Common Mistakes Companies and Employees Make with their Tax in Singapore
With the tax-filing season right around the corner, it comes as no surprise that employees and employers still make these common but costly mistakes in their tax in Singapore. But these mistakes are easily avoided because the IRAS or Inland Revenue Authority of Singapore gives companies and individuals enough time to file their tax returns.
Whether you're an employer, employee, or self-employed, here are the tax mistakes you should be avoiding this year.
Common Mistakes Corporate Taxpayers in Singapore Make
Corporations, both big and small, often commit these mistakes. These mistakes may not be as severe as you might think, but there are still penalties for these.
Below are the 5 common corporate mistakes:
Understating their taxable income
Incorrect filing of expenses
Claiming deductions for non-deductible expenses
Compensating or remunerating related parties
Not maintaining business records
Understating Taxable Business Income
IRAS requires all Singapore companies to maintain their accounts and bookkeeping records properly. The records should include numbered invoices and receipts for all products and services rendered by the company.
Excluding these details and more is considered an offense, and the company will get penalized.
Incorrect Filing of Expenses
Incorrectly filing company expenses is probably the most common mistake, including filing expenses based on estimates. Claiming of fees and cost of sales need to be filed accordingly based on the actual amount spent along with supporting documents (invoices and receipts).
Another critical thing to note here is that the invoices and receipts should be serially numbered and contain pertinent information such as date and company registration info.
Claiming Tax Deduction For Non-Deductible Expenses
Companies must make a distinct line between business expenses and employees' expenses. Companies will often claim tax deductions for non-deductible costs, ranging from money spent on unofficial business activities such as out-of-town travel expenses on club memberships and vacation trips.
ACRA categorizes deductible expenses into three types:
Direct and indirect expenses
Statutory expenses
Regulatory expenses
Direct expenses are expenses paid out in relations to insurance, real estate, and management. Indirect costs will cover expenses obtained in Singapore, such as Directors' Fees, office rentals, retirement contributions, employee salary and benefits, and more.
Regulatory expenses cover expenses incurred for working with accounting and audit services, bank-related charges, and secretarial fees.
Compensating or Remunerating Related Parties
Another common mistake is when companies provide unjustified compensation to related parties (i.e. parents, spouses, siblings, or children). When we say unjustified, the money was paid out to the party for something that has nothing to do with the company.
Companies should only provide compensation for related parties if the quality of the service they render is comparable to the same service carried out by an independent employee and if the related parties are qualified to carry out the task at hand.
Not Maintaining Business Records
This is a common mistake made by sole proprietors, individuals, corporate taxpayers, and other tax residents. Maintaining business records is a must when it comes to filing your tax returns correctly. These supporting documents will help substantiate all filed claims made by the individual or company.
As long as you own a permanent establishment in Singapore, claims need to be based on the actual amount spent on expenses and purchases, which will need to be backed by the receipts or invoices associated with them. Business records that aren't maintained properly run the risk of inaccurate reporting come tax filing season.
Common Mistakes Singapore Employers Make When Reporting Employee Earnings
Not Identifying Taxable Income and When To Report It
Profits earned by any tax resident from Singapore companies are taxable in Singapore, regardless of the business structure. To put it simply, the entire employment income earned by an individual by carrying out services in Singapore is taxable, even if the local employers' foreign holding company (or parent company) does the paying. Employers need to declare non-salary taxable income. A good example is the NSMen (National Servicemen) pay used to reimburse payments.
It's also worth noting that taxability may vary depending on the nature of payment and whether an employee is entitled to receiving said payment. Good examples are the bonuses and directors' fees, which are often the sources of these tax mistakes.
For cases relating to bonuses, employers need to avoid reporting contractual bonuses when paid rather than when employees receive them. For cases on directors' fees, employees need to avoid reporting these fees approved in arrears in the years the services rendered instead of when the fees were voted on and approved during the company's annual general meeting.
You can read up on our comprehensive tax guide in Singapore.
Overreporting or Underreporting Gains From Employee Stock Option Plans or Employee Share Ownership Plans
ESOP (Employment Stock Option) and ESOW (Employee Share Ownership) have become popular with Singapore employers. But with their popularity, employers need to understand how taxes work for these options because they're considered as employment income still. Both are completely taxable if they're granted to employees currently employed in Singapore, regardless of where the company is located.
Employers may also tend to underreport because they don't understand or follow the "deemed exercise" rule. Underreporting happens when a foreign employee is no longer employed in Singapore and gains unvested or unexercised stock options. These gains need to be reported on Form IR21.
On the other side of the fence, overreporting also happens when employers declare benefits or gains from ESOW or ESOP earned during non-Singapore employment. These gains are considered foreign-sourced and not taxable, even if the plans are vested or exercised during Singapore employment or if profits are remitted to Singapore.
There are also instances where employers make mistakes when computing for gains coming from ESOP or ESOW plans that have moratoriums or selling restrictions. They may miscalculate the gains by basing them on the date of exercise rather than when the moratorium's date was lifted.
Incorrect Treatment of Benefits-In-Kind
Benefits-in-kind are taxable unless they're exempt from tax or granted administrative concessions. You can check out IRAS' list here. Gifts for special occasions and awards are examples of taxable benefits that employers may omit. These are only taxable when they exceed S$200 in value. Staff discounts are also taxable when they exceed S$500.
There are also instances when employers don't report premiums incurred for employees' insurance policies. These are always taxable regardless if payments were made directly to the insurance companies or employee reimbursements.
Failure To Report Overseas Employment And Overseas Income
Income earned overseas employment (in other words, non-Singapore based) is not taxable. There are instances during reporting where lapses may occur when services for employment are rendered in Singapore as part of the overseas employment. In other words, if you stayed in Singapore as part of your employment responsibilities despite being based overseas, you’re still paying income tax.
Unless employment in Singapore lasted less than 60 days, income attributed to the services rendered while in Singapore is subject to Singapore tax.
A Singapore-based employee who's overseas and earning employment income will need to report their income. A good illustration of this statement is when a Singapore company hires an individual who frequently travels outside of the country as part of their job responsibilities. Money paid out for these services are considered as taxable income.
Failure To Keep Updated with Regulatory Changes
Singapore's Income Tax Act constantly changes to adjust to the country's current employee compensation landscape. Employers who are not updated with these regulatory changes put themselves at risk for non-compliance and will affect their ability to accurately report employee earnings and more.
5 Common Mistakes People Make With Personal Income Tax in Singapore
Singaporean citizens earning more than S$22,000 annually are required to pay personal income taxes. Foreigners in Singapore who stayed for more than 183 days and earning S$22,000 annually or higher need to pay personal income tax too.
Tax avoidance is a severe offence in Singapore, so it's best to avoid doing that and these mistakes.
Not Declaring Your Overseas Income
Singapore nationals who travel a lot outside the country but are based here need to disclose their income overseas. This only applies to Singapore citizens working abroad as part of their contract or job responsibilities with a Singapore company.
Even if you're employed abroad on behalf of the Singapore government, your income is taxable in the country because you're a tax resident of Singapore
Not Mentioning Rental Income
All income is taxable and not just limited to the salary earned from working with a company. If you own property that brings in regular rental income, it's taxable income. Failure to report rental income, or filing it incorrectly, is a common mistake made by many Singapore tax residents.
Rental income has several aspects that need to be considered when reporting income for rented property. If you installed new furniture or fittings in your rented property, which is your basis for charging a higher rent, it needs to be included in filing tax returns.
You cannot deduct these expenses from the total rent received when making tax claims, but you need to state them separately.
Not Differentiating Between Types of Expenses
This is a common problem faced by self-employed people, taxi drivers, freelancers, and those who run their business independently. They're required to file their tax returns and state expenses incurred as part of their business (if they want to claim deductible expenses).
Here's the problem. Some people confuse business expenses with personal or family expenses, so they claim them as deductible expenses. Please remember that only business expenses are allowed to be claimed as deductible expenses.
To avoid this mistake, you need to maintain a detailed record of income received, no matter how minor it is, and expenses incurred for carrying out the services to generate revenue.
Reporting Taxes Based on Estimates
Another common problem faced by taxpayers is reporting taxes based on estimates, and no one is excused from this mistake. Whether you're self-employed or a real estate agent, filing returns based on estimates instead of documented numbers is problematic.
Estimated expenses end up being incorrect all of the time and don't stand when the IRAS ask for supporting documents to back these claims.
If you do make a mistake: The IRAS Voluntary Disclosure Programme
IRAS recognizes that employers, employees, and other parties will commit these mistakes while complying with their tax obligations. The IRAS Voluntary Disclosure Programme encourages taxpayers who've committed these mistakes and more to come forward voluntarily on time. As long as qualifying conditions are met, IRAS is willing to reduce penalties for these disclosed errors.
Closing
Committing these mistakes when filing your tax returns can be costly. Repeated errors may lead to increasing penalties in the long run. While IRAS forgives these mistakes, it doesn't mean you can abuse them.
When you're unsure about how to file your tax returns, whether it's for your income tax or corporate tax, you can always talk to accounting firms and ask about their tax services.
Here at Piloto Asia, we have an exceptional team of experts and tax professionals willing to help you with any of your tax-related concerns.
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