Charging section of the ITA – s10(1)

“Income tax is, subject to the provisions of this Act, payable at the rate
or rates specified hereinafter for each year of assessment upon the
income of any person accruing or derived from Singapore or received in
Singapore from outside Singapore in respect of –

AC2301: Principles of Taxation

2023/24 Semester 2
Defining heads of charge

Charging section of the ITA – s10(1)

(a) gains or profits from any trade, business, profession or
TBPV - Trade Income vocation, for whatever period of time such trade, business,
profession or vocation may have been carried on or
exercised;
(b) gains or profits from any employment;
(c) [ [Deleted by Act 29/65]] s10(1)(a) income – Trade, business,
Non-trade Income (d) dividends, interest or discounts; profession or vocation (TBPV)
(e) any pension, charge or annuity;
you still owning the property.
(f) rents, royalties, premiums and any other profits arising from
property; and
(g) any gains or profits of an income nature not falling within
any of the preceding paragraphs.”
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 Determine existence of TBPV
Why determine existence of TBPV? – Badges of trade SECOND TEST - BOT test!
If TBPV exists, receipt from act/transaction in the ordinary course of the TBPV “Trade”, “Business”, “Profession”, “Vocation” not defined in ITA
is income and taxable To determine TBPV, apply “badges of trade” to the facts of the case
Badges of trade: Profession = lawyer, engineer, accountant, doctor
Different tax treatment of s10(1)(a) income compared to non-s10(1)(a) 1. Subject matter of realisation - smtg in common: Certificates / Training
income: 2. Length of period of ownership - EG: Dentist are earning money when they are
running their own practice (10 - 1A) can claim the
Trade loss may be set off against income from other sources / carried back / carried 3. Frequency of transactions machinery equipments through
S10-(1) (A)
forward CA to reduce 4. Supplementary work done
your
Capital allowances claim previous 5. Circumstances responsible for realisation Vocation:
(details to be covered in later session) year trade
6. Motive Taxi Driver and Hawker (cannot claim CA) but can
income so
claim 10-1(A)
Depreciation (not accounting concept) that
you can get Which badges of trade is the most persuasive to
- Always need to remove so that the taxable income will be lower. Tuition Teachers (can claim under 10-1(A))
refund from prove the conclusion?
- Capital Allowances (CA) similar to depreciation (but it is called CA.)
the other
government Need to talk about these 6 factors.
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Tuas (tables, chairs, machines) --> can put claim under trade income (CA)
Trade = Buy and Sell Things (don't need know whether its trade or business)

Identify if there is a trade or business only!

Badges of trade Badges of trade

1. Subject matter of realisation 2. Length of period of ownership

Nature of the asset EG: Paining and selling jewelry --> it will be for own use The longer the period less likely to be trading

Is this asset: What is considered “long”?

Commonly acquired for trading or own use? EG: Buy shares --> sell one week later (short)
Purchased in large quantities? Generally, items for one year or less considered short. No number threshold

How do you determine if it is inconclusive / conclusive? Link back to the case study. It depends on the nature of the assets (qualitative assessment of the asset to determine long/short)

Ans: If it can be trading or own use, then it is consider inconclusive.

However, if it is only seems like trading, then it will be more likely

to be trading

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Badges of trade Badges of trade
3. Frequency of transactions 4. Supplementary work done don't have to do smtg onto the assets.

More often
Repeated similar transactions more likely to be trading Work done on the asset to bring it into a more
marketable condition more likely to be trading
you made changes (what you do on the assets) then sell it at higher price.

trading E.g. Manufacturing

Processing
What is considered “repeated”? Improvement
Modification
Marketing Allow more buyers (higher demand) - don't have to do smtg onto the assets.

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Badges of trade Badges of trade Tax = be a detective and identify the motive

5. Circumstances responsible for realisation 6. Motive Evidences of the tax-payer if a real motive is a purported motive:

EG: COVID-19

Forced to sell / unplanned sale / not connected with normal course of trade “Profit-seeking motive”, which means that the asset was purchased with the
less likely to be trading intention to resell in a relatively short period of time for a profit. There was
no intention of either holding it as an investment or for personal use.
E.g. Forced cessation of business more likely to be trading
Sudden emergency <all unplanned>

Opportunity that requires ready money Motive may be inferred from surrounding circumstances in the absence of
direct evidence
describe the events that lead to the assets. E.g. Why the asset was purchased, owned & sold
Conclude whether it is planned or unplanned. *could have change of motive = identify the factors (more likely to be trade)

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Class discussion
TEL Courseware: CASE STUDY
Usually just need to do one test. And which test will it be used?
1. PMA test = Income vs Capital - (If pass, this shows that it is capital?)
2. BOT test = Whether there is 10-1 (A) - (if pass, this shows that it is income)
If use BOT test and pass the test, then it proves that it is income.
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1. Subject Matter of Realization (Nature of Assets) - Second-hand Office Building (inconclusive, less likely to be trading)
2. Period - 2.5 years (short = Trade - short trading)
3. Frequency of Transactions - only once (inconclusive, not likely to be trade)
4. Supplementary work done (maintenance fee, repairs, property agents - inconclusive, not likely to be trade because there are insufficient information)
5. Circumstances Responsible for Realization - "BOD felt that it was an opportune time to sell the building given that property prices were rising because of improved economic conditions"
6. Motive - Strong speculation that building and its neighboring (more likely to trading)
- Refinancing (any means of refinancing - no. No intention of keeping the rental + how are they going to repay their loan)
- Developments because for short-term rental
- Tax-payer purported motive (real or not)
Case Study
The building was let out from 1 April 20XX for a 2-year lease period.
During this period, the gross rental yield amounted to $520,000
whereas property taxes and maintenance expenses totalled $130,000.
Interest costs over the same period amounted to $500,000.
In mid 20XY (where 20XY is 2 years after 20XX), the decision was
taken by the company to dispose of the building. When subsequently
queried by the IRAS as to the reason for the disposal, the company
responded that this was in view of the negative net rental yield.
Moreover, the company’s Board of Directors felt that it was also an
opportune time to sell the building given that property prices were
rising because of improved economic conditions. Property agents were
appointed and a further expenditure of $0.1 million was incurred to
spruce up (i.e. effect minor repairs and maintenance to) the building in
preparation for its sale. The building was eventually sold on 15 July
20XY at a price of $11 million. Commission and legal expenses borne
by the company in connection with the sale amounted in total to
$150,000.
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Case Study
Franco Industries Pte Ltd was incorporated 20 years ago with an
issued share capital of $10 million. The company makes up its annual
accounts to 31 December. Its shareholders are Mr and Mrs Franco,
who also act as directors of the company. The company’s principal
activities, as stated in its annual accounts, are in the manufacture of
household cleaning products. Except for the one instance described
below, the company has not engaged in any real property transactions.
In 20XX, the company acquired a second-hand office building in Tuas
with the purported intention that the building would be leased out to
exploit its long-term rental yield potential. This intention was explicitly
documented in the resolution passed by the company’s Board of
Directors as well as in the minutes of the Board meeting. The purchase
agreement was signed on 15 February 20XX and the purchase cost of
$5.1 million (including legal fee and stamp duty amounting to
$100,000) was capitalised in the company’s “Investment Properties”
fixed asset account. The purchase of the building was financed by a $4
million term loan due for repayment in 3 years’ time, with the balance
drawn from the company’s existing overdraft facility.
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Case Study
Further communications between the company and the IRAS as well as the
IRAS’s own investigations revealed the following:
• The company informed the IRAS that it had not undertaken, or engaged
any third party to undertake on its behalf, a formal feasibility/viability study
on the long-term rental yield potential of the building prior to the purchase
of the building;
• The IRAS obtained the opinion of a reputable independent property
valuation firm which revealed that the $520,000 gross rent derived over
the period during which the company rented out the building was quite
reflective of property market conditions that prevailed around the time of
the purchase of the building and could have been reasonably foreseen at
that point in time. According to the valuation firm, there had been (and
continues to be) strong speculation that the building and its neighbouring
properties would be acquired by a large property developer for re-
development into a major mixed commercial-cum-residential hub in view of
their proximity to a planned MRT station.The speculation had caused
rentals of these properties under leases longer than a three-year term to
be depressed because potential long-term tenants were put off by the
prospect of their leases being prematurely terminated should
redevelopment of the neighbourhood occur; and
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their actions --> does not show the purported motive (on refinancing)
Case Study
Further communications between the company and the IRAS as
well as the IRAS’s own investigations revealed the following
(cont’d):
• In response to a query from the IRAS, the company informed
that it had not at any time taken any steps to re-finance the $4
million term loan which was due for repayment 3 years from
20XX. As events turned out, the loan was fully repaid as
s10(1)(b) income - Employment
scheduled.

Required (Details to be covered in later session)

Advise the company’s Board of Directors as to whether the gain
on disposal of the building amounting to $5.65 million ($11m –
$5.1m – $0.1m – $0.15m = $5.65m) is taxable. only for individual employment income
Actions + Facts suggests that it is more likely to be trade (income in nature).
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Dividends tree = shares | apples = dividends

Distributions to shareholder representing share of company’s profits

Shareholder (taxpayer) receives dividends as a return (fruit) from

investment income in nature & taxable
s10(1)(d) income
– Dividends, interest, discount Generally s10(1)(d) income, but in certain cases taxed as s10(1)(a) income
When is dividend income taxed as s10(1)(a) income?
discount = financial instruments

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 EG: DBS prefer income to be taxed as 10(1a) Trade Income

Dividends Interest EG: Loan Shark = will not be taxed because illegal unless getting caught by police / regulators

Dividend income accrues on the date when there is an obligation Interest income represent return (fruit) from loans / deposits income in
for the company to pay the dividend date of declaration Legal entitlement nature & taxable
Some exceptions (exceptions are not examinable)
Generally taxed as s10(1)(d) income, but in certain cases taxed as s10(1)(a)
Receipt of dividends vs gains from disposal of shares income
How are gains from disposal of shares taxed? Itordepends!! whether it is capital gain 10(1)(a or g)
gain from disposal of shares When is interest income taxed as s10(1)(a) income?
use BOT test or PMA test
(Dividends to be considered further in later session) Interest income accrues on the date it is due and payable

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Pension, Charge, Annuity

Pension Pension funds NOT THE SAME AS CPF (forced savings plan)
Payment made to individual after retirement from employment
Accrues on date of receipt

Charge ex-spouse paying for the custody of child of other ex-spouse

s10(1)(e) income Payment by order of court / legal instrument
- Pension, Charge, Annuity E.g. alimony / maintenance Parents maintenance or child maintenance = can get exempted from tax
Accrues on date of receipt

Annuity
Recurring annual payment arising from purchase of annuity
policy from insurance company, or by way of gift or legacy
Accrues on date of receipt
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somewhat similar to pension funds -

give a sum of money > once reached a certain age > will get a monthly payout
 Rent 10(1a) Income - CapitaLand, Mapletree (because trade loss got value and can gain CA)

Return (fruit) from letting out the use of or granting the right to use movable
or immovable tangible property income in nature & taxable

Generally s(10)(1)(f) income, but in certain cases taxed as s(10)(1)(a) income

s10(1)(f) income When is rental income taxed as s(10)(1)(a) income?
- Rent, Royalties, Premiums, Any
other profits arising from property
Rental income accrues on the date it is due and payable
Premium - for Rental
Rental income vs gains from sale of the property
How are gains from sale of property taxed?
It depends - capital in nature or

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- Author's Book (full-time)

- F&B / franchises model (Mcdonalds - they own the trademarks and

allow franchisee to use it & Coke)

Royalties Any other profits arising from property

Royalties vs Rent Any other receipts for the use of or the right to use property
Return (fruit) from granting use or right to use intangible or intellectual
property income in nature & taxable NOT gains from sale / disposal / assignment of property

Similarly, there could be instances when royalties are taxed as s10(1)(a)

income – when?

Royalty income accrues on the date it is due and payable

Royalty income vs gains from sale / assignment of the property

How are gains from sale / assignment of the property taxed?
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Assignment of IP - usually capital gain (R&D firms)

*know the business model + taxes

 s10(1)(g) income
Income receipts not captured in preceding paragraphs
Income receipt from transaction:
this is not 10(1)(a) That
is not an activity carried out in the ordinary course of the person’s business; or
That is not an ordinary incident of some other business activity of the person service income
S(10)(1)(g) income provided that at the time of transaction, the person had the intention or purpose of
- Any gains or profits of an income nature not making a profit from the transaction
falling within any of the preceding paragraphs
Casual service income
Fail the BOD test then go into S(10)(1) (g) Income

Receipts specifically deemed as s10(1)(g) income

- trust distributions / unit trust --> look at dividends/interest/distributions (income in nature) but not under any
preceding trade of income but still under 10(1)(g) income

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Tuition > can be under 10(1)(a) or 10(1)(b) or 10(1)(g) BOD (for future svc case studies):
- Frequency of services,
- You perform a service and under employment --> 10(1)(b) - Level of expertise experience,
- Full time teacher performing --> 10(1)(a) - Is it a source of livelihood?
- Part-time tuition (university student) --> 10(1)(g) - Marketing / advertising activities (Supplementary)
- Investment / use of assets &/or people
BOT test cannot apply bcos this is a service

s10(1)(g) income

NOT include:

Capital gains, e.g. gain from disposal of assets held as long-term assets /
investments

Receipts that are truly voluntary payments

EG: Lottery Winning TOTO / 4D (Profit-seeking)

- IRAS view as a win/fall --> subscribe with "hope" for better future
- However, not taxable in SG.

EG: Long service award --> Its not under contract but reward for department service
31 - are taxed under 10(1)(b) by IRAS 32