The IRAS issued the new e-Tax Guide on 30 September 2016 to explain the new treatment of certain expenses incurred prior to the commencement of a business as a direct result of the Budget 2016.
To recapitulate, before the Budget change, where a person’s income from a business activity is subject to tax at different rates of tax in the first YA (e.g. it may enjoy tax incentives which accord tax exemption or concessionary tax rates on the incentivised income), it is not required to allocate the pre-commencement expenses and Section 14U expenses to normal income, concessionary income and tax-exempt income.
New Treatment with effect from 25 March 2016
The new treatment seeks to ensure fair allocation of the pre-commencement expenses and Section 14U expenses to income derived from the business activity that is subject to tax at different tax rates in the first YA and provide certainty on the allocation method to be used. As a result, the pre-commencement and Section 14U expenses will be allowed as follows:
1. Pre-commencement expenses and Section 14U expenses that are directly attributable to the normal income, concessionary income and tax-exempt income will be offset against the respective income streams;
2. The remaining pre-commencement expenses and Section 14U expenses will be allocated to the respective income streams based on income apportionment. Examples of income-apportionment basis include “turnover”, “gross profit” or “ratio B” for banks.
If the person carries on more than one trade, business, profession or vocation (as the case may be), the pre-commencement expenses and Section 14U expenses incurred in respect of each trade, business, profession or vocation should be separately tracked and attributed to income of the respective trade, business, profession or vocation, before applying the above treatment.
Any excess of the pre-commencement expenses or Section 14U expenses over the respective income streams would form part of the trade losses and such trade losses may be available for:
a. offset against other sources of income in the same YA
b. offset against income for future YAs
c. transfer to a related company under the group relief system; and
d. carry back to the immediate preceding YA
Taxpayers are required to provide the description and amount of such expenses and the basis to substantiate their claim that such expenses are directly attributable to the respective streams of income in their income tax computations for the relevant YA. They are also required to maintain the relevant supporting documents relating to expenses claimed but they need not submit those documents to IRAS unless requested by IRAS to do so.
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