How to reduce your income tax

Avoid paying more taxes than necessary through careful review and early planning, bearing in mind the following tips.

Fri, Dec 03, 2010
The Business Times

By BJ Ooi and Jave Loh

THERE are two things we cannot avoid in life - death and taxes. The good news is that if you plan carefully and early enough, you can avoid paying more taxes than necessary. Being ignorant of some of the basic rules can cost you money.

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As 2010 draws a close, it is timely to consider the following tax tips that are still available to you before Dec 31 to reduce your tax bill for the Year of Assessment 2011, which covers income earned in 2010.

These tax tips are general in nature. You should review your own situation with a qualified tax advisor to see if it applies to you.

Claim applicable reliefs

Remember to claim the applicable reliefs in your tax return. If you are a Singapore resident and meet the qualifying conditions for the various reliefs available, you can claim tax reliefs which apply to you. For example, earned income relief, spouse relief, child relief, parent relief and foreign maid levy relief for married female taxpayers.

This past year, the wife relief was replaced with spouse relief and this applies to income earned in 2009 and beyond. Both male and female taxpayers can now claim tax relief for their wives or husbands, if the spouse does not have annual income exceeding S$4,000 in a year.

In addition, tax relief for educational courses undertaken has increased from $3,500 to $5,000 with effect from the Year of Assessment 2011.

There are other reliefs to claim. These include the Central Provident Fund (CPF) top-up, CPF contributions for the self-employed, contributions to the Supplementary Retirement Scheme (SRS). The SRS is a voluntary retirement savings scheme allowing individuals to enjoy a tax relief for the year in which they make contributions to their SRS account. For 2010, SRS contributions are capped at $11,475 for Singaporeans and permanent residents, and $26,775 for foreigners.

A key point to note is that except for certain types of relief such as earned income relief and NSman relief, most of the reliefs are only granted when claimed each year. What this means is that if you do not file a claim, the tax authority will not automatically grant the relief to you.

Donation to approved charities

You can claim tax relief for cash donations made to an approved Institution of Public Character (IPC) or a Qualifying Grant-making Philanthropic Organisation.

Besides cash, donations to IPCs can be in the form of Singapore-listed shares, unit trusts that are ready to trade in Singapore, as well as land and buildings.

The tax deduction for the Year of Assessment 2011 will be equal to 2.5 times the amount of donations made by Dec 31, 2010.

If the tax deduction for the donation is more than the donor's income for the year, the donor is allowed to carry forward the un-utilised deductions for a maximum of five years.

Not Ordinarily Resident Scheme

If you are a non-resident of Singapore for three consecutive years before the year you become a Singapore resident, you can apply for the Not Ordinarily Resident (NOR) status for a five-year period commencing with the first year of residency.

As a NOR taxpayer, if you spend at least 90 days outside Singapore for business and your employment income is at least $160,000, you can apply for the concession of time-apportionment of employment income.

What this means is that you would not be taxed on the portion of employment income that corresponds to the number of business days spent outside Singapore.

If you qualify as a NOR taxpayer and meet this criteria, you should review your travel schedule to determine if you can apply for this time-apportionment concession.

Rental income from property

If you own a rental property, you should know that while the rental income is taxable, you can claim rental expenses to offset the rental income.

There are different types of allowable deductible rental expenses. Some common examples include mortgage interest on the loan borrowed to purchase the property. Others include property tax, maintenance fees paid to the management corporation, fire insurance and general repairs or maintenance such as painting and pest control services.

However, if this is the first time that you rented out your only property, certain expenses incurred to secure the first tenant are not allowed. Examples of such first-time expenses include any commission paid to the property agent as well as advertising and legal costs. Expenses incurred for securing subsequent tenants to this property are deductible.

For any subsequent properties that you rent out, your property agent's commission, advertising and legal expenses (even if incurred for securing the first tenant of the subsequent property) are deductible against the rental income from these properties. The cost incurred to renew a lease or secure the subsequent tenant is also deductible.

If you own several rental properties, rental losses from one property can be used to offset the income from another property.

Where the final amount from all the rental properties is a loss, you cannot offset the loss against income from other sources. You may, however transfer the loss to your spouse if he or she has positive rental income to absorb the loss.

Tax deduction for angel investors

A new area to consider is the Angel Investors Tax Deduction Scheme (AITD), introduced as a new incentive scheme in Singapore Budget 2010.

Its objective is to encourage eligible individuals who are able and willing to invest in start-up companies. This provides them with tax relief to encourage their efforts in providing management expertise, in building business networks and so on.

This new incentive applies to approved angel investors committing at least $100,000 in qualifying investment, in a qualifying start-up within a given year. It applies for investments made during the period from March 1, 2010 to March 31, 2015 (both dates inclusive).

They can enjoy a tax deduction at the end of a two-year holding period equal to 50 per cent of their investment. The tax deduction will be subject to a cap of $500,000 of investments in each Year of Assessment.

An individual has to apply to be an approved investor with Spring Singapore who can also provide interested investors with more details about the scheme and its qualifying conditions.

Effective tax planning requires you to be aware of any changes to the tax laws and regulations that may affect you. You should speak to your tax adviser to determine whether there are any of such changes that you should capitalise upon.

This article was first published in The Business Times.