultation with the income tax people, would exercise extreme caution in valuations. Their record on tax matters would justify such confidence and indeed I do not expect there will be large numbers of fake antiquities presented for donation purposes. We are conscious of the need to exercise caution.

Dr Augustine Tan: On a point of clarification, Mr Speaker, Sir. In regard to the treatment of capital gains arising from trading in stocks and shares by fund managers in particular, does not the Minister agree with me that if we want to develop a capital market this is a very serious constraint? In other words, if we were to allow all such transactions to be treated on capital gains basis, then our stock exchange, our securities market will be much better developed as a consequence. And I think it will be a small price to pay in that regard. One can make a distinction between financial assets and other goods which are inventories, eg, manufactured goods, and so on and so forth.

At the same time, under the CPF investment rules, there is a safeguard there already: you have to register your share and when it is registered you may then sell it, which normally takes six weeks to two months, and I presume there is no tax on the capital gains that may be realized for CPF investment holders. Why could a similar rule not be applied for fund managers and others who hold stocks and shares, provided they go through the process of registering the shares or a suitable time limit of two or three months which would deter unusual turnover such as speculation and so on? This might be beneficial for our economy?

Dr Richard Hu Tsu Tau: I would like to point out for the Member for Whampoa's information that incentives to encourage development of the fund management already apply in the case of trading in foreign shares and securities where trading income is subject to nil tax. What we want to avoid is to extend the same privilege to dealings in domestic stocks and shares by companies which deal exclusively in this class of business. The Income Tax Department is very generous in its treatment of transactions by individuals like yourself or other members of this House who buy shares on the stock market and make capital gains. In fact, I doubt whether any individuals gains from stock trading have ever been taxed as ordinary income. It is only unwilling to extend the same privilege to companies whose sole business is trading in stocks and shares because stocks and shares then becomes a commodity in which it deals. And we see no difference between dealing in rubber or tin and dealing in securities.

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 Richard Hu Tsu Tau].

Bill considered in Committee.

[Mr Speaker in the Chair]

Clauses 1 to 3 inclusive ordered to stand part of the Bill.

Clause 4 -

Dr Richard Hu Tsu Tau: Sir, I beg to move that Clause 4 be amended as follows:

In page 2, to leave out line 20 to line 5 in page 3, and insert -

(a) by deleting the word "and" at the end of sub-paragraph (i)(F) of the proviso;

(b) by deleting the words "shall not exceed 25%," in sub-paragraph (i)(G) of the proviso and substituting the words "and before 1st April 1986 shall not exceed 25%;"; and

(c) by inserting, immediately after sub-paragraph (i)(G) of the proviso, the following sub-paragraph:

"(H) commencing on or after 1st April 1986

shall not exceed 10%,".

Sir, the purpose of this amendment is to reflect more accurately the intention to reduce the tax deductibility of employers' CPF contributions from 25% to 10%, with no change to the existing treatment at the moment.

Amendment agreed to.

Clause 4, as amended, ordered to stand part of the Bill.

Clauses 5 to 17 inclusive ordered to stand part of the Bill.

New Clause (A) - "Amendment of Section 13B of the principal Act is section 13B. amended by deleting the words "or 43D" in subsections (1), (2), and (8)(a) and substituting in each case the words ", 43D or 43E".". - [Dr Richard Hu Tsu Tau].

Brought up, and read the First time.

Dr Richard Hu Tsu Tau: Sir, I beg to move, "That the new clause be read a Second time."

Sir, this amendment is consequential to the legislation which effects the tax incen- tive for operational headquarters in clause 11 of the Bill.

The amendment to section 13B will ensure that dividends declared by the approved headquarters company out of income which has been taxed at the 10% concessionary rate will not suffer further tax in the hands of its shareholders. It will enable the benefit of the tax concession granted to the approved headquarters company to be passed on in full to the shareholders, as is generally the case in our incentive schemes.

Question put, and agreed to.

Clause read a Second time and added to the Bill.

The Chairman: This new clause is to be inserted immediately after clause 2. This will be done.

New Clause (B) - "Amendment of Section 40(1) of the principal Act is section 40. amended by inserting, immediately after the words "Fifth Schedule" in the ninth line, the words "and section 39(2)(h)".". - [Dr Richard Hu Tsu Tau].

Brought up, and read the First time.

Dr Richard Hu Tsu Tau: Sir, I beg to move, "That the new clause be read a Second time."

Sir, at present, individual taxpayers are allowed an annual tax deduction of up to $2,000 on certain educational expenses. This relief was introduced in the 1985 Budget Statement and was intended for resident individual taxpayers only. The amendment to section 40(1) puts beyond any doubt that non-resident individuals are not entitled to claim the deduction.

Question put, and agreed to.

Clause read a Second time and added to the Bill.

The Chairman: This new clause is to be inserted immediately after clause 7. This will be done.

Amendments will also be made to the numbering of clauses consequent on the addition of the two new clauses.

Bill reported with amendments; read a Third time and passed.