Week 3 (Exemptions, Deductions, Computing Adjusted Profit and Statutory Income))

Question 1

What are deductions or deductible expenses?

Answer 1

These are expenses that are allowed to be deducted against a taxpayer’s gross taxable receipt from a particular source of income to arrive at the net taxable income (statutory income).

Question 2

What are the conditions to meet for an expense to be deductible?

Answer 2

1. The general deduction formula is satisfied.
2. The deduction is not prohibited by S15.

Deduction applies to expenses incurred to derive income under any of the heads of charge, (whether trade or non-trade). As long as the expenses incurred are deducted against that source of income.

Question 3

What is the General Deduction Formula? S14(1)

Answer 3

“Chargeable with Tax”:

• Only expenses incurred in the production of taxable income is deductible (against that income).
• This does not include expenses incurred to produce:
  1. Capital gains
  2. Exempt income
  3. FSI not received in Singapore.

“Wholly”:

• Refers to the quantum of the expenditure.
• The whole amount of the expense deducted must be in the production of the income.
• If multi-purpose expenditure, apportionment may be allowed. (For example: Different levels etc etc. Apportionment is judged by the comptroller)

“Exclusively”

• Refers to the motive for the expenditure.
• Must have an income-producing motive
• To distinguish between ‘motive’ and ‘effect;’:
  1. There need not be income as a direct result of the expense.
  2. However, there could be a private or personal purpose that is inherent in the expense.

“Incurred”:

• The expenditure must have taken place.
• Liability to pay has crystallized.
• Has the liability to pay crystallized for:
  1. General provisions?
  2. Unrealized losses?

“That period”:

• This refers to any period from any source chargeable with tax:
  1. Expenses must be incurred in the period where there is the source of income chargeable with tax.
• What about pre-commencement expenses?
  2. Post-cessation expenses?
• If there are on-going revenue expenses that are incurred even after the source of the business income has ceased in that period then those expenses will not be deductible because the source of the income chargeable with tax has already ceased.

“That person”:
- Refers to a person claiming a deduction must be the one incurring the expense.

“In the production of the income”:

• There must be a sufficiently close nexus/connection between the expense incurred and the income earning operations:
  1. Apply the “wider nexus” test.
  2. This test views business as a “whole set of operations directed towards producing income”.
  3. When applying this test, it includes all closes connected expenses:
• Expenses must be so closely connected with the income earning operations that they may be reasonably regarded as part of the cost of performing it.
• Deduction on a source by source basis. Expenses incurred in the production of each source of income must be deducted against that source.