INCOME TAX (AMENDMENT NO. 2) 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 No. 2) Bill, 1990 gives legislative effect to income tax changes relating to unit trusts, contributions to the CPF and other approved funds, and a 5% rebate on personal income tax. These changes take effect from Year of Assessment 1990. The Bill also raises the limit on tax deduction for employers, in line with the increase in the employer's rate of CPF contributions from 1st July 1990.

The first tax change relates to the tax treatment of approved unit trusts. Prior to my announcement in the 1988 Budget Statement, gains derived by a unit trust from disposal of securities could be treated either as trading income or capital gains depending on the circumstances of each case. To resolve this uncertainty, I announced in my 1988 Budget Statement, that a unit trust could elect for an alternative method of taxation whereby such gains would be taxed according to a schedule of rates based on the length of time for which the securities were held. This method was subsequently revised following representations from local unit trusts. Under the revised method, which takes effect from 1st July 1989, 10% of the gains derived by an approved unit trust from the disposal of securities shall be subject to tax at the prevailing corporate rate; distribution of the remaining 90% will not be taxable in the hands of individuals and foreign investors but be subject to tax if received by other persons; and when the gains are distributed to a taxable unit holder, the trustee has to withhold tax. The tax withheld will be available as a credit to the unit holder. Clauses 2, 4 and 8 insert new sections 10(11), 10B and 45C to provide for this.

The second tax change limits the tax exemption and deduction of contributions to CPF and other approved funds. This is to prevent the use of such funds as tax shelters. The change was first announced in my 1989 Budget Statement but was subsequently revised based on public feedback. The revised changes are as follows:

(i) contributions by both employee and employer to CPF or designated funds in respect of the first $100,000 of total annual wages shall continue to be fully tax deductible and exempt to the employee;

(ii) the deduction for an individual's contributions to approved funds, including the CPF, shall not exceed the statutory contributions under the CPF Act;

(iii) in the case of additional wages, the deduction is limited to the statutory CPF contributions from additional wages not exceeding 40% of annual ordinary wages;

(iv) where an employer's contributions to approved funds are in excess of statutory requirements under the CPF Act, or are based on additional wages in excess of 40% of the employee's annual ordinary wages, the employee shall be assessed to tax on the excess.

Clauses 4 and 7 insert a new section 10C and amend section 39 to give effect to this.

To reward effort and enterprise, I announced in my 1990 Budget Statement, a 5% across-the-board rebate on personal income tax payable for Year of Assessment 1990. Clause 10 provides for this concession.

Finally, clause 5 amends section 14(1)(e) of the Income Tax Act to raise the limit imposed on the deduction allowed in respect of an employer's contributions to an approved pension or provident fund from 15% to 16(r)%. This would enable the limit to be in line with the increase in the employer's CPF contribution rate. The change will take effect from 1st July 1990.

Sir, I beg to move.

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; reported without amendment; read a Third time and passed.