March 8, 2009
How to avoid tax tangles
Common mistakes in filing tax returns involve rental income and claims for child and parent relief
By Lorna Tan
Tax time is here again for individuals - just as other money worries are crowding in for many people.
But there is no need to fret. The process of submitting tax returns in Singapore is one of the simplest in the world, especially if you keep a few basic principles in mind.
Also, there are enhanced incentives about to come into effect which are designed to encourage taxpayers to admit past mistakes to the taxman.
First the basics: If you are submitting a hard copy, the tax form must be posted to the Inland Revenue Authority of Singapore (Iras) by April 15.
Online filing is fast gaining popularity. Those filing their returns on the Internet have an additional three days to do so. Their deadline is April 18.
Every tax return should be completed with care but some groups come in for particular scrutiny from Iras in a given year.
Iras makes an ongoing effort to identify industries it can help with education programmes - such as proper record-keeping methods.
Last year, real estate and food and beverage operators were in the spotlight.
This year and the next, three self-employed groups can expect close scrutiny so they should exercise extra care when filing returns.
They are: medical practitioners, renovation contractors and public accounting firms. Iras will be checking the details of their income declarations and verifying them against documents and records.
The inclusion of medical practitioners is partly due to the rising popularity and prominence of the Traditional Chinese Medicine (TCM) sector in recent years. Last year, Iras organised two seminars for 170 TCM practitioners to help them with the submission of tax returns.
Although tax time comes around every year, individual taxpayers still tend to make common mistakes - often involving the reporting of rental income and claims for parent relief.
Here are some basic principles taxpayers should look out for:
Rental income
Among taxpayers who rent out property, it is a common mistake not to report the gross rental income that they collect.
In most cases that fail to meet Iras' requirements, taxpayers omit the income they get for furniture and fittings. The taxman says taxpayers need to declare the gross or total figure - which typically includes rent for premises, furniture and fittings, and service charges.
You can claim interest on your mortgage loan but mortgage interest incurred on personal loans is disallowed. Other tax-deductible expenses are property tax, fire insurance, commission paid to secure a subsequent tenant - commission paid to secure a first tenant is not tax-deductible - and expenses on repairs and maintenance.
Case 1: Incorrect reporting of rental income
Mr and Mrs Chia are new owners of a private apartment which they are renting out. Mr Chia approached Iras to admit that in their declaration of the rental income for the first year, they omitted to report the rental income received for furniture and fittings.
In addition, they wrongly claimed the agent's commission for getting the first tenant, and the cost of buying furniture for the apartment, as expenses.
The outcome: Iras adjusted the rental income to include the rental income received for furniture and fittings, and disallowed the expenses on the agent's commission and the cost of the furniture.
Parent relief
Taxpayers who support dependants aged over 55, such as parents or grandparents, can claim this relief.
Common errors arise from duplicate claims and non-eligibility because of the dependant's income level or age. Certain conditions have to be met to qualify for this relief, such as the dependant's income - including dividends and interest - not exceeding $2,000 in the previous year.
Another condition is that no one else can claim this relief in respect of the same dependant.
Child relief
This may be claimed by working mothers whose status is married, divorced or widowed in the previous year.
However, some women are unaware that they cannot claim relief if their children are not Singapore citizens.
Real estate agents
A common mistake is not reporting all sources of commission income received. This includes co-broking fees, referral fees or bank referral fees received from third parties, as well as profit from property sub-sales transacted.
'All sources of income must be properly recorded and reported in their tax returns,' said Mr James Khor, Iras' deputy commissioner, Individual Group.
Some real estate agents claim the salaries paid to family members as an expense. These members perform work such as distributing fliers and doing administrative tasks.
However, Iras has found that these claims are usually higher than the actual amount of wages paid and not commensurate with the work performed. Taxpayers and real estate agents should claim only expenses actually incurred for business against their income. In such cases, the amount claimed should be reasonable. It also means that expenses such as medical costs are not claimable.
Case 2: Incorrect claims of medical expenses
Mr Ng (who does not want his real name to be used) has been a full-time real estate agent for eight years. His income has been consistently high compared with that of other real estate agents. During the year in which his real estate business accounts were audited, the audit officer noticed that there was a significant decline in the net profit.
Upon examining the accounts, it was discovered that Mr Ng had made a medical expenses claim amounting to $80,000. He claimed that he was unaware that the medical expenses incurred by him were not tax-deductible.
The outcome: As medical expenditure is private in nature, Iras disallowed the medical expenses claim of $80,000.
Food and beverage operators
Understating one's income and the failure to report rental income are two common mistakes made by food and beverage operators.
Taxpayers are cautioned that they should report their takings in full and should the takings be used to pay for purchases, there must be proper documentation.
Many food and beverage operators also fail to report the rental income received from sub-letting stall space to other operators.
Case 3: Under-declaration of income
Mr Ong (not his real name) runs a chicken rice stall at a popular food centre. Iras officers observed that his business is extremely good but the amount of turnover declared in his tax return did not correlate to the brisk trade at the stall.
The audit review revealed that Mr Ong did not have proper record-keeping for his business. For instance, profit and loss statements were prepared based on estimates, rather than actual transactions. And no receipts or invoices were kept.
Iras projected his sales based on plate-count by its audit officers and the number of chickens supplied to him by his supplier for the year. Based on the projection, his income was under-declared by $350,000.
Mr Ong eventually confessed to the under-declaration of his income.
The outcome: His tax and penalty came up to $84,000.
Self-employed
Common mistakes made by the self-employed include wrongful claims for expenses and the understatement of income.
Sole proprietors should claim only actual expenses incurred by the business. This should be supported by receipts and invoices. Approximate amounts are not acceptable.
The self-employed are also urged to keep complete records as they would be required to substantiate their claims for expenses.
Said Mr Khor: 'To support claims, taxpayers must keep complete records and proper receipts to show that the expenses/purchases are incurred for business purposes.
'A good practice is to issue payment vouchers to the recipients. Copies of the payment vouchers, which have been duly endorsed by the recipients, are to be retained by taxpayers to substantiate their claims for expenses.'
A common misconception is that records can be discarded once a Notice of Assessment is received. Self-employed taxpayers must keep and retain sufficient records to enable Iras to ascertain their income and business expenses.
Records should be retained for a period of five years even if an assessment has not been raised. This is because the Comptroller may request these documents in the course of audits.
Reduced penalty
Most people see the filing of income tax returns as a mundane exercise but for taxpayers who fail to report accurately, the penalty could be painful, involving fines or even a jail term.
The good news is that Iras is willing to reduce the penalty for those who voluntarily disclose past mistakes. This is to encourage taxpayers who have submitted incorrect returns to come forward voluntarily to disclose errors or omissions and straighten out their tax affairs.
Under the revised Voluntary Disclosure Programme, Iras will waive the penalty for voluntary disclosures made by individual taxpayers within a 'grace period' of one year from the statutory filing date of April 15.
For voluntary disclosures made after the 'grace period', Iras will impose a standard reduced penalty rate of 5 per cent a year if these disclosures meet qualifying conditions.
Previously, the penalty rate for voluntary disclosure was at an incremental rate of 10 per cent a year, subject to a maximum of 30 per cent.
Where errors are discovered by Iras, penalties of up to double the tax undercharged may be imposed. The reduced penalty regime will take effect from tomorrow.
Those who would like to voluntarily disclose past errors in their returns can approach Iras by sending an e-mail message to iit_ compliance@iras.gov.sg, or calling 6351-3481, 6351-3090 or 6351-2915.
For more details of the programme, visit www.iras.gov. sg/irashome/vdp.aspx
UNDER SCRUTINY
§ Self-employed groups can expect close scrutiny of their income declarations and supporting documentation this year and the next, so exercise extra care when filing returns. Here are some common mistakes that can be avoided:
§ Taxpayers who rent out property must declare the gross or total figure - which typically includes rent for premises, furniture and fittings, and service charges.
§ Real estate agents must report all sources of commission income received. This includes co-broking fees, referral fees or bank referral fees received from third parties, as well as profit from property sub-sales transacted.
§ Food and beverage operators must report their takings in full. Should the takings be used to pay for purchases, there must be proper documentation. They should also report the rental income received from sub-letting stall space to other operators.
§ The self-employed should not include wrongful claims for expenses or understate their income. Sole proprietors should claim only actual expenses incurred by the business. They are also urged to keep complete records as they would be required to substantiate their claims for expenses.
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