On 25 January 2021, the Inland Revenue Authority of Singapore (IRAS) published an updated e-Tax Guide on Ascertainment of Income from the Business of the Making of Investments (Third Edition). The guide provides details on how income from the business of the making of investments is determined based on the provisions of section 10E of the Income Tax Act (ITA) and explains the tax treatment in certain scenarios. The guide has been updated to provide clarity on the tax treatment of section 10E entities, including the addition of Annex A to provide further details on the tax treatment applicable to a section 10E entity in the business of letting immovable properties.
A summary and the new Annex A are provided in the guide as follows:
At a Glance
A business of the making of investments is different from a business of dealing in investments or passive holding of investments. Based on the facts and business activities of the case, a company, trustee of a property trust, partner of an LLP or LP may be regarded as carrying on a business of the making of investments. In which case, its income would be taxable under section 10(1)(a) of the ITA but the provisions of section 10E of the ITA would apply to determine the income chargeable to tax.
Investments include securities, immovable properties, and immovable property-related assets. A business of the making of investments includes a business of letting immovable properties such as service apartments.
Under section 10E of the ITA, the deduction of any outgoings or expenses and capital allowances are limited to the income derived from investments which produce income in that Year of Assessment ("YA"). Other than the industrial building allowance ("IBA") and the land intensification allowance ("LIA"), the balance of any outgoings or expenses and capital allowances in excess of the income in that YA shall be disregarded.
Annex A - Further details applicable to a section 10E entity in the business of letting immovable properties
1. Scope of section 10E
1.1 Prior to YA 2005, section 10E of the ITA would apply to a section 10E entity, regardless of whether it is the owner of the immovable property. From YA 2005, an administrative concession was granted to exclude non-owners of immovable properties that carry on the business of letting immovable properties from the provisions of section 10E. Non-owners of immovable properties include lessees of properties, main tenants of food courts that sublet stalls to operators etc. This administrative concession does not apply if the arrangements by such non-owners with the owners of the immovable properties are not on arm's length basis or are entered into to obtain a tax advantage that is not intended by this concession.
1.2 The Income Tax (Amendment) Act was gazetted on 7 December 2020 to regularise the above administrative concession and to provide clarity on the tax treatment. Where the investment made by the section 10E entity is an immovable property, section 10E of the ITA applies only if the section 10E entity is the legal owner of the investment, or otherwise has a proprietary interest in the investment and would receive consideration if the proprietary interest in the investment is disposed of or transferred, for example, by way of an assignment or a novation. The administrative concession mentioned in paragraph 1.1 is no longer available from the same gazette date.
1.3 As an illustration, a master lessee of a food court leases the food court from its landlord who is the legal owner of the property. The master lessee in turn sublets the food stalls in the food court to various tenants and derives rental income. The master lessee would not be subject to section 10E of the ITA since it is not the legal owner of the property. This is provided that the lease for the food court (i.e. a proprietary interest in the property) cannot be disposed of or transferred for a consideration by the master lessee.
1.4 The exclusion from the scope of section 10E of the ITA in paragraph 1.2 above would not apply if the arrangement between the relevant parties is entered into to obtain a tax advantage or the arrangement does not fall within the spirit and intent of the exclusion. The CIT is not precluded from reviewing the facts and circumstances surrounding each arrangement before according any exclusion from the scope of section 10E of the ITA.
2. Commencement of business
2.1 The date of commencement of a business depends on the facts of each case. The earliest date that the business of letting immovable properties may be regarded as commenced is only when the Temporary Occupation Permit ("TOP") of the property is obtained and rental income has commenced. This is because the income-earning structure of the section 10E entity is established on the date when TOP is issued where the use and/ or occupation of the property is permitted and the section 10E entity is in a position to derive rental or other related income.
2.2 Pre-commencement expenses incurred by a section 10E entity are regarded as expenses incurred to put in place the income-earning structure of the business. Section 14U of the ITA that allows deduction for expenses incurred before a person derives its first dollar of income from a trade, business, profession or vocation is not applicable to section10E entities.
3. Investments which produce income
3.1 An immovable property is regarded as income-producing if it is available for letting and it produced income. Where an immovable property is not available for letting (e.g. awaiting redevelopment, demolished or under redevelopment) and not producing income in the basis period or any part of the basis period, it would be regarded as non-income producing in that basis period or part of that basis period, as the case may be. This is regardless of whether income had been produced by the investment property in previous years or period.
4. Income subjected to the provisions of section 10E of the ITA
4.1 The business of the making of investments includes the business of letting immovable properties. Income from the business of letting immovable properties is not confined to rental income but may also include other income such as charges for the use of car park spaces, and income from the provision of services.
4.2 Whether an entity is in the business of providing services which involve the use of immovable property or the services provided are merely ancillary to the conduct of a business of letting immovable property is a question of fact. The income from the business of providing services is taxable under section 10(1)(a) and section 10E is not applicable. Where the services provided to the tenants are ancillary to the letting of the immovable property, i.e. the activities undertaken are in connection with the letting of the immovable property, the services provided would form part of the business of the making of investments.
5. Rental incentives
5.1 Renovation subsidy provided by a section 10E entity to its tenants is deductible if the ownership of the renovation is passed to the tenants (i.e. lease agreement requires tenants to remove the relevant fixture and fittings or to reinstate the premises to the original condition at the end of the lease). However, if the landlord has ownership to the fixtures left behind by the tenants, such renovation subsidy would constitute a benefit of an enduring nature to the landlord's trade and is not deductible.