INCOME TAX (AMENDMENT) BILL

Order for Second Reading read. 3.19 pm

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 1995 gives legislative effect to income tax changes announced in the 1995 Budget Statement, and other changes not announced in that Statement.

I shall begin with the tax changes that were announced in the 1995 Budget Statement. First, on changes pertaining to foreign income received in Singapore.

At present, a Singapore company does not have to pay Singapore tax on foreign income received if tax exemption has been granted or if the foreign tax credit is equal to or more than the Singapore tax payable. Such income received by shareholders of the company is also tax-exempt provided they hold at least 50% stake in the company. However, this is currently limited to two levels of shareholding. I have announced that such foreign income would be exempt beyond the two levels of shareholding if the 50% shareholding requirement is satisfied. In addition, I have also announced that the 50% shareholding requirement may be waived on a case-by-case basis. Clauses 7 and 8 amend sections 13 and 13E to provide for these changes.

Currently, Singapore companies deriving foreign dividend income from countries whose tax rates are comparable to or higher than Singapore's do not have to pay Singapore tax on such income provided they own at least 25% of the company paying the dividends. As there are cases of large multi-party ventures where the Singapore holding company may have less than 25% shareholding, I have announced that the 25% requirement would be waived on a case-by-case basis. Clause 25 amends section 50A to enable the Minister to waive this requirement for deserving cases.

To further encourage companies to invest and expand into the region, I have announced that approved expenses incurred by companies to promote master franchising and master licensing activities overseas would be granted double tax deduction. Clauses 10 and 11 amend sections 14B and 14C to provide for this tax change.

A tax incentive was also introduced to foster the development of the domestic unit trust industry. With this incentive, all income except Singapore dividends received by approved unit trusts will no longer be taxed at the level of the unit trust. The tax treatment of distributions made out of unit trust income will depend on the type of income and the tax status of the recipients. Clauses 3, 4, 12, 18 and 23 amend various sections of the Act to provide for this incentive.

Another tax incentive announced was to encourage offshore aircraft leasing activities. At present, aircraft leasing companies which operate from Singapore enjoy a 10% concessionary rate of tax on income derived from offshore aircraft leasing. To complement this concessionary tax treatment, I have announced that approved aircraft leasing companies would also be allowed the flexibility to depreciate their aircraft over 20 years instead of the normal five years. Clause 16 amends section 19(2) for this purpose.

Members may recall that I have announced in an earlier Budget to allow general provisions made by banks and merchant banks to cushion themselves against unforeseen losses in their loan and investment portfolios to be tax deductible. The limit allowed for deduction is either 25% of qualifying profits or one quarter percent of qualifying assets, whichever is lower. In addition, the total amount of general provisions eligible for tax deduction is limited to 2% of qualifying assets. To encourage banks to set aside a greater proportion of their profits as general provisions, I have decided to increase the limit for deduction from one quarter percent to half percent of qualifying assets. Clause 13 amends section 141 for this extension of the incentive.

I have announced the increase in the limit for tax deduction for CPF contributions, inclusive of compulsory Medisave contributions, by self-employed persons. The present limit for such deductions is 18.5% of assessable income from self-employment, subject to a maximum of $13,320. The limit will be increased to 20% of the assessable income from self-employment, subject to a maximum of $14,400 with effect from the Year of Assessment 1996. Clause 19 amends section 39 to effect the change.

Following the good performance of the economy last year, I have also announced a one-off 10% rebate on personal income tax payable for the Year of Assessment 1995. Clause 28 provides for this rebate.

I shall now deal with the tax changes not announced in the 1995 Budget Statement.

Several of these changes are needed to streamline and improve tax administration.

Members may be aware that, at present, employers are required to prepare and deliver a return in the prescribed form to the Comptroller of Income Tax. The Act, however, does not explicitly require employers to send a copy of this form to their employees as well, though it is required by the employees in declaring their annual employment income in their income tax returns. Clause 27 thus amends section 68(2) to make it clear that such returns are to be made to the Comptroller of Income Tax as well as to any persons specified by him through a Gazette notification.

Another change pertains to the collection of tax arrears from taxpayers. At present, the Act empowers the Comptroller of Income Tax to appoint any person as an agent of the taxpayer concerned. Such an agent is then required to pay any tax due by the taxpayer from the taxpayer's monies held in the agent's custody. However, in the event that the taxpayer holds monies in a joint bank account or has proceeds from the sale of a property to which he has a share, the Comptroller is unable to garnish from such joint-interest. This is a tax loophole which should be closed. I have thus decided to amend the Act to empower the Comptroller to garnish from such joint-interests. Clause 26 thus amends section 57 for this purpose.

Members may be aware that it is provided in the Goods and Services Tax Act that if the supply of goods and services is for a consideration in money, the consideration received by the traders should be inclusive of the GST chargeable. However, there are some traders who, contrary to the GST Act, treated the price paid by customers as exclusive of GST and have claimed that the so-called "absorbed" GST as an expense to be deducted from their profits. To discourage such practices, clause 15 amends section 15(1) to disallow such "absorbed" GST to be deducted as an expense.

I will now turn to the three amendments that are needed to fine-tune the provisions of our existing tax incentive schemes.

The first relates to our tax incentive for shipping companies. Currently, any balancing charge arising from the sale of a vessel operated under certain tax incentive schemes will not be deemed to be income chargeable to tax. This tax concession can, however, be exploited by companies who time their entry into the schemes with the sale of their vessels in order to derive this tax-free benefit. To plug this tax loophole, clause 3 amends section 10(4) to provide that only a portion of the balancing charge arising from the sale of such vessels will not be deemed to be income chargeable to tax.

The second concerns our tax concession for insurance companies. Insurance companies are taxed at a concessionary tax rate of 10% in respect of profits derived from the offshore business. At present, this tax concession is granted automatically to all insurance companies which carry out offshore insurance activities. However, under certain circumstances, some insurance companies may not wish to enjoy the tax concession. Clause 20 thus amends section 43C to allow the Minister to grant the tax concession on an approval basis.

The third tax change relates to the art and antique market. To attract offshore activities to Singapore and facilitate Singapore's development into an international art and antique market, I had announced in the 1993 Budget a 10% concessionary tax rate for income derived by approved art and antique dealers from transactions on behalf of non-residents through approved auction houses. To further promote the art and antique market, I have decided to lift the condition that such activities must be carried out through approved auction houses. Clause 21 amends section 43L for this change.

The next two amendments pertain to the taxation of individuals.

To encourage private sector employers to follow the Government's lead in providing employees with additional Medisave contributions in lieu of hospitalisation benefits, I have decided to allow employers tax deduction for similar Medisave contribution made on behalf of their employees. The employees will also be exempt from tax on such Medisave contributions made by their employers. Clauses 5 and 9 amend sections 10C and 14 for these tax changes.

At present, private sector employees and directors of companies are taxed on non-monetary benefits like car allowances received while similar benefits received by the Chairman and members of statutory boards are not taxed. To be consistent, clause 2 amends section 2 to subject non-monetary benefits provided to Chairman and members of statutory boards to tax.

Finally, the last three amendments are needed to clarify certain tax treatment under the Act.

Firstly, clause 3 amends section 10 of the Act to clarify the meaning of "income received in Singapore from outside Singapore". The amendment makes clear the circumstances under which foreign-sourced income falls within the meaning of "received in Singapore". This gives certainty and will assist taxpayers in complying with the law. At the same time, this amendment also ensures that arrangements to circumvent the intention of the law are prevented.

Secondly, clause 6 inserts a new section 10E to the Act to clarify the circumstances under which expenses incurred by a company carrying on the business of holding investment are deductible under the Act.

Finally, an amendment relating to tax exemption for charities. At present, the income of a charity is exempt from tax if at least 80% of its income is applied to charitable objects in Singapore in any Year of Assessment. To be clear that the proviso includes donations, clause 7 amends section 13 of the Act to direct charities to apply 80% of their donations and income to charitable objects in Singapore in order to qualify for the tax exemption on their total income.

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.