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Personal Income Tax Planning in Singapore
Start with an estimation of your taxable income for the year, know your effective tax rate and plan for your tax bills for the year. The purpose of this guide is to provide information about how to save your personal income tax every year (for tax residents in Singapore).
1. FOR DIRECTORS AND SHAREHOLDERS
As a Company director and shareholder, you can consider withdrawing profits from the company either through Director’s salary, Director’s fee, or dividends.
Director’s Salary
Do note that if you are a Singapore citizen or Singapore Permanent Resident, CPF contributions are required to be made on your salary on a monthly basis. The employee’s portion of the CPF contributions are allowed as relief in your personal tax return.
Director’s Fee
Director’s fees are assessed in the year that a director becomes entitled to the fees. This is regardless of when the payments are received by the director, and when the payments are accrued. Generally, there are 3 type of director’s fee
– Director fee received in accordance to the employment contract , he/she can recognise the fee in the same year
– For director’s fees that are approved in arrears (e.g. approved in 2016 after a director has rendered the requisite services for the accounting year ended 31 Dec 2015), the director is generally entitled to the director’s fees on the date the fees are voted and approved at the company’s Annual General Meeting or Extraordinary General Meeting (“AGM/ EGM”).
– For director’s fees that are approved in advance (e.g. approved in 2016 before a director has rendered the requisite services for the accounting year ending 31 Dec 2016), the director is not entitled to the director’s fees on date of AGM/ EGM. Instead, he is entitled to the director’s fees as and when he renders his services for the accounting year ending 31 Dec 2016.
Both director’s salary and director’s fee are treated as deductible expenses in the company. Therefore, you will pay lesser company income tax should you received more director’s salary and director’s fee from the company.
Dividends
Dividends received by the shareholder from a Singapore Company are tax exempt under the one-tier corporate tax system. This means shareholders will not be taxed on such dividend income. In simple terms, the dividends are distributed from the company’s profit after tax.
Question: Should I pay myself director’s salary, director’s fee, or dividend?
It depends on how much profit is made by the company. Business income is taxed at a flat corporate tax rate of 17 percent. For New start-up companies (exempted private limited) pay zero tax on the first S$100,000 of chargeable income (profit) for the first three consecutive years of assessment. A further 50 percent exemption is given on the next S$200,000 of chargeable income. From the fourth year of assessment onwards, you will still benefit from about 50 percent tax exemption on the first S$300,000 of chargeable income.
Therefore, the effective tax rate of the company for the first S$300,000 in the first 3 years of assessment is only 5.66%. From the fourth year of assessment onwards, the effective tax rate of the company for the first S$300,000 is around 8.36%.
For personal tax rate, taxes are charged progressively (0 percent – 22 percent) on your chargeable income. Income tax rates details about the tax rate.
From YA 2012 onwards, the effective tax rate of the tax resident individual for the first S$80,000 is around 4.18%. Anything above S$80,000 will be taxed from 11.5% onwards.
Therefore, how much to pay yourself is subject to the profit that company is going to make.
Illustration 1
Assuming the company has S$100,000 profit in its first year of assessment. Since this amount is exempted from tax. You will pay zero tax if you do not pay yourself any salary or director fee.
If you are paying yourself a remuneration of S$80,000, your income will be taxable at 4.18% and the company will still paying zero tax since the profit is below S$100,000 (S$100,000 – S$80,000)
Illustration 2
Assuming the company has S$300,000 profit in first year of assessment. Since there is only 50 percent exemption is given on the next S$200,000 of chargeable income, you are paying income tax at 8.5% for the S$200,000 profit generated. The tax payable amount is S$17,000.
If you are paying yourself a remuneration of S$80,000, your income will be taxable at 4.18% only which is amounting to S$3,350. The company profit will reduce by S$80,000 and the company tax payable will reduce to (S$300,000 – S$100,000 full tax exemption – S$80,000) X 8.5% = S$10,200. Total tax payable will be S$13,550.
In summary, you can save S$3,450 income tax by declaring a salary or director fee of S$80,000.
Illustration 3
To help companies cope with rising business costs, the Minister for Finance has announced in Budget 2016 that, for the Years of Assessment (YA) 2016 and 2017, companies will receive a 50% Corporate Income Tax (CIT) Rebate that is subject to a cap of S$20,000 per YA.
Assuming the company has S$300,000 profit in first year which is YA 2016. Since there is only 50 percent exemption is given on the next S$200,000 of chargeable income, you are paying income tax at 8.5% for the S$200,000 profit generated and less 50% CIT Rebate given by the government. The tax payable amount is S$8,500. The effective tax rate for the S$200,000 profit is only 2.83%.
If you are paying yourself remuneration of S$40,000, your income will be taxable at 1.375% which only amounts to S$550. The company profit will be reduced by S$40,000 and the company tax payable will be reduced to (S$300,000 – S$100,000 full tax exemption – S$40,000) X 8.5% X 50% = S$6,800. Total tax payable will be S$7,350.
We will suggest to declare a remuneration of not more than S$40,000 as the personal tax rate is 7% for the following S$40,000. The corporate tax rate in YA 2016 is lower which is only 2.83% as illustrated above.
In view of the above, you can save S$1,150 in taxes by declaring a salary or director fee of S$40,000.
You may engage our bookkeeping services and income tax services today and we can advise you on how much to declare for the salary and director fee to reduce the tax payable of your income.
Other consideration for declaring salary and director fee
You may consider other factors which may affect how much salary or director fee you should pay yourself. For example,
– Are you getting a loan in the coming future? You can get a higher loan quantum if you declared a higher personal income.
– Are you applying for credit card? You can get higher credit limit if you declared a higher personal income.
2. MAXIMISATION OF TAX DEDUCTIONS
Tax deductions reduce your taxable income. Your total deductions are subtracted from your taxable income in order to determine your total taxable income for the year. Make full use of the available tax reliefs will save you more taxes.
Below are the common tax deductions for resident individual which includes approved donations / gifts and tax reliefs.
Below are some tax deductions for resident individuals which you may not have considered previously. Please click for the complete list of tax deductions for individuals.
Employment Expenses
Employment expenses are expenses that are ‘wholly and exclusively’ incurred in the production of your employment income in Singapore. These expenses may be deducted from your employment income as long as they are allowable expenses.
The expense may be allowed when the following conditions are satisfied:
- The expense was incurred while carrying out your official duties;
- The expense was not reimbursed by your employer; and
- The expense was not capital or private in nature.
Examples of Allowable Expenses
- Entertainment expenses incurred in entertaining clients
- Subscriptions paid to professional bodies or society for professional updates, knowledge and networking
- Travelling expenses incurred on public transport, such as buses, trains, taxis
Course Fees Relief
You can claim relief of up to S$5,500 on the course fees paid in the preceding year for:
- Any course, seminar or conference you attended leading to an approved academic, professional or vocation qualification
- Any course, seminar or conference you attended that is relevant to your current employment, trade, business, profession or vocation; or
- Any course, seminar or conference that you completed which is relevant to your new employment, trade, business, profession or vocation.
You can claim the actual course fees incurred by yourself up to a maximum of $5,500 each year regardless of the number of courses, seminars or conferences you have attended.
CPF Cash Top-Up Relief
This relief is available to Singaporeans and PRs. Tax relief can be claimed for topping up your own CPF Special/Retirement Account or those of your family members to meet basic retirement needs. CPF Cash Top-up relief may be claimed up to S$14,000 (maximum S$7,000 for self and maximum S$7,000 for family members).
Supplementary Retirement Scheme (SRS) Relief
This relief is available to all Singapore tax residents. For those who are eligible, the relief amount is the actual amount of SRS contribution made by you and/or your employer in 2015.
The maximum SRS contribution for a Singaporean/Singapore permanent resident and foreigner is S$12,750 and S$29,750 respectively.
3. KEEP DOCUMENTS AND RECORDS
All supporting documents and records to your Tax Returns (e.g. course fee receipts, employment expenses) need to be kept for 5 years. For receipts or bills that are less inky, do make a photocopy. Alternatively, scan and keep the electronic copy for easy retrieval later.
The tax authority may make a request for the supporting documents in the event of a compliance review. Estimates and improper records are not acceptable.
4. GET PROFESSIONAL HELP
Consider hiring a qualified accountant and tax consultant like 3E Accounting to help you plan and prepare taxes effectively. 3E Accounting could help you to lawfully maximize deductions and reliefs that are specific to your situation which could bring significant savings in the long run.
Should you have any questions regarding Individual Tax Planning, please e-mail us at info@3ecpa.com.sg for a no-obligation consultation.
