Under the concessionary group tax treatment for dividend income, the deficit arising from a block of shares may be set-off against the net dividend income from other blocks of shares within the same group.
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Dividend income is taxable under Section 10(1)(d) of the Income Tax Act 1947, unless the dividends constitute receipts of a trade or business carried out by your company, which renders the dividend income taxable under Section 10(1)(a) instead.
Each block of shares is regarded as a separate source of dividend income. To claim deduction of expenses, your company is required to match expenses incurred on each block of shares against the dividend income from the same block of shares.
Example
A company which takes up a loan to finance the purchase of a block of 10,000 shares in X Ltd is allowed a deduction of the interest expense incurred on the loan against the dividend income from the same block of 10,000 shares in X Ltd.
Any excess of the interest expense over the dividend income (i.e. the deficit) is disregarded. The deficit cannot be set-off against dividend income from other blocks of shares or other sources of income for that year or subsequent years.
Concessionary Group Tax Treatment
The concessionary group tax treatment for dividend income taxable under Section 10(1)(d) allows the deficit arising from a block of shares to be set-off against the net dividend income from other blocks of shares within the same group.
Any excess of expenses of any group in any year is disregarded. In other words, the deficit cannot be set-off against the net dividend income of another group or other sources of income.
All investments in shares/ stocks are to be divided into the following groups under the concession:
| Group 1 | Group 2 | Group 3 | Group 4 |
|---|---|---|---|
Non-income producing shares (local and foreign shares). Shares are regarded as non-income producing if they have not generated any dividend income since the date of acquisition. | Shares which generate tax-exempt dividend income (e.g. one-tier and foreign-sourced dividend income remitted to Singapore in the year and exempted from tax). | Income producing shares in overseas companies where dividend income is remitted to Singapore in the year and taxable in Singapore. | Income producing shares in overseas companies where dividend income is not remitted to Singapore in the year. |
| Expenses are not deductible as the expenses incurred on the shares do not produce dividend income taxable in Singapore. | Expenses are deductible. | Expenses are deductible. | Expenses are not deductible as the expenses incurred on the shares do not produce dividend income taxable in Singapore but may be carried forward.* |
* Under the liberalised treatment, expenses incurred on shares in Group 4 may be carried forward for deduction against the foreign dividend income of this group that is remitted to Singapore in later years. Learn more about the liberalised treatment of expenses incurred in Singapore to derive foreign income (PDF, 132KB).
Example
A company which takes up a loan to finance the purchase of a block of 10,000 shares in X Ltd is allowed a deduction of the interest expense incurred on the loan against the dividend income from the same block of 10,000 shares in X Ltd.
Any excess of the interest expense in respect of the 10,000 shares in X Ltd (assume in Group 2) can be deducted against the net dividend income from shares in Z Ltd (similarly in Group 2) under the concession. Should there be a net deficit in Group 2, the deficit cannot be set-off against the net dividend income of Group 3 and vice versa.
Claiming Foreign Tax Credit under the Concessionary Group Tax Treatment
To determine the net foreign dividend income for the purposes of calculating foreign tax credit (FTC), the weighted average method is used to allocate the deficit arising from 1 or more blocks of shares to be set-off against the net dividend income of the other blocks of shares within the same group.
Example
| Shares in Company | Foreign Dividend Income | Allowable Expenses | Net Income/ (Deficit) |
|---|---|---|---|
| A | $5,000 | $1,000 | $4,000 |
| B | $2,000 | $1,000 | $1,000 |
| C | $4,000 | $6,000 | ($2,000) |
| Total Net Income | $3,000 |
The deficit of $2,000 arising from the shares in Company C is allocated to the net dividend income from the shares in Company A and B as follows:
| Shares in Company | Allocation Of $2,000 Deficit Arising From Shares in Company C | Net Income for Computing FTC |
|---|---|---|
| A | [$4,000 / ($4,000 + $1,000)] x $2,000 = $1,600 | $4,000 - $1,600 = $2,400 |
| B | [$1,000 / ($4,000 + $1,000)] x $2,000 = $400 | $1,000 - $400 = $600 |
| C | - | FTC is not applicable as the net dividend income is nil. |
| Total Net Income | $3,000 |