INCOME TAX (AMENDMENT) BILL

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INCOME TAX (AMENDMENT) BILL: Order for Second Reading read.

The Acting Second Minister for Finance (Mr Raymond Lim Siang Keat): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Income Tax (Amendment) Bill 2004 comprisesfour groups of changes. The first provides for the income tax changes announced in this year's Budget Statement in February 2004. The second group comprises tax changes that form part of the Marriage and Parenthood package, announced in the Prime Minister's National Day Rally Speech in August 2004. Thirdly, the Bill includes legislation that spells out the income tax treatment of limited liability partnerships incorporated or registered in Singapore or overseas. And, finally, it covers other amendments to the Income Tax Act arising from regular reviews to improve our income tax system.

The Income Tax (Amendment) Bill was released for public consultation on two occasions this year. The first consultation was conducted in June. A second consultation, on the income tax treatment for limited liability partnerships, was held from July to August. The draft Bill has been revised to incorporate suggestions from businesses and members of the public.

Tax policy changes from 2004 Budget Statement

Let me first highlight the key tax policy changes that were announced in the 2004 Budget Statement.

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(a) Reduction of corporate tax rate

With effect from Year of Assessment 2005, the income tax rate of companies, trustees and non-resident persons will be reduced from 22% to 20%. Three other tax rates which are presently pegged to the company income tax rate are also correspondingly reduced. These are:

(i) the general rate of withholding tax;

(ii) the rate of deduction of tax from Singapore franked dividends paid on or after 1st January 2004; and

(iii) the rate of tax to be used to compute the maximum effective tax rate for a body of persons.

These changes in tax rates are reflected in the Bill under clauses 24, 32, 36, 37, 38, 40 and 41.

(b) Tax exemption for new companies

As part of Government's efforts to encourage entrepreneurship, the first $100,000 of the normal chargeable income (excluding Singapore dividends) of qualifying new companies will be fully exempt from income tax. This exemption will apply to each of the firstthree Years of Assessment of qualifying companies that fall within Year of Assessment 2005 to Year of Assessment 2009. Clause 32 of the Bill provides for this tax exemption. Where a company does not meet the qualifying conditions, it would still be eligible for partial tax exemption under the existing scheme.

(c) Reduction in rate of tax on royalties to non-residents

To facilitate the use of intellectual property in Singapore, the rate of tax on royalties to non-residents will be reduced from 15% to 10% of the gross amount. This reduced rate will apply for royalties

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that are due and payable to non-residents on or after 1st January 2005. This change is covered by clauses 29, 32, 38 and 42 of the Bill.

(d) Enhancement of Approved International Shipping Enterprise Scheme

To retain and attract international ship owners and operators to Singapore, the scope of tax exemption for a company under the Approved International Shipping Enterprise (AISE) Scheme is extended. The exemption will now cover income derived from chartering of ships to residents or permanent establishments in Singapore, as well as charter payments made to non-residents (excluding any permanent establishments in Singapore) by AISEs for the charter of any vessel used for offshore oil and gas activity. The scheme is further enhanced through an expansion of the list of qualifying ships under the scheme to include any vessel used for offshore oil or gas activity. Clauses 5, 9 and 10 provide for these changes.

( e) Tax exemption for foreign-sourced income and domestic-sourced investment income of individuals

Since 1st January 2004, all foreign-sourced income received in Singapore by resident individuals (except those received through a partnership in Singapore) has been exempted from tax. This exemption is intended to facilitate the remittance of offshore funds by resident individuals for investment and management in Singapore.

In addition, specified Singapore-sourced investment income derived on or after 1st January 2004 by individuals from financial instruments has been exempted from tax as well. This does not include investment income from financial instruments derived through a partnership in Singapore or derived as gains or profits from the carrying on of a trade, business

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or profession. The exemption for domestic-sourced investment income is granted to ensure that the tax exemption for foreign-sourced income does not bias individuals against investing in Singapore instruments. It also simplifies and aligns our tax treatment of different kinds of investment income. Clause 9 provides for these exemptions.

Marriage and parenthood tax changes

Let me now move on to the second group of tax changes covered by this Bill. These are the various tax measures in the marriage and parenthood package announced during the National Day Rally and elaborated by the Steering Group on Population.

(a) Parenthood tax rebate

First, the Parenthood Tax Rebate replaces the current Special Tax Rebate with effect from the Year of Assessment 2005. The amount of rebate given is $10,000 for the second child and $20,000 each for the third and fourth child. We have also removed the condition that the mother must be below a certain age for parents to enjoy the rebate for their second child, and the 9-year cap to use up the rebate. The Parenthood Tax Rebate will be extended to parents of adopted children. Parents with unexpired Special Tax Rebate (STR) balances in Year of Assessment 2004 will have their balances converted to the Parenthood Tax Rebates. Clause 31 provides for this change and transitional arrangements for taxpayers with unexpired STR balances.

(b) Working mother child relief

Next, the working mother child relief will replace the enhanced child relief and further tax rebate with effect from Year of Assessment 2005. The objective of this tax relief is to encourage more women to

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rejoin the workforce after having children. The amount of relief that the mother can claim is 5% of her earned income for her first child, 15% for her second child, 20% for her third child and 25% for her fourth child, capped at a maximum of $25,000 for each child inclusive of other child reliefs. We have removed the condition that the mother must have three GCE 'O' levels or equivalent qualifications to qualify for the working mother child relief, which was a condition for the enhanced child relief. Like the further tax rebate and parenthood tax rebate, the working mother child relief is only claimable by parents of Singapore citizen children. Clause 31 removes the further tax rebate and makes transitional arrangements for taxpayers with existing rebate balances, and clause 55 amends the Fifth Schedule to introduce the working mother child relief.

(c) Grandparent caregiver relief

Third, we will introduce a new grandparent caregiver relief of $3,000 from Year of Assessment 2005 to provide greater support to working mothers whose parents are helping to take care of their children, and also to recognise the important role that grandparents play in bringing up the next generation. This relief is for working mothers with children aged 12 or younger if their parent, parent-in-law, grandparent or grandparent-in-law is not carrying on any trade, business, profession, vocation or employment and is helping to take care of the children. Clause 28(i) introduces this tax relief.

(d) Removal of relief for delivery and hospitalisation expenses for fourth child

We have also removed the relief for delivery and hospitalisation expenses for the fourth child from 1st August 2004 because parents will now be able to use their Medisave for such expenses. Clause 28(b) removes this relief.

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Tax changes for limited liability partnership

Let me take this opportunity now to highlight the income tax legislation to provide for the introduction of limited liability partnerships. I shall briefly explain the two key provisions.

(a) General tax treatment of the LLP

A LLP is fundamentally viewed as a partnership notwithstanding that it has legal rights similar to that of a company. Hence, under the Income Tax Act, the partners of an LLP will generally be treated the same way as partners in general partnerships. Specifically, an LLP's profits will not be taxed at the partnership level, but instead each partner will be assessed to tax on his share of LLP profits based on his marginal tax rates. To prevent streaming of disproportionate amounts of capital allowances or losses from the LLP to set-off against a partner's non-LLP incomes, we put a cap on such claims up to the amount of his contributed capital. Any excess will be carried forward to be offset against his LLP income for the following year. Clause 25 adds a new section on the tax treatment of a limited liability partnership.

(b) Duties of liquidator

Currently, the Income Tax Act only specifies that a liquidator of a company being wound up cannot distribute any assets unless the taxes payable by the company have been provided for. With the introduction of the LLP Bill in 2005, it is necessary for the Income Tax Act to be amended to specify the duties of the liquidator with respect to the liquidation of LLPs. In addition to providing for the taxes payable, the liquidator will also be answerable for all matters required under the Income Tax Act in relation to the affairs of the LLP. Clause 44 provides for this amendment.

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Other tax policy changes

I shall now deal with other keytax policy changes which require amendments to the Income Tax Act. Our existing tax policies and incentive schemes are reviewed regularly to ensure they remain relevant. Let me highlight two major changes to our incentives and policies that came about as a result of this review process.

(a) Taxing stock options for taxpayers leaving Singapore

Currently, when taxpayers who have been granted stock options in Singapore leave Singapore, they will be subject to the "deemed exercised" rule. Under this rule, they will be taxed on the deemed gain from their unexercised or restricted Employee Stock Options (ESOPs) and unvested or restricted shares from Employee Share Ownership (ESOW) plans at the time of exit from Singapore.

The amendments to the Act, provided by clauses 5, 47 and 49 of the Bill, will now allow employers to alternatively choose to track the individuals, after their exit from Singapore, to determine the actual gains accruing to such individuals at the time they exercise their ESOPs or at the time of lifting of the restriction on shares acquired under ESOPs, or vesting or lifting of restriction on the shares under any ESOW plan. Tax would then be assessed based on the actual gains. The "deemed exercised" rule still remains as an option.

(b) Removal of combined assessment and change to wife relief

Combined assessment is currently the default mode of tax assessment for married couples. Separate assessment was only introduced as an option for married women from 1962. However, separate assessment provides more advantageous tax treatment than

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combined assessment in the overwhelming majority of cases. That being the case, clauses 11, 23, 28, 43, 45 and 53 of the Bill will amend the Act to remove combined assessment with effect from Year of Assessment 2005.

To ensure that no one will be worse off after the removal of combined assessment, the Act is also amended to allow husbands or wives to transfer to their spouses any unabsorbed capital allowances, trade losses and donations in spite of the separate assessment. Clauses 2, 7, 8, 22, 26, 27 and 28 provide for these changes.

I shall now briefly outline two key legislative changes related to improving our tax administration.

(a) Inland Revenue Interactive Network

IRAS will be replacing its information system, the Inland Revenue Integrated System (IRIS), with a new system, the Inland Revenue Interactive Network (IRIN). Through IRIN, customer service will be enhanced as electronic services, such as the furnishing of electronic notices, can now be provided to taxpayers via individualised portals. The Income Tax Act will be amended to provide electronic transactions and notices with the same legal force as paper documents. The electronic service of notices will be provided to taxpayers on an "opt in" basis. Clauses 2, 3, 4, 48 and 50 will enable IRIN e-notices to be legally enforceable when IRIN is implemented.

(b) Empower Minister to appoint Deputy Chairmen for Income Tax Board of Review

To increase the efficiency of the Income Tax Board of Review (ITBR), the Income Tax Act will be amended to:

(i) empower the Minister to appoint Deputy Chairmen to the ITBR, who may

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preside over hearing committees in the same capacity as the Chairman;

(ii)require appellants and IRAS to state reasons for objecting to members of ITBR being part of the hearing committee for specific cases;

(iii)clarify that it is the Chairman who may nominate the members to constitute the hearing committee; and

(iv) specify that the Chairman may decide on whether to allow a person to proceed with his appeal if the appeal is lodged late.

These changes are covered by clauses 51 and 52 of the Bill.

Sir, I beg to move.

Question proposed.

Dr Ahmad Mohd Magad: Mr Speaker, Sir, it is my understanding that this Bill, as clarified by the Acting Second Minister for Finance, essentially covers the tax changes which were announced and debated in the last Budget Statement debate and also in the Prime Minister's National Day Rally speech. I should not dwell into the key income tax changes as they had been dealt with in past sittings. However, Sir, there are two points with respect to the tax policy changes, which have been introduced in this Bill, which I would like to comment on and, wherever applicable, I would be seeking clarification from the Minister.

The first point concerns the changes to facilitate electronic transactions with the Inland Revenue Authority of Singapore (IRAS) and the second is about the removal of combined assessment. On the first point, I believe the move by the Ministry of Finance to expand its electronic services, which include e-services to taxpayers via individualised portals, represents a laudable effort.

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While electronic services are already provided under the IRAS system, which is the IRIS, this Bill paves the way for the introduction of a new system which enhances customer service which among others will include the provision of e-services to taxpayers via individualised portals.

I see this as a positive change as it provides taxpayers with an option to interface directly with the selected departments within IRAS and will also enable the taxpayer to access more advisory information and services than what is currently available. With this amendment, electronic notices sent to a taxpayer will have legal force if the taxpayer agrees to receive such electronic notices. Taxpayers who do not opt for these services will not be subject to the new provisions. This is fair.

In rolling out these enhanced electronic services to our taxpayers, I take it that the Ministry assumes that the majority of Singaporeans will take to the system. May I ask the Minister what is his Ministry's projection of the percentage of taxpayers expected to make use of this new system within a reasonable period of time from its roll-out? This is important because anecdotal evidence suggests that a large number of Internet-savvy users still prefer conventional methods of correspondence and are likely not to embrace this new method of dealing with the tax department feverously.The Income Tax Act currently prohibits prosecution for non-compliance of an electronic notice, unless the notice is served in person or by registered post. I believe that this will remain the case with the new change.

Sir, while I believe that the introduction of e-services is in line with best practices, I am also cognisant of the fact that we cannot force everyone to adopt these new services instantaneously.

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Inevitably, the benefits of this introduction will only be realised at a later date. With this in mind, and given the anticipated percentage of users, what would be the expected cost savings to the Ministry? Can I ask the Minister whether any part of these cost savings will be passed on to the participating public in order to entice more to use this system?

Mr Speaker, Sir, in our push to enable more transactions to become less paper-dependent and to maintain the top spot in e-governance, I hope the Ministry has plans in place to inculcate trust in taxpayers to use the system. While I believe those who shun using e-services cut across the various social strata, it is usually those in the lower income bracket that feel discouraged to venture into this new realm of possibilities because of the perceived upfront costs, lack of confidence and also probably lack of incentives. Looking ahead, it could take a generation or two before we could envision a totally paperless system by making e-services the only method of transaction. I hope the Government and the Ministry will craft out a convincing holistic plan to build trust, encourage and persuade more taxpayers to adopt e-services to be offered by IRAS.

Reverting back to my second point about the complete removal of combined assessments, while this makes sense in view of the fact that separate assessment provides a more advantageous tax treatment in comparison to joint assessment, I would like the Minister to clarify whether homemakers, ie, non-working housewives, are still required to fileseparate assessments. If so, there may still be some utility in combined assessments in such cases as it helps to reduce paper work.

Finally, Sir, there is also the introduction of a new section 36A concerning the general tax treatment of the limited liability partnership. Since

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there is also a separate Bill on this subject which is due to be read in 2005, I shall take this matter up when this Bill is discussed next year.

On that note, Sir, I support the Bill.

Mdm Halimah Yacob (Jurong): Mr Speaker, Sir, I rise in support of this Bill. This Bill has proposed many changes to the Income Tax Act but I shall be dealing primarily with a couple of amendments dealing with marriage and parenthood.

I strongly support these amendments as they are aimed at providing greater financial support for Singaporeans to raise their children. These are progressive measures and together with other initiatives already announced will help to promote a more conducive environment for couples to have children. The NTUC Women's Committee quite recently conducted a survey among 1,200 union members to seek their views on what measures would encourage them to have more children. More than half of the respondents cited cost of raising children as a key factor in their decision to have smaller families. Hence, financial incentives will help to lessen the financial burden of couples with young children.

Sir, I am particularly happy to support the amendment under clause 55 of the Bill. Clause 55 seeks to remove the enhanced child relief provision and put in its place a new working mother child relief. This relief will now be available to any married woman, divorcee or widow. The current enhanced child relief provision is discriminatory. Only women who have at least three GCE 'O' levels which they must pass at one sitting or higher educational qualifications are eligible for the enhanced child relief. This is elitist and unfair to working women with lower educational qualifications but who also contribute to our economy and our

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population growth. I am glad that the new working mother child relief does not stipulate any qualifying educational criteria. This is more equal and fairer to all working women and not only those who are educated. Whilst I agree that tax policies are useful in helping to shape social behaviours and norms, it is nevertheless important that such policies are applied fairly and consistently. Indeed, it makes little sense to use tax policies as a way of encouraging more babies among the better educated who form a smaller number when the situation that we are in requires incentives that will encourage everyone to do their part.

Sir, let me now come to my second point. Clause 28 provides for deductions for grandparent caregivers.

A working mother whose child is being cared for by his or her grandparents will get a grandparent caregiver tax relief of $3,000. This applies to working mothers of Singapore citizen children aged 12 years and below at 1st January 2004. This is a welcome development. The Government currently subsidises every childof working mothers who place their children in the childcare centre. Working mothers whose children are being cared for by their parents or their parents-in-law should not be penalised and deprived of financial incentives from the Government. The current law ignores the contributions of grandparents and gives the impression that institutional care is more superior to the care provided bygrandparents at home.

However, Sir, the present amendment, in my view, does not go far enough. By confining the deduction to only grandparents who are caregivers,it fails to take into account the role played by other caregivers in helping working mothers to take care of their children at home. There are many families where young children are looked after by aunties, cousins or other relatives. There are families with no grandparents as they

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have passed away or are overseas. There are also many more working mothers whose children are looked after by non-relatives. And some of these are under CDC-approved schemes, as grandparents are not keen to take on this responsibility because of age, illness, or other reasons.

Sir, under the preamble of the Explanatory Statement to the Bill, it is stated that the objective of the amendment is to provide incentives for marriage and parenthood. If this is the objective, and not strengthening bonds between grandchildren and grandparents, then this deduction should be extended to all situations where a child below 12 is taken care of by any relative or other caregivers. I urge the Minister to give serious consideration to this suggestion, as I believe grandparent incentive is not wide enough and does not take into account the different home-based caregiving arrangements that are practised today but which contribute equally to a working mother's decision whether or not to continue working or to have more children. The way this relief is structured, Sir, and the fact that subsidies are extended only to children placed in childcare centres create an impression that the Government policies favour institutional care of young children, instead of having them cared for at home. Our focus today, Sir, should be on flexibility and providing young mothers with options so that they can decide what is in the best interest of their children.

Sir, secondly, on the same issue, I wish to seek a clarification from the Minister on the implication of the new section 39(p). Sub-paragraph (ii) of the section provides that the deduction will be given if the grandparent caregiver was looking after any of the working mother's children. From a reading of this section, it is unclear whether this deduction will be allowed even for children who are placed in a childcare centre. In other words,if a working mother placesher childina

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childcare centre but, at the same time, her childis also taken care of by her grandparents, will the working mother still be entitled to the relief? I hope that the Ministerwill clarify this point, as it is presently unclear.

On this note, Sir, I support the Bill.

Mr Raymond Lim Siang Keat: Mr Speaker, Sir, I thank the two Members for speaking and for their support of the Bill and the suggestions that they have made. Let meaddress some of the issues that they have raised.

Dr Ahmad Magad raised issues on the electronic service system which will be introduced by IRAS. He asked how would these new electronic services be received by taxpayers. I think one way to benchmark it or have a sense of reference is to look at our e-filing of income tax by individuals. We introduced that in 1998. We had about 7% of the tax base who did e-filing or about 100,000 taxpayers. In 2004, the latest numbers that we have, it is now 68%, or about 970,000 taxpayers. So if you use that as a base andyou look at the reason, I think it is familiarity,they get used to the system, and we have also enhanced to make it more user-friendly. So if you take 68% as the number of people who are now e-filing their tax returns, we can expect a shorter time for them to adopt the other e-services that would be introduced by IRAS.

A related question which is raised by Dr Ahmad Magad was: what about those who, for social reasons, are discouraged or disadvantaged from using the e-services that we are introducing? The IRAS e-services programme is part of the overall Government's e-Government Action Plan. Anda key part of this e-Government Action Plan is the eCitizen Helper programme where we seekto reach out to such people to helpthose who do not own a computer,who do not

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understand or are notfamiliar or comfortable with using the Internet. There are 80 locations for theeCitizen Helper programme islandwide, including clubs atour community centres. IRAS itself will start upa "Surf Centre"at its premises to help taxpayers use these e-services.

Dr Magad also asked what are the benefits or cost savings in these e-services. IRAS expects to reap productivity gains of about 20% in the service functions and it will also save costs inprinting, delivery and manpower.Taxpayers would benefit by saving time and effort in filling their forms, or when they interact with IRAS in gettinginformation. The system is really a 24-by-7 system. So if you have a query, you can access it and getany information almost immediately.

Dr Magad also asked for clarification on whether a non-working spouse needs to filea tax return. The answer is "no". Only ifa person has an annual income of above $22,000 wouldhe need to file a tax return.

I turn now to some of the issuesraised by Mdm Halimah. I fully agree with the views and sentiments that she has expressed. On the specific issues that she raised, she asked what about the grandparent caregiver relief. There areother caregivers, why do we not recognise them? The Committee that looked into this issue conducted extensive consultations and feedback. And their assessment and conclusion was that for most families, the grandparents play a critical role in taking care of their grandchildren, and the recommendation then was to recognise this special role played by grandparents, in terms of inter-generational bonding. So the Government had to make a decision and the decision was to do what is practical and

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affordable. If we were to broaden this relief, it would dilute its focus. It would increase the cost of this particular reliefand at the same time, it would affect the other measures in the overall parenthood package. So we kept its focus on grandparents to make it meaningful.

Mdm Halimah also asked for clarification on whether this grandparent caregiver relief is mutually exclusive to the infant care or childcare subsidies that a mother is enjoying. The answer is "no". You can claim both. It is in addition to it. You can get the grandparent caregiver relief as well as the infant care or childcare subsidies.

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. – [Mr Raymond Lim Siang Keat].

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