IRAS | Tax Treatment of Business Expenses (G-L)

Impairment Loss on Trade Debts

Financial Reporting Standard (FRS) 109 - Financial Instruments has replaced FRS 39 - Financial Instruments: Recognition & Measurement and applies to companies for financial years beginning on or after 1 Jan 2018. The FRS 109 tax treatment is the only applicable tax treatment once taxpayers adopt FRS 109 for accounting purposes. There is no option to opt out of the FRS 109 tax treatment.

Learn more about the FRS 109 tax treatment.

If your company does not need to comply with FRS 109 for accounting purposes, it can continue to apply the pre-FRS 39 tax treatment or FRS 39 tax treatment (as the case may be).

Under FRS 39, general and specific provisions for bad and doubtful debts are no longer made. For income tax purposes, impairment losses or losses on debts incurred on financial assets are tax-deductible as long as the debts are relating to the trade or business and are revenue in nature. Similarly, any reversal of such losses is taxed.

If your company has opted for pre-FRS 39 tax treatment, only specific provision for doubtful debts is deductible for tax purposes. General provision for doubtful debts remains non-deductible.

Your company does not need to file any supporting documents with its Corporate Income Tax Return to claim tax deduction. However, supporting documents must be kept and submitted upon IRAS’ request.

Insurance Policy Premium

For an expense to be deductible, it must be revenue in nature. Generally, this means that the expense must be ‘wholly and exclusively incurred’ in the production of income and not be capital in nature.

Insurance Premiums that are Revenue in Nature (Deductible for Employers)

Below are examples of insurance premiums that are deductible:

Group term life insurance policy where employees are the intended beneficiaries, either because the employees are the named beneficiaries or there is a contractual obligation for the employer to pass the payout to the employees or their next-of-kin. With effect from the Year of Assessment (YA) 2019, tax deduction is extended to similar policies where employers are the beneficiary of the policy and there is no contractual obligation to pass the payout to employees. Such expenses are deductible as they are regarded as staff costs.
Keyman insurance to cover loss of profit due to the demise or incapacity of a key executive of the business. Learn more about the deductibility of ‘keyman’ insurance premiums (PDF, 223KB).
Insurance for work injury compensation; expenditure is incurred for the purpose of insuring against statutory liability under the Work Injury Compensation Act 2019 as an employer.

Insurance Premiums that are Capital in Nature (Non-Deductible for Employers)

An example of insurance premiums that are non-deductible is those relating to group insurance which provides for a cash surrender or investment/ saving value. Such expenses are incurred to acquire a capital asset and are not tax-deductible.

Taxation of Insurance Premiums for Employees

Where employees are the beneficiaries of an insurance policy paid for by the employer, the insurance protection is a benefit-in-kind derived from employment and the value of the insurance premiums is taxable under Section 10(1)(b) of the Income Tax Act 1947, except for:

Group medical insurance which is provided in lieu of medical cost that would have been reimbursed by employers and where the benefit is available to all staff. This is available as an administrative concession.
Group insurance (excluding group medical insurance) where the employer has elected not to claim the tax deduction on the insurance premiums so that the premiums will not be taxed in the hands of the employees. This is available as an administrative concession.

However, these administrative concessions do not apply to investment holding companies and service companies that elect for the 'cost plus mark-up' basis of tax assessment. These companies should continue to report the insurance premiums paid in respect of each of their employees in their Form IR8A (if there is any contractual obligation to disburse any insurance payout to the employees).

No upfront approval for these administrative concessions is required. Once your company avails itself of the administrative concessions, it should apply the treatment consistently for all employees covered by the group insurance policy. This means that your company cannot choose to report the staff benefit on the share of premiums paid for only some employees covered by the group insurance policy, and claim a partial deduction of premiums paid in respect of other employees.

Taxation of Insurance Payouts for Employers and Employees

Nature of Payouts	Implication for Employer	Implication for Employee
Revenue	Revenue receipts are taxable; insurance payout is on revenue account if insurance is taken to insure against loss of profits of the company, per Section 10(3).	Gains from employment are taxable under Section 10(1)(b) unless exempted under Section 13(1)(i) of the Income Tax Act 1947^*. Where there is no contractual obligation to pay the employee but the employer decides to pay the insurance payout to the employee, the insurance payout is taxed as additional remuneration in the hands of the employee.
Capital	Capital receipts are not taxable; hence insurance payout moneys received from realisation of a capital asset are not taxable.	Capital receipts are not taxable. Where the employee is the intended beneficiary of the insurance policy and the insurance company pays the employer out of administrative convenience (the employer then pays the employee) or the employee directly, the insurance payout is not taxable as it is received from the realisation of a capital asset.

Nature of Payouts

Implication for Employer

Implication for Employee

Revenue

Revenue receipts are taxable; insurance payout is on revenue account if insurance is taken to insure against loss of profits of the company, per Section 10(3).

Gains from employment are taxable under Section 10(1)(b) unless exempted under Section 13(1)(i) of the Income Tax Act 1947^*.

Where there is no contractual obligation to pay the employee but the employer decides to pay the insurance payout to the employee, the insurance payout is taxed as additional remuneration in the hands of the employee.

Capital

Capital receipts are not taxable; hence insurance payout moneys received from realisation of a capital asset are not taxable.

Capital receipts are not taxable.

Where the employee is the intended beneficiary of the insurance policy and the insurance company pays the employer out of administrative convenience (the employer then pays the employee) or the employee directly, the insurance payout is not taxable as it is received from the realisation of a capital asset.

^*Sum received by way of death gratuities or as a consolidated compensation for death and injuries is exempted under Section 13(1)(i).

View illustrations (PDF, 139KB) of the above principles.

Intellectual Property (IP) Licensing Expenditure

IP licensing expenditure incurred by your company to license intellectual property rights (IPRs) for use in its trade or business is tax-deductible under Section 14 or Section 14C of the Income Tax Act 1947 if they are used for a qualifying Research and Development (R&D) project.

Enhanced Deduction for Qualifying IP Licensing Expenditure

To support business innovation, the tax deduction for qualifying IP licensing expenditure has been enhanced from 100% to 200% on up to $100,000 of qualifying IP licensing expenditure for each Year of Assessment (YA) from YA 2019 to YA 2023¹.

[NEW!] As announced in Budget 2023, under the Enterprise Innovation Scheme (EIS), to encourage more firms to engage in IP-related activities and use innovations to improve their productivity and outcomes, businesses with annual revenue² of less than $500 million in the basis period of the YA of claim can qualify for 300% enhanced tax deduction for up to a combined cap³ of $400,000 for each YA from YA 2024 to YA 2028.

For qualifying IP licensing expenditure incurred in excess of $100,000 for each YA from YA 2019 to YA 2023 or the combined cap³ of $400,000 for each YA from YAs 2024 to 2028, businesses can claim 100% tax deduction.

¹ From YAs 2013 to 2018, expenditure incurred on the licensing of qualifying IPRs for use in trade or business qualifies for benefits under the Productivity and Innovation Credit (PIC) scheme.

² Revenue refers to income that arises from the ordinary activities of a business. It refers to the business' main source of income, excluding separate source income such as interest. The revenue criterion will be applied at the group level if the entity is part of a group.

³ The combined cap of $400,000 qualifying expenditure is based on the amount of qualifying IPR acquisition costs and qualifying IPR licensing expenditure incurred for each relevant YA, and is computed based on the amount of qualifying expenditure incurred by the business net of any Government grant or subsidy received by the business in respect of the acquisition or licensing of IPRs.

The enhanced tax deduction does not apply to:

IP licensing expenditure not allowable as a deduction under Section 14 or Section 14C of the Income Tax Act 1947
All related party licensing arrangements
Any IPRs where a writing-down allowance has been previously made to the person under Section 19B of the Income Tax Act 1947
Payments made for the use of trademarks. Your company can claim 100% tax deduction under Section 14 of the Income Tax Act 1947 if the trademarks are used for its trade or business

Option to Convert Qualifying IP Licensing Expenditure into Cash Payout under the EIS

[NEW!] In lieu of tax deductions and/ or allowances, eligible businesses may opt to convert up to $100,000 of the total qualifying expenditure across all the qualifying activities under the EIS for each YA into cash at a conversion rate of 20%. The non-taxable cash payout is capped at $20,000 per YA from YA 2024 to YA 2028.

For licensing of IPRs, the option to convert qualifying expenditure into a cash payout need not be made on a per IPR basis.

Qualifying IP Licensing Expenditure

This refers to the licence fees incurred on the licensing of qualifying IPRs from another person but excludes:

Any part of the expenditure that is subsidised by grants or subsidies from the Government or a statutory board
Expenditure on the transfer of ownership of the rights
Legal fees and other costs related to the licensing of any rights

Qualifying IPRs are:

Patents
Copyrights^* (excluding any rights to the use of software)
Registered designs
Geographical indications
Lay-out designs of integrated circuit
Trade secrets or information that has commercial value^*
Plant varieties

^*Exclusions from the Expressions 'Trade Secret', 'Information that has Commercial Value' and 'Copyright'

In line with the policy intent of Section 19B, in the definition of IPR, the expressions 'trade secret' and 'information that has commercial value', and any work or subject matter to which the expression 'copyright' relates, exclude the following:

Information of customers of a trade or business, such as a list of those customers and requirements of those customers, gathered in the course of carrying on that trade or business
Information on work processes (such as standard operating procedures), other than industrial information, or technique, that is likely to assist in the manufacture or processing of goods or materials
Compilation of any information as described in (1) or (2) above
Such other matter as the Minister may by regulations prescribe

Interest Adjustment

Interest expenses normally accrue on a debt liability (e.g. loans or borrowings).

Interest expenses incurred on loans or borrowings specifically taken up to finance income-producing assets are tax deductible against the income produced. On the other hand, interest expenses attributable to non-income producing assets are not tax-deductible. When your company has interest expenses that are attributable to non-income producing assets, it has to make interest adjustments in its tax computation.

Examples of non-income producing assets are:

Vacant properties acquired for long-term investment
Investments in shares/ securities that have not yielded income
Interest-free loans or amounts owing by non-trade debtors
Interest-free loans or amounts owing by related companies (non-trade) or shareholders

Interest adjustment is not required for interest-free loans extended to directors or employees as the interest expense incurred in the provision of such loans constitutes staff cost. The interest-free benefits arising from such loans are taxable as employment benefits of the directors or employees - these must be included in the Form IR8A of the directors or employees. The interest-free benefits can be computed by multiplying the interest-free loan due from each director or employee as at the balance sheet date with the average prime lending rates.

Information on prime lending rates may be found at the Monetary Authority of Singapore's website.

Method for Computing Interest Adjustments

IRAS computes interest adjustments using the total asset method ("TAM").

If your company wishes to claim tax deduction on interest expense but cannot identify and track the use of an interest-bearing loan to specific assets¹ financed by the loan and not all the assets are income-producing, the TAM is the default method to be applied to attribute the common interest expense to the assets.

Under the TAM for interest adjustment:

Disallowable interest expense =
Cost² of non-income producing assets x Common interest expenses
Cost of total assets³

Learn more about the Total Asset Method for interest Adjustment (PDF, 333.9KB) and the Adopting Financial Reporting Standard (FRS) 109 & 39 & the Tax Implications.

¹The specific assets include Right-Of-Use ("ROU") assets treated as sale agreements for tax purposes for which a lessee is eligible to claim tax deduction on interest expense against the income produced from the ROU assets (including assets under hire purchase arrangements). Learn more about the Tax Treatment Arising from Adoption of Financial Reporting Standard 116 or Singapore Financial Reporting Standard (International) 16 - Leases (PDF, 506.2KB).

²For assets that are not covered under FRS 39 and FRS 109 ("non-financial assets"), the historical costs of these assets will be used in the TAM. For assets that are covered under FRS 39 or FRS 109 tax treatment ("financial assets"), by default, the value of these assets reported in the balance sheet will be used for TAM. Learn more about Income Tax Implications Arising from the Adoption of FRS 39 - Financial Instruments: Recognition & Measurement (PDF, 317.4KB) and Income Tax Treatment Arising from Adoption of FRS 109 - Financial Instruments (PDF, 0.6MB)

³Total assets refer to all "current assets" and "non-current assets" as per balance sheet. Cost of total assets excludes cost of assets financed by specific interest-bearing loans, and cost of ROU assets.

Interest Incurred on Late Central Provident Fund (CPF) Contributions

The CPF Board may impose interest if CPF contributions are not paid to the Board on time. As this is an offence under the Central Provident Fund Act 1953, the late interest payment is a penalty and is not tax-deductible.

Interest Incurred on Late Payment of Fees to a Management Corporation for a Strata Title Plan (MCST)

Late payment interest may be imposed if contributions (including management fees) are not paid to the MCST on time. As the late interest payment is not a penalty for committing an offence, it is tax-deductible if it is incurred in the production of income.

Interest Incurred on Loans to Re-finance Prior Loans or Borrowings

Where a re-financing loan is taken out and the money from the loan is used solely to repay an existing loan, the characterisation of the re-financing loan (i.e. whether it is a revenue or capital loan) follows that of the loan that was repaid.

Where the existing loan is a revenue loan:

A re-financing loan is regarded as a revenue loan if it is taken solely to repay an existing loan that was entered into for a revenue purpose (e.g. the existing loan was taken to fund the purchase of stock-in-trade or inventories of a business). The interest expense incurred on the re-financing loan is allowed deduction under Section 14(1) of the Income Tax Act 1947.
Where the existing loan is a capital loan:

A re-financing loan is regarded as a capital loan if it is taken solely to repay an existing loan that was entered into for a capital purpose (e.g. the existing loan was taken to fund the purchase of fixed assets or long term investments of a business or to augment the capital structure of a business).

The deductibility of the interest expense incurred on the re-financing loan follows that of the repaid loan based on the direct link test under Section 14(1)(a) of the Income Tax Act 1947.

If interest deductions were previously allowed on the repaid loan, the interest expense on the re-financing loan is accorded similar interest deductions. If the interest expense incurred on the repaid loan was subject to adjustments under the Total Assets Method (TAM), the TAM similarly applies to the re-financing loan.

If the interest expense on the repaid loan was not tax-deductible, the interest expense on the re-financing loan is similarly not tax-deductible.

There may be instances where a re-financing loan is not used solely to repay an existing loan (e.g. the principal amount of the re-financing loan obtained is higher than the principal of the existing loan and the balance of the re-financing loan is used for other purposes). In such cases, whether the interest expense on the portion of re-financing loan not used to repay the existing loan is tax-deductible is determined by the purpose of the additional loan amount (i.e. whether the purpose of the additional loan amount is for a revenue or capital use).