Capital Allowance - Part Two

Newly incorporated Companies in Singapore enjoy no tax for the first $100,000 of chargeable income.

So how does capital allowances come into the picture?

Example,

Net profit $40,000

Add back:
Depreciation $20,000

Adjusted profit $60,000 (before capital allowances)

If you have capital allowances available for NEW assets, should you start claiming them?

Let's assume you have capital allowance of $15,000.

If you claim, your tax free chargeable income is $45,000 ($60k-$15k).

Assume this happens for 3 years. You have paid no tax but you have wiltered away your capital allowances of $45k ($15k x 3).

In year 4, we will see the what happens.

Net profit $40,000

Add back:
Depreciation $0 (assume fully depreciated)

Adjusted profit $40,000 (before capital allowances)

Less:
Capital allowances $0 (all claimed previously)

Chargeable income $40,000

Less: Tax exemption
First $10,000 ($7,500)
Next $30,000 ($15,000)

Chargeable income $17,500

Tax payable $3,500
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Compared with,

Net profit $40,000

Add back:
Depreciation $0 (assume fully depreciated)

Adjusted profit $40,000 (before capital allowances)

Less:
Capital allowances ($15,000) (first year claim)

Chargeable income $25,000

Less: Tax exemption
First $10,000 ($7,500)
Next $15,000 ($7,500)

Chargeable income $10,000

Tax payable $2,000

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How much do you save?

First example - $3,500 tax
2nd example - $2,000 tax

You save $1,500!

Assume this scenario plays out for the next 3 years, you would save $4,500 ($1.5k x 3).

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If we assume that your 4th year profit exceeds $100k, and anything above $100k is tax at a full 20%.

$15,000 x 20% = $3,000 saved
$3,000 x 3 years = $9,000 saved!

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This is a very legal tax strategy and yet very few companies utilise it. Are you one of them?