Revaluation surplus and tax issues with Yeo Hiap Seng

What is the issue?
Yeo Hiap Seng (YHS) said the revaluation surpluses ($215.3mio) accumulated for several pieces of land it owned are not taxable gain and has not made any tax provision.

PricewaterhourseCoopers, its auditors, has signed off on the accounts for the year ended Dec 31, 2006 while highlighting the "discrepancy" in the audit report.

The Inland Revenue authority (IRAS) has, expressed its disagreement with that position. It is currently reviewing the information submitted by YHS.

Further Explanation
YHS has chosen to make no provisions for tax liability on revaluation surpluses of $128.8 million and $86.5 million, on its tax counsel's advice that they are capital accretion.

The Sterling / Gardenvista - condominium developments
Prior to obtaining the developer's licence in Apr 1997, I presume that YHS would be saying that it was holding the land as long term investment or for its own use given F&B as its main business.

Only after Apr 1997, YHS, with the developer's licence, is now officially in the property development business.

Thus any appreciation in the value of the lands it was holding prior to that date would go to Revaluation Reserve account. Thus YHS's position that $215.3mio revaluation surplus is deemed not taxable.

In 2004, however, the IRAS said some revaluation surpluses may not be considered capital accretion. In Feb 2006, IRAS repeated that part of YHS's $128.8 million surplus would not be considered capital accretion. It asked YHS for more information so that it could update its assessments. YHS made submissions to IRAS on June 9.

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.

Loss Carry Back System

What was then?
Companies can either carry forward their unutilised capital allowances (CAs) and trade losses to offset future incomes (i.e. loss carry-forward) or transfer these unutilised CAs and trade losses to offset profit in related companies as part of group relief.

What was wrong?
These schemes may not provide adequate or timely support to smaller businesses that run into cash flow problems, particularly during a cyclical downturn.

What is the solution?
Starting YA 2006, a one-year carry-back of current year unutilised CAs and trade losses will be introduced.

The main features of the scheme are:

a) Only current year unutilised CAs and trade losses will be allowed to be carried back for one YA immediately preceding the YA in which the CAs were granted or the trade losses incurred.

b) Up to $100,000 of current year unutilised CAs and trade losses can be carried back.

c) The carry-back system will be available to all businesses, including sole proprietors and partnerships.

d) The current requirements for carry-forward of unutilised CAs and trade losses will similarly apply when these amounts are carried back i.e. no substantial change in shareholding and nature of business.

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.

Till death do your money part as taxes?

Insurance proceeds, as you probably know, are NOT automatically exempt from death duty.

While there is an exemption threshold for residential property of up to $9 million, any payouts from mortgage protection plans taken up on the properties will be taxed should the mortgagor or borrower and policy owner die.

I didn't know that until I read today's BT on "Of Death and Taxes".

I bought the standard MDTA ie. mortgage decreasing term assurance to cover my property loan exposure. The plan's death benefit would go to pay down any outstanding home loan. But didn't know it would be taxable.

So what are the possible solutions?
All the solutions except for (d) essentially try to play with this specific rule:-

"The exemption threshold for financial assets is $600,000.
Insurance policies structured as trust policies under Section 73 of the Convenyancing and Law of Property Act are automatically exempt BUT each policy will be subject to the $600,000 threshold."

Briefly they are:-
a) Enter into a "cross life" arrangement ie. you buy for me and I buy for you.
b) Assign the policy to the mortgagee bank.
c) Take a joint life policy.
d) Set up a trust. (Not advisable.)

So much for now.

QAF and S44A

P/S - Singapore River on Sunday last.

QAF, the company best known for Gardenia bread, told its shareholders that they will receive 973 PSC shares and 284 Zhongguo Jilong shares as dividends for every 1,000 QAF shares held.

Advantages to shareholders
- Allow them to seek tax credits if the corporate tax is higher than personal income tax rate.
- Shareholders have the flexibility to sell the new shares received for cash.

Advantages to QAF
- goodwill with its shareholders
- no impact on its cashflow

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.

Incentives for Overseas Investment

Why the need for Singapore companies to invest overseas?
In a very simple manner, to make more monies from a bigger market size.

There was a rallying call from the government under Goh's administration for Singapore companies to go overseas. I was working for one such company who took up that challenge.

We were overcame by lack of attitude preparation to operate in a foreign market and finally succumbed to the financial crisis in the late 1990s.

Recently, Mr David Sandison in his article in BT's "Tax alone cannot solve everything" raised the issue on overseas investment again. He said Singaporeans still need a push to get them out and about in the world, to take their businesses across borders and leave a footprint in the global sands.

Currently, incentives to venture abroad are virtually non-existent, and even less used, as they reward only failure through deductions for losses.

The interpretation of our tax schemes may be harsh. They were crafted to anticipate losses from early days of any investment.

Perhaps it is timely now to heed Mr Sandison's call to change the approach.

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.

Happy New Year :)

2
0
0
7% GST

I just want to be the first to pen this down :)

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.

Merry Christmas!

Merry Christmas to you!

I think it will be an interesting year in 2007 for tax!

Section 44A balances

P/s - Pic of a very majestic bldg to be converted into serviced apartments.

The one-tier corporate tax system will be fully implemented on Jan 1, 2008.

Under the "old two-tier" system, individual shareholders receiving section 44 dividends can claim a refund in part or all of the corporate tax paid.

Example
Under the "old" system, company pays $80 dividend nett of corporate tax rate of 20%. The gross dividend would be $100. $20 has been paid by the company to IRAS. The $20 is placed in the Section 44 account.

Let us assume the individual shareholder's personal income tax rate is 10%. $10 (ie. $100 x 10%) would be taken out of IRAS's Section 44 account as credit against the tax payable by that individual.

What is the difference?
Under the one-tier system, the $80 received by the individual would be treated as exempt income. No adjustment of $10 would be given. Effectively, the individual pays a tax rate of 20% for that income.

What to do?
Companies, with accumulated profits which qualify for Section 44 credits and have the liquidity to pay dividends, may consider paying dividends before end of 2007.

So think about it.

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.

GST in your F&B bill

Dear friends,

When you makan at a restaurant, the restaurant will almost definitely hit you with a 10% service charge on actual F&B that you consumed.

Let us take a simple example.

2 steaks @$25 $50.00
A bottle of Cardonnay $40.00

subtotal (1) $90.00
10% service charge $9.00
subtotal (2) $99.00

How much is the GST payable?
Answer - 5% of ($90.00 + $9.00) = $4.95

Mrs Lee, Director of Corporate Communications, IRAS said GST is applied on the final value of goods or services (including any indirect taxes/duties) consumed in Singapore.

P/S - For those who have gone to a movie recently - can share how they calculate GST for your movie ticket?

Reference - Straits Times - Inbox - page 45, Nov 19, 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.