15s1 Topic 6 CF, GR, CBNANYANG TECHNOLOGICAL UNIVERSITY NANYANG BUSINESS SCHOOL AC2301 – PRINCIPLES OF TAXATION TOPIC 6 - CARRY FORWARD, GROUP RELIEF, AND CARRY BACK Selected tax provisions Income Tax Act (OPTIONAL): sections 23, 35, 37, 37C and 37E. STG, chap 8-500 (omit “Exceptions”); 9-100 to 9-200 (omit “Sole-proprietors and partners” and “Business of hiring out motor cars”); 9-300 to 9-400; 9-500 (omit “Loss items that are not transferable”, Example 7, and “Companies not eligible for Group Relief” on pp.345-346); and 9-700 (omit “Historical Note” and Example 9 on pp.351-353) APPENDIX 1 - Self-study questions 1, 2 and 3 (with suggested solutions) Oct 2015 1 15s1 Topic 6 CF, GR, CB Question 1 Sky Enterprises Pte Ltd (Sky), Ekin Pte Ltd (Ekin) and Luke Pte Ltd (Luke) are three Singapore-incorporated and resident companies. Since 1 April 2014, the corporate group structure, together with the ultimate individual shareholders, has been as presented in the diagram below: Mr Chew 35% Ms Yeo 45% Mrs Lee 20% SKY 80% 20% EKIN 90% 10% LUKE Note: % refers to the percentage of issued and fully paid-up ordinary shares. The above shareholding structure is not expected to change in the foreseeable future. Historically, Sky’s shareholders and their shareholding percentages have been as follows: Shareholder Mr Arthur Mr Chew Mrs Lee Mr D Veloo Miss Threepio Ms Yeo Percentage of issued and fully paid-up ordinary shares owned Prior to 1.4.2013 20 0 20 30 20 10 100 1.4.2013 to 31.3.2014 0 10 20 40 0 30 100 There have been no changes in the immediate shareholders of and their shareholdings in Ekin and Luke since 2007. There have been no changes in the nature of the respective businesses carried on by Sky, Ekin and Luke since 2008. Oct 2015 2 15s1 Topic 6 CF, GR, CB The following information relates to the tax positions of Sky, Ekin and Luke: YA 2015 Adjusted profit/(loss) for YE 31.12.2014 Capital allowances 250% deduction for approved donations Prior Year Item Unabsorbed business loss - YE 31.12.2012 Sky $ (80,000) Ekin $ 150,000 Luke $ 400,000 70,000 50,000 10,000 60,000 90,000 Based on the tax computation previously submitted to the IRAS, Sky’s chargeable income for the Year of Assessment 2014 amounted to $200,000, with the tax assessed of $23,800 [i.e., ($200,000 x 17%) less 30% tax rebate] already paid to the IRAS. Required (a) Comment on whether Ekin is able to set off its prior-year business loss of $90,000 against its taxable income in the Year of Assessment 2015. (b) Advise Sky, Ekin and Luke as to whether and to what extent the Group Relief and Carry-Back Provisions may be used to mitigate the income tax exposure of the three companies in the Year of Assessment 2015. Assume that no waiver (should it be required) of the Shareholdings Test is obtained. You should present relevant income tax computations to support your advice. Oct 2015 3 15s1 Topic 6 CF, GR, CB Question 2 (adapted) Adios Pte Ltd (D Co), Arrivederci Pte Ltd (R Co), Auf Wiedersehen Pte Ltd (W Co) and Au Revoir Pte Ltd (V Co) are all companies incorporated and resident in Singapore. The following diagram presents the corporate group structure to which these companies belong: D Co 100% 80% R Co W Co 90% V Co Note: % refers to the percentage of beneficial ownership of ordinary shares. The corporate structure above has prevailed since 1999. The ordinary shares of W Co and V Co are beneficially held to the extent of 20% and 10% respectively by minority shareholders. The shareholders of, and their shareholdings in, D Co for various periods of time are as follows: Up to and including 31.3.2014 ’000 shares From 1.4.2014 to 31.3.2015 ’000 shares From 1.4.2015 ’000 shares 700 1,000 300 0 1,200 300 300 2,200 1,200 0 0 2,800 Shareholder Mr Grazie Ms Danke Ms Gracias Mdm Merci The following tax data pertains to the various companies for the Years of Assessment 2015 and 2014: D Co R Co W Co V Co $ $ $ $ YA 2015 (YE 31.3.2014) Adjusted profit/(loss) (600,000) (100,000) 2,000,000 500,000 Capital allowances 250,000 650,000 1,400,000 100,000 YA 2014 (YE 31.3.2013) Adjusted profit Capital allowances 850,000 230,000 1,000,000 300,000 2,400,000 1,500,000 450,000 150,000 On 31.3.2014, R Co permanently ceased its manufacturing business which it had been carrying on since its incorporation in 2000. On 1.4.2014, it commenced a new business as a provider of IT consultancy and this new business is expected to be very profitable from the start. Required: Advise R Co on the most tax-beneficial utilisation of its unabsorbed loss and capital allowances of $100,000 and $650,000 respectively for the Year of Assessment 2015. Oct 2015 4 15s1 Topic 6 CF, GR, CB Your answer should clearly indicate the amounts (if any) of the unabsorbed items that you recommend R Co to carry back, carry forward and/or transfer to another company under the Group Relief scheme, and explain how these amounts were arrived at. You are NOT required to present the tax computations of any of the companies. Question 3 (adapted from 1314s2 question) From 1 July 2014, the Vulture Group comprises Vulture Incorporated (Vulture), Hawk Pte Ltd (Hawk), Eagle Pte Ltd (Eagle) and Sparrow Pte Ltd (Sparrow). The corporate group structure is as presented below: Vulture 100% 100% Hawk Eagle 80%* 20% Sparrow Note: ‘%’ refers to the percentage of beneficial ownership of ordinary shares. * These shares were held by Mr Paul Wing, Mdm Sally Claw, and Ms Jane Feather up until 30 June 2014 – see details below. Vulture is a company incorporated and tax-resident in the United States. Its ordinary shares are beneficially owned by Mr John Beak (90%) and Ms Jane Feather (10%). Vulture carries on business in both the United States and, through a branch, in Singapore. Hawk, Eagle and Sparrow are all Singapore-incorporated and tax-resident companies carrying on business in Singapore. Recently, Sparrow underwent a corporate restructuring exercise that entailed the following: Up until 30 June 2014, Sparrow’s ordinary shares were beneficially held by Mr Paul Wing (40%), Mdm Sally Claw (20%), Ms Jane Feather (20%), and Eagle (20%). On 1 July 2014, the individual shareholders (i.e. Mr Wing, Mdm Claw and Ms Feather) sold all of their respective shareholdings in Sparrow to Hawk; and On 31 December 2014, Sparrow ceased permanently its business as a canteen operator and on 1 January 2015, it commenced a new business of manufacturing bird feed. Oct 2015 5 15s1 Topic 6 CF, GR, CB The following presents certain Singapore income tax related data for the four companies in the Vulture Group: Vulture Hawk (Singapore branch) $ $ Year of Assessment 2015 Adjusted profit/(loss) for 31.12.2014 YE 5,000,000 Eagle Sparrow $ $ 400,000 800,000 (1,000,000) Capital allowances – YA 2015 700,000 900,000 200,000 600,000 Year of Assessment 2014 Chargeable income 150,000 330,000 450,000 800,000 Assume that no waiver of the Shareholdings Test for the set-off of unabsorbed items will be granted by the IRAS in the event that the test is not satisfied. Required Advise Sparrow on how it can tax-efficiently utilise its Year of Assessment 2015 unabsorbed capital allowances of $600,000 and unabsorbed trade loss of $1,000,000, including the options (where possible) to elect for group relief and/or carry-back. You are NOT required to present the full income tax computation of any of the companies. Oct 2015 6 15s1 Topic 6 CF, GR, CB Question 4 (14s2 question) This question combines Topic 6 with Topic 7 DTR. For Topic 6, do ONLY part (a). The Pasta Group comprises five private limited companies incorporated and taxresident in Singapore. These companies are Pasta, Spaghetti, Macaroni, Vermicelli and Lasagne. All the companies carry on their respective businesses in Singapore although, as mentioned below, Spaghetti also carries on business through a branch in MamaMia Republic while Lasagne ceased to carry on its business on 31 December 2014. The corporate group structure of the Pasta Group is depicted in the diagram below and this structure has been in place since 1 January 2005. Since that same date, 70% of Pasta’s ordinary shares have been beneficially held by Mr Roberto Rotini, with the remaining 30% by Mr Fabio Fusilli. Pasta 65% Spaghetti 72% Macaroni 80% Vermicelli 28% 72% Lasagne Note: % refers to the percentage of beneficial ownership of ordinary shares. The remaining 35%, 28% and 20% of the ordinary shares in Spaghetti, Macaroni and Vermicelli respectively are held by various minority shareholders. On 31 December 2014, Lasagne ceased permanently to carry on its business and became dormant. Its only item of plant, which had a tax written down value of $600,000 as at 31 December 2013, was transferred over to Macaroni for a consideration of $350,000 on 31 December 2014. The consideration of $350,000 was reflective of the open market value of the plant as at the date of the transfer. Macaroni immediately put the plant to use for the purposes of its business. The following information pertains to the companies in the Pasta Group: Pasta $ Spaghetti $ Macaroni $ Vermicelli $ Lasagne $ YA 2015 (YE 31.12.2014) Singapore business: - Adjusted profit/(loss) [1] - Capital allowances [1] Foreign income Oct 2015 750,000 220,000 200,000 30,000 (400,000) [2] 40,000 100,000 190,000 400,000 [2] 0 [3] 7 15s1 Topic 6 CF, GR, CB YA 2014 (YE 31.12.2013) (agreed with the IRAS) YA 2014 unabsorbed items c/f to YA 2015: - Unabsorbed allowances - Unabsorbed loss Chargeable income 50,000 120,000 120,000 150,000 0 380,000 340,000 0 Notes: [1] The amounts exclude unabsorbed items (if any) from YA 2014. [2] Capital allowances of $40,000 and $0 for Macaroni and Lasagne respectively exclude the allowances (if any) relating to the item of plant transferred from Lasagne to Macaroni on 31.12.2014. [3] Spaghetti derived the following foreign income in YE 31.12.2014: - Business profits of $250,000 from the operations of its branch in MamaMia Republic. The amount of $250,000 is net of MamaMia Republic income tax and was credited into Spaghetti’s Singapore bank account on 31.12.2014; - Interest income of $100,000 from a deposit placed with a financial institution in EtnaLand. The amount of $100,000 is net of 5% EtnaLand withholding tax and, on 31.12.2014, was used in EtnaLand to pay a supplier who had supplied goods to Spaghetti’s branch in MamaMia Republic; and - Rental income of $100,000 from leasing a piece of equipment to a company resident in EtnaLand. The amount of $100,000 is net of 8% EtnaLand withholding tax and was received in Singapore on 31.12.2014. Both MamaMia Republic and EtnaLand share many similarities in their income tax systems. Neither country has concluded a tax treaty with Singapore. Both countries adopt the Classical Two-Tier Model for the taxation of corporate profits and dividends, with the corporate tax rate at 25% and the dividend withholding tax rate at 3%. However, neither country imposes any withholding tax on remittances of branch profits. Due to an impending economic downturn in 2015 and beyond, all the companies in the Pasta Group are not expected to be in a tax-paying position in the near future. Required (a) Advise on how the Group Relief and/or Carry-Back schemes may be used to mitigate the total income tax liability of the Pasta Group for the Years of Assessment 2014 and 2015. Your answer should also include a recommendation as to whether a section 24 election should be made in respect of the transfer of the plant from Lasagne to Macaroni on 31 December 2014. You are NOT required to present full income tax computations for any of the companies for this part of the question. (b) Compute Spaghetti’s income tax liability for the Year of Assessment 2015, making the most tax-efficient claim for relief from double taxation. Oct 2015 8 15s1 Topic 6 CF, GR, CB APPENDIX 1 Self-study Questions (with suggested solutions) Question 1 (extract from 12s1) NOTE: The original 12s1 exam question tested content on Topic 6 and also Topic 7 DTR. This extract has been prepared for Topic 6 self-study purposes only. Co F is incorporated and tax-resident in CraziLand where it carries on its business. Up until 30 June 2014, Co F’s issued ordinary shares had been beneficially held by Mr Rabid (55%) and Mdm Neurotic (45%). On 1 July 2014, Mr Rabid transferred his entire shareholding in Co F to Ms Psychotic. Co F has investments in three Singapore-incorporated and tax-resident companies, Co L, Co P1 and Co P2, all of which carry on business in Singapore. Since 2002, the corporate structure involving the four companies is as depicted below: Co F 90% 90% 10% Co P1 Co P2 80% Co L Notes: % refers to the percentage of beneficial ownership of issued ordinary shares. The remaining 10% of the issued ordinary shares in each of Co L, Co P1 and Co P2 have been, and continue to be, held by Mr Rabid. The following presents tax-related information pertaining to Co L, Co P1 and Co P2 for the Years of Assessment 2015 and 2014: Co L $ Co P1 $ Co P2 $ (40,000) 0 (50,000) 10,000 400,000 (9,000) 10,000,000 0 (1,000,000) 900,000 100,000 50,000 Year of Assessment 2015 (YE 31.12.2014) Adjusted profit/(loss) Foreign-sourced income Capital allowances – YA 2015 Year of Assessment 2014 (YE 31.12.2013) Chargeable income (after partial exemption) Oct 2015 9 15s1 Topic 6 CF, GR, CB Required: Advise on whether any of the following independent proposals may be effected in respect of Co L’s unabsorbed items arising in the Year of Assessment 2015: (i) transfer to Co P1 under the group relief scheme; (ii) transfer to Co P2 under the group relief scheme; (iii) carry back to the Year of Assessment 2014. Question 2 (extract from 14s1 question) NOTE: The original 14s1 exam question tested content on Topic 6 and also Topic 7 DTR. This extract has been prepared for Topic 6 self-study purposes only. Hertford Holdings Pte Ltd (HERT) is incorporated and resident in Singapore where it carries on its business. Since its incorporation in 2010, the ordinary shares of the company are beneficially held by Ms Broxbourne (60%) and Mr Enfield (40%), and this shareholding structure is expected to remain unchanged for the foreseeable future. HERT is the ultimate holding company in a corporate group that also includes Ware Pte Ltd (WARE), St Margarets Pte Ltd (MARG), and Rye House Pte Ltd (RYE), all of which are also Singapore-incorporated and resident companies carrying on their respective businesses in Singapore. The following diagram presents the corporate group structure: HERT 60% 80% WARE MARG 60% 40% RYE Note: % refers to the percentage of beneficial ownership of ordinary shares. The remaining 40% and 20% of the ordinary shares in WARE and MARG respectively are held by various minority shareholders. Oct 2015 10 15s1 Topic 6 CF, GR, CB The following information pertains to the companies in the corporate group: Year of Assessment 2015 Adjusted profit/(loss) for YE 31.12.2014 Capital allowances – YA 2015 Year of Assessment 2014 Chargeable income HERT $ WARE $ 50,000 800,000 NIL 50,000 18,000 270,000 MARG $ RYE $ (160,000) 1,000,000 190,000 500,000 100,000 700,000 Required Advise on how the Group Relief and/or Carry-Back schemes may be used to mitigate the total income tax liability of the corporate group as a whole for the Years of Assessment 2014 and 2015. You are NOT required to present full income tax computations for any of the companies for this part of the question. Suggested dsolution Group relief MARG and HERT - Members of the same co group (80% direct shareholding by HERT in MARG) - Not tax-efficient to transfer unabsorbed items to HERT because it would cause HERT to lose its partial exemption, foreign tax credits, and corporate tax rebate MARG and WARE - Not members of the same co group (HERT holds 80% in MARG but only 60% in WARE) MARG and RYE - Members of the same co group (HERT holds 80% in MARG and effectively 84% (60% x 40% + 60%) in RYE) - Transfer $350,000 ($190,000 + $160,000) of unabsorbed items to RYE, resulting in a tax reduction of $59,500 ($350,000 @ 17%) for RYE Carry back - - Carry-back from YA2015 to YA2014 is permitted for MARG since no substantial change in shareholdings as at 1.1.2014 and 31.12.2014, and business continuity test is (assumed) satisfied However, only $100,000 UCA can be carried back, resulting in a tax reduction of only $17,000 ($100,000 @ 17%), with the balance of unabsorbed items of $250,000 to be carried forward to YA2016 Conclusion Elect for Group Relief to transfer unabsorbed items from MARG to RYE Oct 2015 11 15s1 Topic 6 CF, GR, CB Question 3 (adapted from past question) Companies P, Q, R and S are all companies incorporated and tax resident in Singapore. The companies all carry on business in Singapore and there has been no change in their respective businesses since their incorporation. The shareholding structure involving the four companies is indicated in the diagram below. The percentages in the diagram refer to the percentages of beneficial ownership of issued ordinary shares in the respective companies. The remaining 30% shares of Company S are held by minority shareholders. Prior to 31 May 2015, all the shares of Company P are held by an individual, Mr How. On 31 May 2015, Mr Why bought over 60% of the shares of Company P from Mr How. Company Q has been investing heavily in machines for use in its business in recent years and it had claimed capital allowances in those years the expenditures were incurred. As a result, Company Q has unabsorbed capital allowances of $500,000 and $300,000 brought forward from the Years of Assessment 2014 and 2015, respectively. The other three companies do not have any unabsorbed capital allowances, trade losses or approved donations brought forward from prior years. For the Year of Assessment 2016, Company Q has adjusted trade profit and non-trade profit of $200,000 and $10,000, respectively. Required (a) Advise whether Company Q can set off the unabsorbed capital allowances brought forward from Years of Assessment 2014 and 2015 against its taxable income for the Year of Assessment 2016, and calculate the brought forward unabsorbed capital allowances that will be carried forward to future years. (b) Assume that Company Q had made a cash donation of $100,000 to the Singapore Cancer Society, an approved institution of public character, in the financial year ended 31 December 2015. Quantify the tax benefit arising from this donation and discuss the options (carry back, current year utilisation, carry forward and group relief) for Company Q with regard to this tax benefit. Oct 2015 12 15s1 Topic 6 CF, GR, CB Suggested solution (a) YA2014 UCA B/F: - Relevant dates: 31.12.14 and 1.1.16 - 60% change in shareholders. Shareholders test not met. - Cannot be set off against taxable income in YA2016. $500,000 forfeited YA2015 UCA B/F: - Relevant dates: 31.12.15 and 1.1.16 - No change in shareholders. Shareholders test met. - Can be set off against taxable income in YA2016 $300,000 YA2015 UCA set off against $210,000 $90,000 YA2015 UCA C/F to future years (b) Tax benefit is 300% (Golden Jubilee year) x $100,000 = $300,000 C/B: Approved donation cannot be C/B. Current year utilisation not possible as there is no assessable income in YA2016. Group relief: Applying ordinary shareholders test, ONLY P and R are members of the same group as Q. - P: direct shareholding of 100% of Q - R: P is common shareholder. P holds 100% of Q, and P holds 79% (70%x 70% + 100% x 10% + 20%) of R - To also state the conditions for Group relief election to be made. - Assuming these conditions are met, Q may transfer current year UD of $250,000 to either P or R. Assess based on the tax situations of P and R. C/F: If group relief not elected, UD will be C/F, subject to shareholder test. The UD must be utilised by YA2021. Oct 2015 13