Sources of Singapore Tax Law

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Although such rulings and interpretation and practice notes are not legally binding on the IRAS or taxpayers as they are merely expressions of administrative opinion, they do in many situations create informal law in that practitioners and clients accept IRAS practices or rulings without formal challenge and structure their affairs accordingly.

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BASIS OF ASSESSMENT

YEAR OF ASSESSMENT

Tax is assessed in respect of a statutory year which is referred to as the year of assessment - which is a calendar year. For example - the year of assessment 2011 refers to the calendar year commencing 1 January 2011 and ending 31 January 2011.

Basis Period - the statutory income of a person for a year of assessment is ascertained by reference to the income of a basis period - the calendar year immediately preceding that year of assessment.

Section 35(1) - in calculating statutory income for any year of assessment, the full amount of income for the year preceding the year of assessment is taken into account.

For example - the basis period for the year of assessment 2011 is the 12 months from 1 January 2010 to 31 December 2010.

Section 35(2) recognises that a trade or business organisation may have an accounting year-end which does not end on 31 December. Section 35(2) allows the accounting year to be the basis period for income derived from a trade, business, profession or vocation source provided that the Comptroller is satisfied that the accounts are regularly made up on the basis of the accounting year. The basis period for income from a trade, business, profession or vocation is the accounting period which ends during the year preceding (the basis year) for a year of assessment.

From the year of assessment 2009, in the case of companies and bodies of persons (eg, clubs, charities, associations, etc) the accounting year basis shall apply to the statutory income of that person from all sources (ie, trade and non-trade sources).

Example – Shonky Pte Ltd prepares its annual accounts from 1 July to 30 June each year. Its trade income and non-trade income earned during the basis period 1 July 2009 to 30 June 2010 will be considered income taxed in the year of assessment 2011.

From the year of assessment 2009, in the case of individuals whether a sole-proprietorship or a partnership, the “accounting year” basis departure from the normal “preceding year” basis applies only in respect of income from a trade, business, profession or vocation - s.35(4).

Example - if a sole proprietor carrying on a retail business prepares annual accounts to 31 August, then the 12 months from 1 September 2009 to 31 August 2010 will form the basis period for the year of assessment 2011.

It is not unusual, in some circumstances, for an individual taxpayer to have more than one basis period for a particular year of assessment but the whole of the income derived from different basis periods must be combined to form the statutory income for the relevant year of assessment.

Example – Mr Tan operates a retail business. He also owns a commercial property and a residential property that he rents to tenants. The financial year-end of his business is 31 March. His statutory income for the year of assessment 2011 will include his taxable income from his retail business for the year ending 31 March 2010 and his net rental income for the year ending 31 December 2010.

Example if a sole proprietor carrying on a retail business in the previous example receives non-business source income such as interest income, rent, dividend, employment income, etc. the basis of assessment for the non-business source income will be the strict preceding calendar year basis. Therefore the year of assessment 2011 will include:

- interest, dividend and rental income received in the period 1 January 2010 to December 2010; and

- business income derived in the 12 months from 1 April 2009 to 31 March 2010.

There are further departures from the “preceding year basis” relating to sources of income such as employment, dividends, and business income, etc. which commence and cease on dates other than 1 January and 31 December respectively.

Where commencement and cessation of sources take place different basis periods apply although the general principles governing the “preceding year” basis still apply.

For Example - Mr Tan starts a new job on 1 May 2010 which he ceases on 1 November 2010. He received interest for the whole of 2010 and on 1 September 2010 sold shares from which he had received dividends. He also runs a business which has an accounting year 1 September to 31

August.

The basis periods that apply for the year of assessment 2011 are:

Employment income 1/5/10 to 1 /11/10

Interest income 1/110 to 31/12/10

Dividend income 1/1/10 to 1 / 9 /10

Business income 1/9/09 to 31/ 8/10

CLASSES OF INCOME

For the purposes of income tax in Singapore, it is not sufficient that a person derives or obtains income. To be liable to tax, the income must fall within one of the paragraphs of section 10(1) which states that- “Income tax is payable for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of -

(a) gains or profits from any trade, business, profession or vocation;

(b) gains or profits from any employment;

(d) dividends, interest or discounts;

(e) any pension, charge or annuity; or other periodical payments,

(f) rents, royalties, premiums and any other profits arising from property;

(g) any gains or profits of an income nature not falling within any of the preceding paragraphs.

As section 10(1) states that tax is payable upon the income of any person in respect of the gains or profits mentioned in section 10(1)(a) - (g) it remains necessary to show that any of those gains or profits are of