Introduction

Understanding local tax codes is essential to running a business in any country. With proper understanding, SMEs in Singapore may be eligible for tax deductions or tax incentives. To fully understand the law and practice of Singapore income tax, SMEs must refer to the policy of the governing body. Implementation of Singapore tax law is handled by the local tax governing authority, the Inland Revenue Authority of Singapore (IRAS). IRAS collects corporate tax at a fixed rate from businesses. Lower rates may be applicable for certain companies.

Content:

1. The Basic Tax Framework in Singapore
2. Common Tax Deductions and Tax Incentives
3. Record-Keeping Requirements
4. Avoiding Common Tax Pitfalls
5. Hiring Professionals vs. DIY Accounting

IRAS defines a company as a ‘business entity incorporated or registered under the Companies Act 1967 or any law in force in Singapore.’ Sole-proprietorships or partnership businesses are not considered companies.

Complying with the Singapore tax law is mandatory. Navigating Singapore’s local tax code is more complex for small businesses should they wish to be considered qualified for tax deductions.

Small business owners must determine if their business is legally eligible for these tax exemptions. It ensures they adhere to the tax code and prevents them from unintentionally abusing the tax exemption system.

This article explains the tax framework and exemptions for small businesses in Singapore. It elaborates on record-keeping requirements and provides tips to avoid common tax pitfalls. Lastly, it assesses the pros and cons of DIY and outsourced accounting.

The Basic Tax Framework in Singapore

As the governing tax authority in Singapore, IRAS collects income, corporate, property, and goods and services tax. It also collects betting levies and stamp duties. 

Singapore’s current corporate tax rate is 17% of a company’s chargeable income. This flat rate applies to both local and foreign companies. Chargeable income refers to the taxable income obtained after deducting tax-allowable expenses.

Local businesses are taxed based on income earned in the previous financial year, i.e., income earned in 2022 will be taxed in 2023. 2023 is the Year of Assessment (YA). To determine the tax amount, IRAS assesses your company’s income and expenses in the basis period or financial year. The basis period is the 12 months before the YA.

The deadline for corporate tax filing for YA 2023 is 30 November 2023.

Common Tax Deductions and Tax Incentives

IRAS grants tax deductions for business expenses. Business expenses refer to costs ‘wholly and exclusively incurred in the production of income.’ 

Capital allowances, which are claimable deductions for the ‘wear and tear’ of fixed assets, may be granted by IRAS. IRAS does not allow tax deductions for depreciation.

IRAS grants two main types of corporate tax exemptions to incentivise small businesses in Singapore.

1) Tax Exemption Scheme for New Startup Companies

IRAS revised the 2005 tax exemption scheme for local startups in the Year of Assessment (YA) 2020 to help grow local enterprises. It grants tax exemption to new startups in the first three years of assessment since their year of incorporation.

Small local businesses must fulfil the qualifying conditions to be eligible for tax exemption:

• Incorporated in Singapore
• Tax resident in Singapore for that YA, i.e., their business must be controlled and managed in Singapore for that YA.
• At most, 20 shareholders hold its total share capital. All shareholders must be individuals, or at least one shareholder must be an individual holding at least 10% of shares in the company.

This scheme is not available for: 

• Companies with a principal activity in investment holdings.
• Companies involved in property development for sale, investment, or both.

2) Partial Tax Exemption Scheme

IRAS revised local startups’ partial tax exemption scheme in the Year of Assessment (YA) 2020. All companies are eligible for the partial tax exemption scheme unless they claim tax exemption for new local startups.

Record-Keeping Requirements

To make tax filing easier, small businesses should maintain proper financial records. IRAS mandates that companies retain ‘source documents, accounting records and schedules, bank statements and any other records of business transactions’ for at least five years from the YA.

Businesses must keep the following source documents and accounting records:

• Income records
• Business expense records
• Purchase records
• Other records for GST purposes
• Accounting records and schedules
• Bank statements

IRAS will take action against companies who fail to comply with record-keeping requirements. Non-compliance is an offence under the Income Tax Act 1947 and Goods and Services Tax Act 1993. 

IRAS may:

• Estimate revenue earned with the best judgement
• Disallow expense claims, capital allowances, or GST claims
• Impose penalties of up to $ 5,000/- or imprisonment of up to 6 months

Avoiding Common Tax Pitfalls

1) Late Filing

Keep up to date with filing deadlines for every YA. You can check the filing deadline on the IRAS website.

2) Incorrect Claims

Educate yourself on the allowable claims, exemptions, deductions, and capital allowances for your small business. Ensure your business meets all the requirements for eligibility. You may examine the criteria in greater detail on the IRAS website.

3) Under-Reporting

Whether intentional or unintentional, errors, omissions, and discrepancies in tax returns are a chargeable offense under the Income Tax 1947. Conduct regular audits and reviews to ensure financial records accurately reflect the company’s financial transactions. Accounting software helps reduce errors in recording and calculating financial data.

4) Not Keeping Proper Records

As mentioned earlier, failure to comply with record-keeping requirements costs time and effort and is also an offense. Hire professional accounting services or use reputable accounting software to avoid this mistake. These help you retain digital copies of your financial documents for easy access.

Hiring Professionals vs. DIY Accounting

Should you hire professional accountants or DIY your accounting? We weigh in on the pros and cons of both options.

Hiring Professionals

Pros

• Professional knowledge of tax deductions and accounting best practices.
• Experienced professionals can tailor solutions for your business requirements.
• Expert understanding of accounting software.

Cons

• Incur costs of hiring professionals. 

DIY Accounting

Pros

• Save costs.

Cons

• Higher risk of human error.
• Lack of knowledge about tax deductions and accounting best practices.
• Unable to use accounting software effectively.

Conclusion

Small businesses must comply with Singapore tax laws and understand the tax code effectively. Doing so reduces the time, costs, and effort spent filing tax returns yearly. 

CorrectCounts Accounting Services provides various accounting services for payroll, bookkeeping, and auditing in SMEs. We use our expertise and experience to help your business maximise tax deductions and comply with Singapore tax laws. 

Contact us to find out how we can help you!