Individual Income Tax

The Inland Revenue Authority of Singapore (IRAS) has observed a few common mistakes to Individual Income Tax as per the following :

Incorrect reporting of revenue

Some taxpayers made mistakes in declaring their revenue. Some common mistakes observed are:

• Errors in totalling up revenue or income.
• Reporting of takings (e.g. sales or service income) based on estimates.
• Failure to keep proper records on the actual takings made.
• Failure to report the full amount of income. Purchases and expenses were made directly from the takings, and the net amount was reported as income.
• Failure to segregate deposits made into personal and business bank acconts resulting in lower amount of business income being reported.

Taxpayers must maintain a full and complete record of income received. Income can be recorded in two ways:

• Key all receipts into a cash register and transfer the total takings to a sales book daily or
• Issue serially pre-printed numbered invoices/receipts in duplicates for goods sold or services rendered.
• Takings that are used to pay purchases or expenses must be properly recorded and included in their reported income. Taxpayers should maintain separate bank accounts for business and private purposes and ensure that the business income is deposited into the business bank account only. This will facilitate an accurate reporting of business income.

Insufficient records kept for purchases of goods and other expenses

Many taxpayers were found not to have kept sufficient source documents and records to substantiate their claims on purchases of goods and expenses. In some cases, purchase and expense amounts were estimated without any valid basis. Taxpayers are reminded that they should keep proper documentation and records to substantiate their purchases of goods and expenses.

Claiming of deduction on non-deductible expenses

Some taxpayers made wrongful claims of private expenses like club membership subscriptions, entertainment, personal insurance, personal medical expenses, travelling expenses for personal trips etc. against their business income. Such expenses are not claimable for Income Tax purposes. Some also made claims of motor vehicle expenses including petrol, insurance, repair and maintenance, parking and CBD charges etc. in respect of private-plate cars (E or S-plate cars). These expenses are specifically prohibited under the Income Tax Act and are not deductible even if these were incurred in the course of business. Taxpayers should ensure that the non-deductible private expenses are not claimed against the business income for Income Tax purposes.

Expenses paid to related parties

Some taxpayers paid excessive salary and bonus to related parties such as his or her spouse, parents, siblings, etc for services rendered in their businesses. They are reminded that salary and bonus paid should commensurate with the services rendered and should be in line with market rate (arms-length transaction). Payment or salary vouchers should be acknowledged and retained. There are also instances whereby some taxpayers included salaries, allowances or CPF paid to related parties such as his or her spouse, parents, siblings, etc in their payroll when these related parties are not working for them. In such cases, salaries, allowances or CPF paid are not claimable for Income Tax purposes.

Failure to keep proper records

Some taxpayers have failed to keep and retain sufficient records to enable us to ascertain their income and allowable business expenses. Some have the misconception that they do not need to keep records or could discard their records once they have received their Notice of Assessments. For income tax purposes, they are required to keep proper records and accounts of their business transactions for 5 years with effect from 1 Jan 2007. They can be penalised or denied claim of expenses if they fail to keep proper records. The set of accounts and other records must be supported by proper documents, such as invoices, receipts, payment vouchers and statements, in order for IRAS to ascertain their income and allowable business expenses readily. The records should be retained for the requisite period whether or not the assessment has been raised. The Comptroller may request for these documents in their course of audits.

Omission of other sources of income such as rental income, director's fees etc.

Some taxpayers may not report other sources of income such as rental income and director's fees in their Income Tax Returns. Under the Income Tax Act, these are taxable items and must be reported in the tax returns.

Corporate Income Tax

The Inland Revenue Authority of Singapore (IRAS) has observed a few common mistakes to Corporate Income Tax as per the following :

Understatement of income

• Businesses should properly account for all the earnings and invoices issued for goods sold or services rendered. Omission of particular receipts or invoices issued amounts to an understatement of income, which is an offence.
• Taxpayers should issue serially numbered invoices in respect of goods sold or services rendered. These receipts supported by proper invoicing should be properly accounted when preparing accounts.

Claiming Deductions for Non-deductible Expenses

• Expenses not incurred for the business such as directors’ private expenses on entertainment, vacation and personal purposes. Businesses should segregate private expenses and exclude them from their claims in the Form C/ Form C-S.
• Claims of motor vehicle expenses in respect of private-plate cars (i.e. non-Q plate cars) and business service passenger vehicles (Q-plate cars) e.g. petrol, insurance, repair & maintenance, parking fees, ERP charges, hire purchase interest, etc. Such expenses are not deductible even if they are incurred in the course of business.

Claims of remuneration to related parties

• Remuneration to related parties (i.e. the directors’ parents, spouses, children and siblings) are usually substantial and do not commensurate with the level of services rendered by the recipients. In some instances, the related parties are not even working in the company. For tax deduction purposes, the remuneration paid should be a reasonable amount having regard to the services performed by the related parties as compared to an independent employee with the same qualifications and experience performing the same services.

Incorrect claim of expenses

• Claiming of purchases/ expenses/ cost of sales based on estimations.
• Claims for purchases and expenses should be based on actual amount incurred, with supporting receipts and invoices. Estimated purchases and expenses without valid basis or proper support of documents are not acceptable.
• Claims for cost of sales should be based on actual closing stock value instead of estimation. Stock-take should be performed at the close of each accounting period to determine the closing stock value.

Keeping of incomplete records:

• Claims on public transport & entertainment should be supported with complete records and proper receipts
• Failure to maintain business records for a period of 5 years:

Some taxpayers have failed to keep and retain sufficient records to enable us to ascertain their income and allowable business expenses.

Some have the misconception that they do not need to keep records or could discard their records once a Notice of Assessment is received. This is incorrect.

Records should be retained for the requisite period of 5 years whether or not an assessment has been raised. The Comptroller may request for these documents in the course of audits.