Windfall tax on bankers' bonuses

was here last weekend

Britain and France have decided to impose a windfall tax on bankers' bonuses.

Under the new one-time tax, any bank operating in Britain must pay a tax of 50% on all discretionary bonuses of more than GBP25,000 (SGD$56,500) paid between now and April 5 next year. Banks attempting 'avoidance schemes' by postponing bonuses would face further, unspecified punishments. As the bonus payouts are mostly contracted, the banks are obliged to pay. Nobel prize-winning economist Paul Krugman supports the idea.

So what could these fat cat bankers do?
Firstly, they can fly out of Europe to anywhere else such as Asia. They can then do whatever they are doing in Europe but do it in Singapore or Hong Kong instead.

Or secondly, they can stop calling themselves "bankers". The windfall tax is on bankers' bonuses and not cleaners'. Perhaps the bankers can call themselves cleaners and they get to keep their bonuses after deducting a nominal income tax. A small humiliation with full pockets.

Suggestion to IRAS

where was i?

There is a significant difference in value placed on a gardener and a household servant in the computation of taxable benefits granted to an employee.

Current laws

• For a gardener, it is $35 per month or actual wages paid by employer, whichever is lower.
• Whereas for a household servant, it is based on the actual wages paid by employer.

Refer - www.iras.gov.sg/irasHome/page03.aspx?id=3638

Perhaps the "discrepancy" could be due to:-

• the gardener's thingy has been around since the British colonial days where expatriates stayed in bungalows with gardens groomed by gardeners getting $35 salary
• the household servant is a more recent phenomenon
• or is it that gardeners are part-timers who come around once a while to touch up on your garden

Whatever it is, I am just trying to cheekily explain the "discrepancy" in IRAS' valuation of a gardener as compared to a household servant.

So can I advise expatriate employees (if there is any left) to ask their employers to hire "gardeners" who can do household chores to effectively lower your taxable employment income? :)

Your IR8A

The Inland Revenue Authority of Singapore (IRAS) encourages all employers to join the Auto-Inclusion Scheme for Employment Income. It is a scheme where employers submit their employees’ income information to IRAS electronically.

The employment income information will be shown on the employees’ electronic tax return and automatically included in their income tax assessments.

Well if things go according to plan as above, all parties involved ie. employer, employee, IRAS and the mother Earth will be all happy.

But what happen when there has been an error or omission in the employer's submission?

For any omission/error in the Form IR8A, the penalties for any tax understated are imposed on the employer for a failure to report.

However, penalties may also be separately imposed on the employee for failure to report in his personal tax return. You can't argue with IRAS that the mistake was committed by your employer.

Remember you are the person who finally submit the return!

What is your personal effective tax rate?

For those who have submitted your income tax return in April, have you received your notice of assessment yet? Can share with us your tax payable :)

In Feb 2008, Mr Sum Yee Loong of Deloitte & Touche presented the following statistics.

If you are an employee married with two children and earns a gross annual remuneration of $100,000, your effective tax is only 3.98%. The other countries cited:-
- Hong Kong 5.15%
-USA 5.35%
- Malaysia 19.26%
- China 20.84%
- India 31.88%

However, if you are an employee married with two children and earns a gross annual remuneration of $200,000, your effective tax would more than doubled to 9.13%. The other countries cited:-
- Hong Kong 11.08%
-USA 14.46%
- Malaysia 23.54%
- China 26.91%
- India 32.94%

Conclusion
While the change in effective tax rate is very high for Singapore for the two income brackets studied, Singapore still offer the lowest effective tax rates for your personal income.

What is your effective tax rate?

SRS enhancements

things people watch together

Old rule - Workers only can top up their own accounts.
New rule - From Oct 1, 2008, employers can top up the SRS accounts for their employees and enjoy tax exemptions.



So if you know that an employee of yours is going to contribute to SRS, why don't the company do it on behalf of the employee?



Old rule - Currently, members are given 10 years to withdraw their SRS savings from the retirement age of 62.
New rule - It will start only when a SRS member makes his or her first withdrawal.



Other features:-

• 50% of the amount taken out of SRS account during that 10-year period is taxable.


• Top-ups will still be capped at $11,475 for Singaporeans and PRs and; $26,775 for foreigners.

Section 94A of the Income Tax (Amendment) Act

two lonely petals

A piece of legislation, passed in Feb last year, has sharply upped the ante for filing late returns. The harsh new penalty kicks in for those who fail to file tax returns for two years or longer. There could also be a fine of up to $1,000.

The new Act has been giving sleepless nights to many, especially this fellow called Joe Ang. He felt so bad that he wrote a letter to IRAS.

"Dear Honourable Tax Officer of IRAS,

I have had many sleepless nights over the last two years for the tax owing. Please see the attached cheque of $100.

Good night.

Your humble taxpayer, Joe Ang.

P/S - If I still can't sleep, I will send the rest of the monies."

I will attribute the above adapted joke to Mr Sum Yee Loong who has kindly shared it with us during his budget review presentation on 27 Feb 2008. Cheers.

Why we should kill off "estate duty" asap?

The reasons for abolishing the estate duty are:-

1. Together with income tax, GST and estate duty, it is a triple whammy for taxpayers. You are subject to tax from the first day of work till one's last day on earth.
2. We have a lopsided exemption limit of $600,000 for movable assets against exemption up to $9mio for residential property. This lopsidedness would ensnare many middle-income households to be liable for estate duty.
3. Will the existence of the estate duty discourage wealthy retirees to settle in Singapore? Maybe. Maybe not. If the tax revenue from this source is relatively insignificant, why risk it?

Why Govt's hesitation to remove the tax?

• Allow me to speculate.
• The Govt could be due to collect some real monies from the estates of tycoon Khoo Teck Puat and ex-OUB banker Lien Ying Chow. While last year's estate duty collection maybe a "mere peanut" amount of $80mio, the coming years of rapidly aging Singapore should "help" to raise the collection figures on this front.
• Alternatively, the Govt could be too busy to dedicate resources to review this area that affect only a minority but the very rich few.

A blanket exemption for estate duty?

To minimise estate duty - invest in residential real estate given the exemption granted for value up to $9mio - was the advice given in last week's article.

This is a heavy weightage on property as an asset class. Why? To encourage home ownership? To encourage you to stay in Singapore or to discourage you from leaving? To hold up property prices? Don't think so.

Tan Peng Boon, in today's Sunday Times, suggested a blanket exemption of up to $9.6mio in term of all assets instead of the current sublimits applied on residential properties and other assets.

Perhaps this is a convenient compromise for the government to hold on to this tax for a few more years.

Balancing your accounts.

P/S Orchard Turn under construction.

1% reduction in corporate tax rate would cost $400mio a year.
1% increase in GST is expected to raise $750mio.

An 8% decline in compulsory road tax is to compensate you 50cts ERP increase in toll rate, more tolls to be operational and higher carpark charges. [I still lose. For a 2-litre car, 8% is about $120 per annum. $120 is meaningless. Btw, my car is only 1.6 litre.]

A 1.5% increase in employer's CPF is cushioned by a 2% cut in corporate tax rate and an increase in the partial exemption threshold from $100,000 to $300,000.

A 2% increase in GST is compensated by a comprehensive offset package to citizens with no change to personal income tax. [I still lose as I won't be able to get a single cent of the offset package.]

Borrowing costs other than interest

There are many other costs associated with the act of borrowing other than interest costs. Example of such costs could be professional fees, arrangement fees, statutory fees etc.

While such costs may be considered capital expenditures, these costs are currently not tax deductible.

Recent budget annoucement has indicated a willingness to reconsider this area. Look out for more details from May 2007.

Let's talk about sex in the Boardrooms!

Humans compressed over 2 streets.

"No no," my friends. I want to say, "Let's talk about TAX in the boardrooms."

Recently a student asked me some questions on how to apply GST on the transactions that she has to invoice.

Not sure where she is in her company's management hierarchy. The fact that she is asking questions should be a comforting plus to her boss. Incorrect GST application not only invite unnecessary attention from the authority but may incur financial loss in the form of fines, penalty and manhours to remedy. A 5%-mistake (and soon a 7%) will really eat into your margin. Customer goodwill may be eroded too.

The directors of a computer gaming developer startup were grilling me on the tax implications of some corporate moves that they are considering.

In the past, tax matters were considered private, too technical for the laymen - it was something the tax department or someone from the auditor's office dealt with, with the tax authorities.

What is the price of not talking about tax in the boardroom?

• Without good tax management, you will not be considered a good boy ie. a company with good corporate governance; and
• You will not have the strength & depth to venture overseas and hold yourself up to the sometimes different standards in other jurisdictions.

If you don't about tax in the boardroom, what do you guys actually talk about? [wink.. wink..]

HG Metal and its S44A balance

Background
HG Metal, a listed company in Singapore, is a stockist and manufacturer of steel products. The company has a S44A balance of approximately $1.6mio.
It also wish to conserve funds to expand its capacity to meet growing demand.

Actions taken
To meet the contradiction in shareholders' need to take advantage of the S44A balance with dividend payout against the company's wish to conserve funds for investment, the company came out with the following initiatives:-

• For the year ended 30 Sep 2006, the company has announced a special dividend of 4cts per share ie. 3.6cts (frankable) and 0.4cts (tax exempt).

A shareholder may seek a tax refund on the "frankable" portion. The refund would depend on the difference between the corporate tax rate of 20% and his personal tax rate.

• HG Metal has also simultaneously annouced a 2-for-5 rights issue @20cts. Shareholders have the option to use part or all of the special dividend to take up the rights.

Our neighbours' tax monies

China
Tax collections - SGD$745.5 billions (+21.9%)
Wow!!! So much? Who is paying all these monies?

Philippines
The VAT rate was increased from 10% to 12% in Feb 2006.
The government expects to collect SGD$10.3 billions (+21%) this year.
This is due to expanded tax base and higher VAT rate.
More roads and bridges can now be built. Pls do that.

Isetan Singapore and S44 tax credits

"Minority investors want Isetan to pay out tax credits" as per today's ST on page 29.

With $61mio tax credits, the investors are asking for only $2 dividend from a maximum $7.50 for a full advantage on the credits.

Does Isetan has the monies?
As per Jun 2006 accounts, it is reported that it has a $100mio cash in its balance sheet. Then why not pay since cashflow is not an issue?

Has the cash been earmarked for investment?
No such info presented. It is reported that the answer lies with the higher tax rate on income received in Japan as compared to Singapore.

Isetan Tokyo, which owns 61% of Isetan Singapore, would have to pay a higher tax in Japan on dividends received from Singapore.

Moral of the story

• Minority investors should not expect to receive much dividends from a company with this kind of tax complication.
• If you are investing for dividend yield, then please do your homework.

Year-end Corporate Tax Planning

Mr Kang Choon Pin and Mr Russel Aubrey of Ernst & Young presented the following list of helpful tips to achieve some tax savings as 2006 draws to an end.

1. Bring forward your plans to buy plant and machinery.
2. Make accruals for expenses incurred.
3. Make provisions for doubtful debts.
4. Review your closing stock for obsolescene and damages.
5. Take advantage of lower effective tax rate for taxable income below $100,000.

Reference - Ernst & Young, You and the Taxman, Sep/Oct 2006.

Hong Kong drops sales tax

What is proposed?
5% sales tax that would raise HKD3.8bio per annum.

Why the drop?
Politically inconvenience. Sadly it reflects very poor planning.

What is the current budget situation in HK?
1. About 1/3 of income earners pay tax. Very narrow tax base.
2. They have been living admist budget deficits.

I wonder how have they been funding their budgets year in year out.
More land sales? How much more land you can sell?
More Disneylands? Oops.. that is certainly a costly exercise.

Any alternatives?

• More "sin" taxes ie. on cigarettes and liquors. Maybe it is a good outcome afterall.
• Capital gains tax - very painful for Hong Kongers as "buying and selling" is a favourite past time activity there.
• More taxes on car - another possible good outcome of no sales tax - it would help with the smog.

I hope Hong Kongers will take action to avoid borrowing from the future generations and spend today.

GST - It is unfair to me.

Goods and Services Tax (GST) is a pay-as-you-consume tax.

So if I were to buy anything ie. anything until the day I die and buried, part of my cash is actually going to the government coffer.

Even if I were to buy from a non-GST registered retailers, he/she would charge a price that would cover the costs of its raw materials etc etc. As most of what we consumed are imported, GST is levied on these imports as they leave the ports.

All my expenses during my retirement will be funded by savings I am accumulating since I started work. These savings are derived from after-income-tax income.

Tax and tax on the same income?

Illustration
Let say my income tax bracket is 10% and GST is 7%. I assume I spend every cent of my disposable income after tax. Let's say, my annual income is $100,000.

$90,000 would be my after-income-tax income. 7% of $90,000 is $6,300.

I would have paid $16,300 in taxes for $100,000 income ie. 16.3%.

While this illustration is taking to the extreme, it serves to illustrate the importance of looking at your total tax burden over time.

I was looking forward to my retirement. But now I have to work harder as I have to protect my savings against normal inflation rate + a factor of GST.

So it now look that I will pay GST until all my funeral expenses are paid from my estate.