Increased personal tax rates for high-income earners
The marginal increase in personal tax rates for high-income earners as announced in Budget 2015 has taken effect from Year of Assessment (YA) 2017. The revised rates are applicable on income earned in 2017 onwards. Singapore’s tax policy has always aimed at retaining its competitiveness in the region. Singapore has successfully attracted investment dollars and multinationals from around the world through its strategic tax regime.
In its jubilee year, the government, in an attempt to raise its tax revenue to support its massive funding programs complementing its economic restructuring efforts, announced a marginal upward revision to the Singapore personal tax rates. Effectively, from the income year 2016 onwards, a highest personal tax rate of 22% is chargeable for annual income in excess of S$320,000. The taxpayers whose annual chargeable income is more than S$160,000 will be impacted by the marginal increase in rates. Prior to the change, the maximum rate for chargeable income in excess of S$320,000 was 20%.
New Singapore Personal Tax Rates Effective YA 2019
| Chargeable Income (S$) | Tax Rate (%) | Tax payable S$ |
|---|---|---|
| Up to 20,000 | 0 | 0 |
| Next 10,000 | 2 | 200 |
| On the first 30,000 | – | 200 |
| On the next 10,000 | 3.5 | 350 |
| On the first 40,000 | – | 550 |
| On the next 40,000 | 7 | 2,800 |
| On the first 80,000 | – | 3,350 |
| On the next 40,000 | 11.5 | 4,600 |
| On the first 120,000 | – | 7,950 |
| On the next 40,000 | 15 | 6,000 |
| On the first 160,000 | – | 13,950 |
| On the next 40,000 | 18 | 7,200 |
| On the first 200,000 | – | 21,150 |
| On the next 40,000 | 19 | 7,600 |
| On the first 240,000 | – | 28,750 |
| On the next 40,000 | 19.5 | 7,800 |
| On the first 280,000 | – | 36,550 |
| On the next 40,000 | 20 | 8,000 |
| On the first 320,000 | – | 44,550 |
| In excess of 320,000 | 22 |
A snapshot of the impact of revision on persons with income above S$160,000
| Chargeable Income S$ | Tax Payable S$ | Difference S$ | Effective Tax rate | |
|---|---|---|---|---|
| Before Revision | After Revision | |||
| 200,000 | 20,750 | 21,150 | 400 | 10.6% |
| 240,000 | 27,950 | 28,750 | 800 | 12.0% |
| 280,000 | 35,150 | 36,550 | 1400 | 13.1% |
| 320,000 | 42,350 | 44,550 | 2,200 | 13.9% |
| 350,000 | 48,350 | 51,150 | 2,800 | 14.6% |
Who will be affected?
The upward revision is expected to affect 5% of the taxpayers in Singapore. Business owners or entrepreneurs, who are operating through sole proprietorships and partnership arrangement and make an annual profit of S$160,000 or more, will be impacted by the new tax regime. Sole proprietorships and partnerships are not considered a separate legal entity, therefore, the profits are treated as personal income of the owners and are subjected to personal tax rates.
Besides business owners, the rate hike will also impact employed persons and professionals who earn more than S $160,000 annually.
Is there an alternative?
The difference in tax payable after the revision may appear marginal but the difference is significant when compared against the savings in a corporatized setup. The headline corporate tax rate of 17%, without taking into consideration the partial exemption, by itself is 5 percentage points lower than the top personal tax rate. Under the revised regime, the personal tax rates surpass the corporate tax rate at a chargeable income of S$160,000 as against S$200,000 previously.
Business owners who make more than S$160,000 chargeable profits can consider upgrading their business setup to a private limited company. By incorporating into a company, the business profits will be subjected to corporate tax. Under the single-tier taxation system, the profits distributed as dividends to the shareholders/owners are exempted from tax on their hands. As a private company, the chargeable income will be subjected to only 17% corporate tax.
More importantly, as a newly incorporated company, the annual chargeable profits of up to S$100,000 will be fully exempted from tax for the first three tax filing years. For income above S$100,000 the newly incorporated entity will be charged only 8.5%. The full corporate tax rate of 17% will be applicable on income over S$300,000. After the third year, the company will still enjoy partial tax exemption, whereby chargeable income of up to S$300,000 will be charged only 8.5% and profits above S$300,000 will be charged at 17%.
Read More Converting a Sole Proprietorship to a Private Limited Company
The following is an illustration of the tax charged in YA 2018 on the annual chargeable income of Mr. Lim via a Sole Proprietorship Vs a newly set up Private Limited Company
| Lim’s Sole Proprietorship | Lim’s Pte Ltd Company | ||
|---|---|---|---|
| Chargeable Profit | S$350,000 | S$350,000 | Chargeable Profit |
| Tax Charged | Tax Charged | ||
| Up to S$320,000 | S$44,550 | 0 | Up to S$100,000 |
| Above S$320,000 @22% | S$6,600 | S$17,000 | Next S$200,000 @ 8.5% |
| S$8,500 | Above S$300,000 @17% | ||
| Total Tax Payable | S$51,150 | S$25,500 | Total Tax Payable |
| Effective Tax Rate | 14.6% | 7.3% | Effective Tax Rate |
| Total tax savings as an incorporated entity S$25,650 | |||
From the above illustration, it is obvious that there is a sizeable saving in tax payable if the business is corporatized. The effective tax rate is slashed by 50%. However, there are some factors that must be considered before incorporating business into a company.
Points to Consider
Impact on existing contracts: If the business has any ongoing contracts with its service providers or customers the impact of the transition to a private company must be analyzed and measures must be taken to mitigate the impact without any loss of customer or service.
The unanimity of partners: If the business is a partnership setup, unanimous support of all partners must be secured before the transition. They should mutually agree on the shareholding structure.
Costs involved: The transition involves certain costs, such as costs of incorporation costs as well as ongoing compliance and administrative costs. The costs must be weighed and it should not override the tax expenses saved through the transition.
Other benefits: The transition to a corporate entity will bring other benefits such as eligibility to government’s incentive schemes, improved access to funding and financing, protection of personal assets of the owners besides ensuring easy transferability and scalability of the business.
Is this an option for other top earners?
Upgrading a registered business, such as a sole proprietorship or partnership, to a Private Limited Company is a viable and legitimate route. Such conversions although done for tax saving purposes will be deemed legitimate.
However employed professionals are advised not to opt for this route. Any collusive attempts with the employer to corporatize and roundtrip the earnings will be deemed as a measure to evade tax and will be subjected to scrutiny. A business entity without adequate substance, headcount, customer base or business spending established with a primary purpose of channelizing personal income to evade high tax rates will pave way for prosecution.
Is Singapore losing its competitive edge?
Singapore’s tax rates continue to remain attractive even against its closest regional rival Hong Kong. On the corporate tax front, though Singapore headline rate is 17%, as against Hong Kong’s 16%, the effective rate is only 8.5% for companies with an annual chargeable income of S$300,000. Singapore’s personal tax rate has also remained comparable with that of Hong Kong, which charges a maximum rate of 17% on a chargeable income above HK$120,000. In Singapore, a comparable 18% is charged for income in excess of S$160,000 only, and Singapore’s maximum rate of 22% will only kick in for income in excess of S$320,000. Hong Kong’s personal tax regime is not so progressive and is charged from the first dollar onwards but in the case of Singapore, the rates are gradually progressive with the first S$20,000 being fully exempted from tax. Howsoever, observers are of the opinion that any further rate hikes will severely hurt the competitiveness of Singapore in drawing crème de la crème talent.
Read More: Doing Business in Hong Kong vs Singapore
If you need help or clarifications with the changes in taxation, do consult a professional tax agent, who would be able to review your entire portfolio and financial situation before providing you with a detailed walkthrough on how you can best manage and represent your tax obligations.
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