Director of construction firm charged for tax evasion

Don't bill for work NOT done! Make sure you can prove you have done actual work. And please NEVER EVER UNDER DECLARE your income!

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7 Apr 2008

VISA Engineering Pte Ltd and its director, Ong Kah Sut, were found to have under-reported about $900,000 in income, between the Year of Assessment 2001 and 2005, and evaded $195,048 in tax. For their wilful intent to evade tax, they were charged under Section 96 (1)(d) of the Income Tax Act.

Ong Kah Sut also committed other offences resulting in a total of $1.25 million in tax and penalties.

“Modus Operandi”

Ong Kah Sut, also a sole proprietor of VISA Contract Services (VCS), had prepared fraudulent invoices from VCS. The subcontract and installation works described in the fictitious invoices were in fact never performed for VISA Engineering. VISA Engineering Pte Ltd created the false records in the General Ledger to substantiate the false claim of expenses. Investigations revealed that the payments were in fact paid to Ong Kah Sut.

The Charges

VISA Engineering Pte Ltd, located in Bukit Batok Crescent, pleaded guilty to two charges of falsifying the company’s General Ledger in the year 2001 with a wilful intent to evade tax. Ong Kah Sut also pleaded guilty to two charges of wilfully with intent to evade tax, assisting the construction firm to evade $19,131.12 in tax in the year 2001. The company and its director had therefore committed offences under Section 96 (1)(d) of the Income Tax Act. The penalty is three times the tax evaded.

Under the Income Tax Act, anyone found guilty of assisting another person to evade tax will similarly be liable to a penalty of three times the tax evaded.

Too Much Profit - Part Two

That is to say, look at the cash flow aspect of the transaction.

Billing your customers for products/services not delivered yet.

For services, you should only recognise the percentage of job completed. You should also accrue for costs (%) that has not been incurred directly related to the job.

In accounting, you should only invoice your customers when you have delivered your products. However, a lot of businesses invoice their customers before delivery because the invoice acts as a confirmation of sorts or a "notice" to get customers to pay before delivery.

This leads to uncertainty to the profitability of the transaction.

1. What if the customer doesn't pay?
2. What if the customer changes its mind and either cancel the order or amend (downwards) the amount billed?
3. What if the cost of the supplying the product goes up and is no longer profitable?

So what should you do?

1. Only invoice a customer backed by a purchase order or a signed agreement.

2. Remember to accrue for the cost, even though your supplier has yet to invoice you.

3. Remember to hedge against any foreign currency fluctuations.

4. Any disagreement in regard to the transaction should trigger a provision for doubtful or bad debt.

5. Go through your customer statements and identify bad pay masters, issue credit notes for returned goods, damaged goods or discounts that you have to give.

End of Part Two

Too Much Profit? Part One

Too Much Profit?

What sort of business doesn't want to show a huge profit at the end of the year?

A business that doesn't want to pay taxes? A business that doesn't want to pay its shareholders? A business that doesn't want to pay out a bonus?

Well, the list goes on...but like everything else, we are missing the KEY reason why a large profit isn't so platable to management or its owners.

A large (or significant) profit does not necessarily mean a healthy business. It could just be the following:

1. More orders in the last month of the year
2. Fixed assets has been fully depreciated
3. A large inventory at the end of the year
4. Exchange gains during year end translation
5. Waiver of amounts due to directors/other creditors

That just means PROFIT IS NOT EQUAL to GOOD POSITIVE CASH FLOWS.

However come tax reporting you are being taxed on your profit cash items or otherwise.

It is therefore important to look at the accounts and see if you are booking in profits that are either non-existent or uncertain.

End of part one

Private Car - Part Two

Employee claim

Can you expense off petrol claims made by your employees as a tax deduction? Answer is NO.

How do you structure these claims?

1. Pay a fixed transportation allowance: IRAS will allow this tax deduction, however, you have to pay CPF on this allowance. Your employee will be taxed on this allowance.

2. Get your staff to take a public transport.

3. You can purchase a business vehicle - G plated vehicles. Why?

a. You can claim petrol, repairs and other related expenses. (except for fines & summons)
b. You are given a capital allowance deduction.
c. You can advertise your company on your business vehicle
d. You need not pay CPF and your employee is not taxed for using the vehicle.

4. Contract out a chauffeur position.

a. Save you the driving, gives you more time to prepare for your sales meeting.
b. Expense off this service received and get a tax deduction.
c. Move the maintenance of a car and driver to another person.

Leave the car in the garage/car park

IRAS clearly states that ALL expenses for S-plated vehicles are NOT tax-deductible. That means no deduction for petrol, repairs, parking etc.

You MAY claim petrol expenses from your company, it is allowed, it is however NOT allowed for income tax deduction.

For example,

Net loss (S$6,000) (Out of which $8,000 is for your car)

Add back:
Upkeep of motor vehicles S$8,000

Adjusted profit S$2,000

Tax approximately S$200

Therefore, it is tax wise better to take a taxi, as you are able to claim every single cent.

Again, this has to depend on your overall expenditure on your vehicle (hire purchase instalments, petrol, repairs, parking, depreciation....)

See Part two to deal with employee claims.

Director's fee

Many auditors and tax agents advise Director's to accrue for directors' fee to reduce the profit that is to be taxed at corporate rates.

There are several considerations before using this technique.

1. You have to know your personal income OTHER than those from your company. What is your effective tax rate?

Example,

Corporate tax rate: 20% BUT for the first $100,000, the effective tax rate is about 10% So any other personal income HIGHER than 10% , directors' fee should NOT be declared.

2. Should you declare bonuses before declaring directors' fee?

Example,

Assume that your have $50,000 to be distributed and you DO NOT want to pay taxes at corporate tax rates.

If you declare $50,000 as director's fee - tax is S$1,750
(Assuming no other income and without calculating for tax relief)

If you declare $50,000 as a bonus - tax is S$900

You save - S$850!! Why?

When you pay bonuses, you will be given a relief for the 20% CPF that is deducted from your bonus.

Therefore,

Income - S$50,000
Less:
CPF - S$10,000 (20%)

Chargeable income - S$40,000

First S$30,000 S$350
Next S$10,000 S$550
Total S$900

This example does not take in the consideration that CPF is payable for the bonus by the Company. This will reduce the corporate profit FURTHER.

Plus, it will increase your NON-taxable income (CPF of 20% and 13%)

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?

Capital Allowances - to use or not?

What are capital allowances? If you know what is depreciation, you know what are capital allowances. However, the distinct difference is the timing of claim, amount of claim, right to claim.

Depreciation rates expressed in years or a percentage are determined by the management of the company.

For example,
A Computer is deemed to have useful life of 3 years, therefore...

Cost - $1,200 Useful life - 3 years

Depreciation per year is $400.

What about IRAS?

Under Section 19A, computers has to be written off in ONE year.

So, a Company will claim $1,200 deductions rather than a deduction of $400.

Or in the case of a machine,

Cost - $3,600
Depreciation - $720 per year (over 5 yrs)
Capital allowance - S19A - $1,200 (over 3 years)

So, what's the loophole?

You are allowed to DEFER the use of capital allowances. IF you decide to START using it, you CANNOT defer capital allowances that you have started claiming.

For example,

Net profit as per accounts $800

Add back:
Depreciation $400

Adjusted profit $1,200

Less: Capital allowance
S19A - current (1,200)

Chargeable income S$Nil

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What if there was a loss of $400 for the year?

Net loss as per accounts ($400)

Add back:
Depreciation $400

Adjusted profit $Nil

Less: Capital allowance (Optional)
S19A - current ($1,200)

Unutilised capital allowance carried forward $1,200

You can opt NOT to claim your capital allowance and defer the claim to another year.

Why?
Although you can claim unutilised capital allowances in the following year, you are subjected to what IRAS calls a shareholders test. Whereby the present shareholder must maintain a 51% shareholding for BOTH the relevant period of claim.

If this test fails, all unutilised capital allowances brought forward are WIPED OFF!

Most new companies need new injection of funds, that means more shareholders in different tax periods and having these tax allowances disallowed can be a major tax disadvantage.

What if you have accumulated $50,000 worth of capital allowances brought forward? That is worth $10,000 (20% of $50k) worth of tax write off THROWN AWAY!!

End of part one...

Tax and Business Loop holes

Are there really tax loopholes? Are there really ways to structure your business to gain maximum financial, tax, operational advantages?

Isn't it all ILLEGAL? Well, not really. Tax planning services are openly promoted and most importantly done by top accounting firms everywhere in the world.

You have to however note the differences between tax avoidance (legal) and tax evasion (illegal). Will tax planners get it right all the time? The simple answer is NO.

Like all good government bodies, they (IRAS or your local tax authorities) reserve the right to interprete your transactions in WHATEVER way they deem fit.

Rule of the thumb is NEVER under declare your income and NEVER over claim your expenses.

In the following blogs to come, I will explore some tax planning that you can use WITHOUT falling foul of the law.