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Tax Planning for Investment Property in Singapore

Tax Planning for Investment Property is important in Singapore. 80 percent of Singapore’s population will live within a 10-minute walk of an MRT station by 2030. Two new MRT lines were unveiled today – the Cross Island Line (CRL) and the Jurong Region Line (JRL) – in addition to the extension of three existing lines that will increase the rail network stretch to 360 km, compared to the current 178 km.

PropertyGuru’s Senior Editor Romesh Navaratnarajah expects property prices within walking distance of the two new lines to rise, especially in areas that are underserved by transport links.

You may be considering whether to realise your dream of investing in a second property in Singapore. In making that decision, you have probably considered factors such as your financial ability, timing of purchase etc. However, are you aware of the potential tax implications that may be relevant to you?

Do i have to register for gst for sales of property?

You have to be registered for GST if your taxable supplies exceed S$1 million in the previous 12 months. If you are currently making taxable supplies and expect to make taxable supplies exceeding S$1 million in the next 12 months, you are also required to register.

The sale of a residential property is an exempt supply. If you are not required to register for GST, and you are selling a residential property, you do not need to register even if the price exceeds $1 million.

The sale of a non-residential property (commercial property) is a taxable supply. If you are not registered for GST, you may have to register for GST as a result of the sale, if you are in the business of selling properties.

The business need not be one that is registered with ACRA. Records of your past purchases and sales of properties (both residential and non-residential) can be used to determine whether you are involved in the business of selling properties.

The following are some factors that should be considered in order to determine whether you are in the business of selling properties:
– Holding period (i.e. the interval between the acquisition and the sale of the property);
– Reasons for acquiring and selling the property;
– Number and frequency of property sales;
– Financial capabilities and financing method;
– Nature of your business;
– Your experience and expertise in property related fields.

The above factors are not exhaustive. If you are in doubt, please submit details of the property transaction (including information on the above factors) to seek a Ruling from the Comptroller of GST.

Generally, when you enter into a contract to sell a non-residential property which is your business asset, you will expect to make taxable supplies of the property within next 12 months. Hence, you have to include the selling price of the property in the computation of your taxable supplies. If the selling price and the value of any other taxable supplies derived from other business activities that you will be making in the 12-month period are expected to exceed $1 million, you have to register for GST.

You have to apply for registration within 30 days from the date you firm up the supplies. For sale and lease of properties, the date of contract is the date when you firm up your supplies.

You do not have to register for GST if you are disposing of a capital asset of your business. The value of the capital asset should not be taken into the computation of taxable supplies in determining your liability to register.

GST on Commercial Property

Commercial property is subjected to GST in Singapore.

You can setup a Singapore Company to purchase the commercial property and claim back the GST from IRAS. Once the company is GST-registered, monthly rental income and the sales proceeds of the property will subject to GST as well.

In order to claim back the GST, you will need to register the company as GST-Voluntary before the commercial property be rented out or sold off.

Kindly take note the GST registration will be approved if one of the following criteria is fulfilled:
1) First taxable rental income will be made within two years’ time, or
2) The property is to be actively marketed and will be ready for sale once a buyer is found (purchase the property with intention of trading), or
3) The company is generating other types of taxable income (like service income or trading income)

Kindly take note that the GST on commercial property can normally be claimed and refunded when the first taxable income of the property is certain — when the rental agreement or sales and purchase agreement is signed.

We are highly recommend not to register GST with the option 2 as your gain on disposal of the investment property will have high chances be subject to income tax when you sold it.

Generally, it is compulsory for businesses to come forward to register for GST when their turnover exceeds $1mil per year. Businesses that do not exceed $1mil in turnover may register for GST voluntarily.

The steps for registration GST is as follows
– Setup of company and open bank account
– Exercise the Option to purchase under Company name
– Submit documents to IRAS for GST registration
– The approval will be granted in 2 weeks time in general
– You can submit your GST claim in your first GST return

It is advisable all payments related to purchase of property to be made by Company bank account.

Taxable rental income

Your investment property and any rental income you derive will be subject to income tax.

In computing the amount of net rental income that is subject to tax, you may claim deduction for expenses incurred such as property tax, mortgage interest expense, fire insurance, repairs and maintenance etc.

However, certain expenses such as those described below are not tax deductible because they are capital in nature:
– Stamp duty and legal fees incurred for the purchase of investments
– Cost of new assets such as refrigerator, air-conditioner, washing machine, furniture and fittings for the investment property. However, replacement cost for fixed assets are deductible expenses.
– Interest expense incurred to acquire shares that did not yield dividends
– Commission, advertising, legal costs incurred to secure the first tenancy.
Such expenses are incurred to acquire a new source of income and are not incurred in the production of income.

You should keep records of expenses incurred on your investment property. This will ensure that you will not miss out any claimable expenses when you file your income tax return and more importantly, to make sure that the supporting documents (eg. receipts) are readily available when the Tax Comptroller requests them.

If you are a tax resident, the net rental income (ie. rental income less deductible expenses) derived will be subject to tax together with your other taxable income, based on progressive tax rates which range from 0 to 20 per cent (personal own) or 0 to 17 per cent (company own), less the GST related income tax rebate and a one-off tax rebate, if any. If you are in a net rental deficit/loss position, you may not set off your rental loss against your other taxable income for that year. You are also not allowed to carry forward the rental loss for set off against future rental income.

If you are a non-tax resident, the net rental income will be subject to tax at a flat rate. This rate is currently at 15 per cent or the resident rate, whichever gives rise to a higher tax amount (individual foreigner own).
With the above in mind, you may be able to save some taxes with proper planning, especially when you are about to replace certain furnishings, so you do not end up with a net rental loss in one year and being in a taxable position the following year.

Besides, we will recommend purchasing the property under Company normally as the income tax rate is lower when compared to the individual.

Sale of the property

There is no capital gains tax in Singapore. However, gains from the sale of real properties (or shares in a private real property company) that have been held for less than five years may be treated as revenue gains and hence taxable. If you incur losses from such sales, such losses are not available for set off against other taxable income for that year.  If you are a property trader, the gains from the sale of real properties (or shares in a private real property company) will be fully taxable regardless of the period of ownership.

When a person is deemed to be trading in properties, the gains from the sale of property in Singapore is considered taxable income. Whether a person is deemed to be carrying on a trade will depend on individual circumstances.

To determine if a person is trading in properties, IRAS applies a set of guidelines known as the “badges of trade”. IRAS considers the facts of each case against the criteria of the “badges of trade” to determine whether the gains are taxable.

Examples of the criteria are as follows:
– Frequency of transactions (buying and selling of properties)
> Number of similar transactions
– Reasons for acquiring and selling of property (We will recommend to document down via board resolution always to avoid dispute in future)
> For trading purpose and made profit (revenue gain)
> For long term investment purposes and receive rental income (capital gain)
– Financial means to hold the property for long term (You should have the capability to service your loan for investment purposes)
– Holding period (more than five years will be advisable)
– Subject matter and circumstances for sale
> Sale to make profit (revenue gain)
> Sale as the Feng Shui environment is changed and certified by Feng Shui master (capital gain)
– Profit motive (revenue gain)
– Supplementary work done on the asset
As a conclusion, the sale of property generally will be considered as capital gain should you have the evidence that the sales are not with profit motive or the holding period is more than 5 years.

Stamp Duty for sales and purchase of property or the Company

For disposal of Property

The Company may be subject to income tax as per previous section.

If the Company is GST registered, the receipt must charge GST (7%) on it.
On 11 Jan 2013, the Government announced that a seller’s stamp duty (SSD) will be imposed on industrial properties (hereinafter known as “industrial SSD”) which are bought or acquired on and after 12 Jan 2013 and sold or disposed of within three years. The amount of SSD payable shall be computed based on the following rates :
– Holding period of 1 year : 15% of price or market value, whichever is higher
– Holding period of 2 years : 10% of price or market value, whichever is higher
– Holding period of 3 years : 5% of price or market value, whichever is higher

Industrial properties acquired before 12 Jan 2013 will not be subject to SSD.
For the property affected, please refer to Scope of Seller Stamp Duty (SSD) for Industrial Properties

For disposal of Share rather than the property

Sales of share is exempted supply in Singapore, therefore it is not subject to GST.

The stamp duty is payable based on the Consideration or Net Asset Value, whichever is higher
– Every $100 or part thereof – $0.20

In summary, the stamp duty is 0.2% of the consideration / the Net Asset Value (“NAV”) value of the Company.

You will need to prepare the latest management account of the Company and certified by the director before the sales of shares are taken place.

The GST can be claimed back and not affected by the change of shareholder of the Company.

The bank loan may be affected by the change of shareholder and you will need to pay it off earlier to release yourself as the guarantor.

As a conclusion, it is better to purchase the property under separate company always so that you will have the flexibility to sell it off anytime and avoid the Additional Seller Stamp Duty.