INCOME TAX (AMENDMENT) BILL

Order for Second Reading read.

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

The Income Tax (Amendment) Bill 2001 seeks to give legislative effect to the income tax changes that I announced in this year's Budget Statement. I have also taken the opportunity to incorporate seven other amendments to the Income Tax Act.

Tax Changes Announced in the 2001 Budget Statement

I shall begin with the tax changes announced in the 2001 Budget Statement. They are as follows:

a) To help us maintain our tax competitiveness and lower the tax burden of businesses, a new corporate tax regime will be introduced from the Year of Assessment 2002. There are two components to this:

(i) a reduction of the corporate income tax rate by one percentage point to 24.5%; and

(ii) a tax exemption scheme for companies whereby three-quarters of up to the first $10,000 of a company's chargeable income, and one-half of up to the next $90,000 will be exempt from corporate tax.

Clauses 17, 23 and 25 to 30 amend the Act to provide for these changes.

b) To reduce the tax burden of individuals, as well as to reward individual effort and enterprise, individual income tax rates will be reduced by between two and five percentage points. Clause 31 amends the Act for this purpose.

c) Because of the good performance of the economy in 2000, I had announced a one-off, across-the-board rebate of 10% on individual income tax to share the budget surplus. Clause 32 amends the Act for this purpose.

d) To encourage businesses to make the best use of technology, a tax write-down of allowances over a 5-year period has been granted for certain capital expenditure incurred to acquire approved intellectual property rights. Clause 15 amends the Act for this purpose.

e) To encourage self-employed persons to save more for their retirement by voluntarily contributing more to their CPF accounts, I announced an increase in the tax exemption limit for CPF contributions made by the self-employed such that self-employed persons will basically receive the same tax benefits from the CPF scheme as both employer and employee combined. This is currently 36% of their income, or $25,920, whichever is lower. Clauses 12 and 19 amend the Act for this purpose.

f) To motivate employees to greater innovation and enterprise, a new tax exemption scheme for employee stock options, the Company Stock Option scheme was introduced. Clauses 10 and 11 amend the Act for this purpose.

g) To encourage greater philanthropy, donations to Institutions of a Public Character of shares that are listed on the SGX as well as unit trusts that are readily tradable in Singapore will be made tax deductible. Clause 18 amends the Act for this purpose.

Tax Changes Not Announced in the 2001 Budget Statement

I shall now move on to tax changes not announced in the

2001 Budget Statement.

Proceeds from the Disposal of Assets Held by Charities

Currently, the Government grants tax exemption on the income of a charity if it spends at least 80% of its income and donations on charitable activities in Singapore. Proceeds from the disposal of assets are, however, not subject to the 80% spending rule. To correct this anomaly, clause 11 amends the Act to ensure that all receipts, including proceeds from the disposal of assets of a charity, will be subject to the 80% spending rule with effect from 1st June 2001.

Buyback of Preference shares

This amendment will make the tax treatment for buyback of preference shares the same as the existing tax treatment for the redemption of preference shares. The company will be regarded as distributing dividends to the shareholders from whom the shares are acquired, but the shareholder will not get a tax credit attached to the payment from the company. Clauses 4 to 7 amend the relevant sections of the Act for this purpose.

Interest Income from POSBank

Following the merger of POSBank and DBS Bank, the Government had announced that tax exemption on all interest income from POSBank savings deposits will continue until 31st December 2001. Tax exemption would apply only to the first $100,000 balance of each POSBank savings account-holder from 1st January 2002 to 31st December 2004. Before the merger, interest income received from POSBank savings deposits was tax-exempt. The phasing out of tax exemption was to give DBS Bank time to restructure POSBank's assets to yield higher returns, so that it can offer POSBank depositors deposit rates that are comparable with those offered by other commercial banks. Clause 8(c) amends the relevant section of the Act for this purpose.

Third Child Maternity Leave Payment

In his National Day Rally Speech, the Prime Minister announced that Third Child Maternity leave will allow working mothers to take time off to bond with their new-born baby without suffering a loss of wages. Third Child Maternity Leave payments will be treated as earned income for tax purposes. With the implementation of the baby bonus and paid Third Child Maternity Leave, the Government has also decided that the amount of further tax rebate granted in respect of third and fourth child born on or after 1st April 2001 be subject to a cap of $20,000 and $40,000 respectively. Clauses 3(b) and 24 amend the relevant sections of the Act for this purpose.

Singapore Exchange

The Income Tax Act has been amended last year to provide for Singapore Exchange Derivatives Trading Limited, which took over the activities of the former SIMEX, to continue to enjoy tax exemption until 2003. Since October last year, certain functions of the above company had been transferred to the Singapore Exchange Derivatives Clearing Limited. Clause 8(b) amends the Act to provide for tax exemption on the prescribed income derived by the Singapore Exchange Derivatives Clearing Limited from the commencement of its business up to 31st December 2003. Additionally, the Act is amended to provide exemption of dividends paid out of those exempt income derived by the Singapore Exchange Derivatives Clearing Limited, subject to certain conditions. Clause 11 amends the relevant section of the Act for this purpose.

Annual Limits of General Provisions Made by Finance Companies

In 1999, the Government decided to temporarily suspend the annual limits of general provisions made by finance companies for a period of two years. As the two years have passed, clause 13 amends the relevant section of the Act to reinstate these annual limits.

The Supplementary Retirement Scheme (SRS)

Finally, the last change pertains to the Supplementary Retirement Scheme (SRS). This scheme encourages Singaporeans to save voluntarily over and above their CPF savings by allowing a range of tax benefits. The main tax benefits are: contributions to the SRS will be tax deductible, investment returns with the exception of dividends will accumulate tax-free, and only 50% of the withdrawals from an SRS account at retirement will be taxable. Clauses 2, 3, 7, 8(a), 14, 19 to 22 and 29 amend the Act for these purposes.

Mr Deputy Speaker, Sir, I commend the Bill to the House.

Sir, I beg to move.

Question proposed.

Mr Leong Horn Kee: Mr Deputy Speaker, Sir, I would like to speak in support of this Income Tax (Amendment) Bill. The Bill seeks to implement the numerous income tax changes announced by the Government for the FY2001 Budget. As most of these tax changes have been well debated in this House, I shall not delve into them. However, the Bill also covers a new issue, which is the introduction of the Supplementary Retirement Scheme (SRS). As this SRS has not been fully debated in Parliament, I feel that it is worthwhile to raise certain issues concerning the SRS so that we can have a full debate on this matter.

Matching Contribution from Employers

Mr Deputy Speaker, Sir, my first point concerning the SRS is that, overall, the objectives of the proposed SRS are commendable. Essentially, the SRS is meant to encourage Singaporeans and residents to voluntarily contribute to their own retirement fund, over and above the mandatory CPF contributions.

However, one negative impression of the SRS is that it appears to cater to and is more favourable as a tax incentive to the higher income group. As we all know, about 70% of the lower income group of the population do not pay income tax. For the lower income group, the tax savings in absolute terms are smaller and less meaningful, compared to the higher income group. But it is the lower income group that needs to save for their retirement.

One way to assist the lower income group and encourage them to contribute more actively to the SRS is to allow for matching contribution, also on a voluntary basis, from the employers. The employers' matching contribution can be up to a limit of 1:1 basis, but it need not be set as a fixed matching quantum since it is meant as a voluntary contribution from employers. For example, the matching contribution can be just on a 1:2 basis, or at such a rate or proportion as the employers feel appropriate.

Sir, I understand that the employers' matching formula is one of the reasons for the success of the equivalent SRS scheme in the US. Equal Contribution Limits for Both Locals and Foreigners

At present, the scheme allows the contribution of Singaporeans and permanent residents of up to 15% of their annual income or $10,800. For foreigners, the limit is higher, at 35% of their annual income or $25,200. Sir, I find this discrepancy in the contribution rates rather strange. In fact, I find it very hard to understand. If the intention of the Government is to encourage Singaporeans and PRs to save more for their old age, then we should allow them a higher limit. In contrast, the foreigners do not need to remain in Singapore and, therefore, there is no reason for us to be concerned about their retirement funding needs. Moreover, a higher limit for foreigners means that they enjoy more tax benefits. To be consistent, I would like to ask the Minister to consider whether the contribution limit for Singaporeans and PRs can be increased to the same level as for foreigners.

Increase of Tax Exempt Limit to 100%

Currently, the proposal is to limit the tax-exempt portion of SRS withdrawal to only 50%. Again, I find this ruling rather strange. If the Government is sincere and truly wants Singaporeans and PRs to save more for their old age, then it would well be beneficial for the Government to allow 100% of their SRS withdrawals to enjoy tax-exempt status. This is the same tax-exempt basis for normal CPF contributions. So why not be more generous? Why be so stingy? Why not allow SRS contributions to enjoy a full 100% tax exemption upon withdrawal? If Singaporeans and PRs can voluntarily save for their old age, then they will become less of a burden to the state. Although I do not know how much tax will be lost if we give 100% tax-exempt benefit, I firmly believe that it is worthwhile to give such a benefit for Singaporeans and PRs.

Extension of the 62-Year-Old Age Limit

Sir, at present, the scheme restricts the contributor to an age limit of 62 years. Many older Singaporeans have enquired as to why there is an age limit of 62 years. Why discriminate against them? If Singaporeans and PRs are prepared on their own to contribute to their SRS beyond 62 years old, they should be encouraged to do so. However, I understand that the Minister and his Ministry are concerned with the risk of round-tripping, meaning that a contributor pays money into his SRS and then withdraws money immediately at the same time, with tax benefits.

Sir, we can contain this problem by setting a moratorium of, say, five years on all new SRS contributions after age 62. This way, the 5-year moratorium will ensure that older workers can save for their old age and overcome the problem of round-tripping, as they can only withdraw their money five years later.

Finally, I wish to reiterate that I find the SRS scheme meaningful. I am in full support of the scheme. However, as can be seen from the points that I have raised above, I just wish that the Government can be more generous in the benefits and conditions for the SRS scheme, so that more Singaporeans and PRs can be encouraged to participate voluntarily.

Dr Richard Hu Tsu Tau: Mr Leong has made several proposals for changes to the SRS scheme and I will respond to them in turn.

First, he says that the structure of the SRS scheme seems to favour the higher income persons. I would like to assure him that this is not so. I think Mr Leong misunderstands the intent of the SRS scheme. Let me explain.

To begin with, I have to stress that SRS is a supplementary savings scheme and not an enhancement of the basic CPF scheme. The CPF is the primary scheme for retirement savings. At the long-term CPF contribution rate of 40%, a typical Singaporean's CPF savings provide individuals with a reasonable monthly retirement income in addition to a fully paid-up home of his own, all paid from CPF savings plus additional monies for his medical needs. However, the contributions towards CPF are capped at a salary of $6,000 a month. This means that earnings beyond this amount will not enjoy tax-free status for savings under the basic CPF scheme. Thus, the SRS scheme has been set up to allow those who wish to increase their retirement savings beyond what is allowed under the CPF scheme to do so. The SRS will allow them to supplement their CPF savings, but on a tax-deferrable and not a tax-exempt basis.

Mr Leong also suggests that employers should be allowed to contribute to the SRS. I do not think this will be a wise proposal. Singapore already has an employee and employer scheme in the CPF, totalling 40%. Allowing employers to make contributions to SRS would put further pressure on them to contribute beyond 20% and thus raise their business cost. SRS is structured as a voluntary scheme and any individual can choose to place part of his earned income in SRS up to the prescribed cap. There is, therefore, no need for Government to dictate or encourage employers to pay part of the wages in the form of SRS contributions.

Mr Leong is also concerned that the higher contribution cap allowed for foreigners in the SRS would be seen as discriminatory against Singaporeans. He suggests that the same cap be applied to both Singaporeans and foreigners alike. I would point out that it is not true that Singaporeans are treated less favourably. Foreigners are allowed a higher percentage cap on their SRS contributions because they are not permitted to participate in the CPF scheme and therefore do not enjoy the tax benefits of the CPF contributions. Singaporeans and PRs who contribute towards both CPF and SRS will, in fact, enjoy tax reliefs of up to 51% of their gross income, subject to a cap of $6,000 per month. This is, therefore, more favourable than the 35% SRS tax relief, subject to the same cap, enjoyed by foreigners.

One of the reasons why foreigners are allowed to participate in the SRS scheme was because when the CPF scheme was removed from them, there was concern that the lack of a retirement scheme might discourage foreign talents from working in Singapore. The SRS was introduced to offset that change. Mr Leong also suggests that Government should be more generous and allow SRS withdrawals to be fully tax-exempt, instead of enjoying the tax benefit of about 50%. I believe that our SRS provisions are already very generous.

Firstly, we have allowed tax relief to SRS contributions. We also allow investment income, except for dividends, to accumulate tax-free and subject only 50% of the savings withdrawn from SRS to tax, even though in the normal tax deferral scheme, usually the entire sum withdrawn is fully taxed. The 50% tax concession on withdrawals is, therefore, very attractive considering that a retiree's tax rate is likely to be lower than his normal terminal salary due to a reduction in his income after retirement. A retiree also has the option to spread out his withdrawals over 10 years after retirement to further lower his tax liability. Allowing SRS withdrawals to be fully tax-exempt would make the SRS scheme a completely tax-exempt scheme like the CPF scheme. This would be too generous. If it is allowed, the Government would indeed be seen to be favouring higher income persons.

Mr Leong believes that the age limit of 62 should not be imposed on participation in SRS. He suggests that the age cap be lifted. The Government, in deciding the age limit for participation in SRS, had to weigh the desire of those who want to withdraw their SRS savings as early as possible, with the accompanying tax benefits, against those who want to contribute to the SRS for as long as they wish. A fair solution is, therefore, to peg the age limit to the prevailing statutory retirement age currently at 62. This means that beyond 62, the SRS account will be closed to contributions but the SRS savings will be freely withdrawable without penalty and would enjoy a concession of being taxed only on 50% of the sum withdrawn.

I do not think the moratorium proposal as suggested by Mr Leong would be a satisfactory solution. The date on which SRS participants can start withdrawing their savings is also the date the new contributions would stop. Otherwise, as Mr Leong has noted, the possibility of round tripping could arise. I would like to point out that the age limit for participation in the SRS would rise over time along with any rise in the statutory retirement age in the future.

Finally, I would like to thank Mr Leong again for his comments and ideas. But as SRS has just been introduced, we will monitor its progress and if improvements are warranted they would be introduced when appropriate.

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.