Company unabsorbed capital allowances, losses and donations

CA

Company unabsorbed capital allowances, losses and donations

The rules for capital allowances and losses discussed in this article generally apply to income derived from a trade, business or profession. Note that capital allowances are not available to a person carrying on a vocation.

 

Unabsorbed capital allowances

Where the Capital Allowance (CA) cannot be fully utilized in the current year, there are three options to the company:

  1. Transfer the current year unabsorbed CA to a claimant company under group relief
  2. Carry back the current year CA up to a specified amount for set-off against its assessable income for the immediate preceding YA
  3. Carry forward any remaining unabsorbed CA to future years

Note that the carry-forward relief is mandatory. This means that if there is taxable income for YA 2020 and the company meets the two conditions below for the carry forward of its unabsorbed CA for YA 2019 to set off its taxable income in YA 2020, it cannot elect to utilize the unabsorbed CA to set off its taxable income only for YA 2021 instead.

The carry-forward of the unabsorbed CA is subject to these two conditions:

  1. The company continues to carry on the same business in respect of which the allowances arose (business continuity test), and
  2. There is no substantial change in the company’s shareholders and their shareholdings as at the relevant dates. Relevant dates are discussed below in this article.

Unabsorbed CA for prior YAs are deducted on a FIFO basis before the unabsorbed CA for the current YA can be deducted.

 

Unabsorbed losses

The losses incurred can be carried forward if the following conditions are satisfied:

  1. Losses must arise from carrying on a Section 10 (1)(a) income (see definition below)
  2. The loss must be of a nature that if it had been a profit, would have been taxable
  3. The loss has not been allowed against statutory income of a prior YA

Similarly, as the unabsorbed CA, where the current year losses cannot be fully utilized in the relevant YA, there are three options to the company:

  1. Transfer the current year unabsorbed loss to a claimant company under group relief
  2. Carry back the current year loss up to a specified amount for set-off against its assessable income for the immediate preceding YA
  3. Carry forward any remaining unabsorbed loss for set-off against the statutory income in future years

 

The loss can be carried forward indefinitely. However, it must be deducted in the first available year where there is statutory income.

Prior-year unabsorbed losses are deducted on a FIFO basis before the current year loss can be deducted.

To qualify for carry-forward of unabsorbed losses, there must be no substantial change in the company’s shareholders and their shareholdings as at the relevant dates.

 

Unabsorbed donations

Subject to conditions, current year unabsorbed donations can be:

  1. Transferred under group relief or
  2. Carried forward for up to 5 years for set off against future year’s statutory income

 

Shareholders’ continuity test

As a condition for the carry-forward of unabsorbed capital allowances, unabsorbed losses and unabsorbed donations, a company must satisfy the shareholders’ continuity test. This test applies regardless the company is resident, non-resident in Singapore.

The shareholders’ continuity test requires that the same shareholders at both relevant dates must own at least 50% of the company’s total issued shares.

If the shareholders’ continuity test failed, the unabsorbed capital allowances, losses and donations concerned will be permanently disregarded for the YA in question and will not be allowed for all subsequent YAs, unless a waiver of the test has been obtained.

 

Relevant dates

The company has to satisfy that its shareholders are substantially the same as at the relevant dates.

The relevant dates for carry-forward of capital allowances are as follows:

  • The last day of the YA in which the allowances arose
  • The first day of the YA in which the allowances are to be utilized

 

The relevant dates for carry-forward of losses and donations are as follows:

  • The last day of the year in which the loss was incurred or the donation was made
  • The first day of the YA in which the loss or donation is to be utilized

 

For carry-back, the relevant dates are as follows.

The relevant dates for carry-forward of capital allowances are as follows:

  • The first day of the YA in which the allowances arose
  • The last day of the YA in which the allowances are to be utilized

 

The relevant dates for carry-forward of losses and donations are as follows:

  • The first day of the year in which the loss was incurred or the donation was made
  • The last day of the YA in which the loss or donation is to be utilized

 

Download our relevant dates calculator here for free.

 

Waiver of the shareholders’ continuity test

Where there is substantial change in the shareholders of a company and that change is not for the purpose of deriving any tax benefit or obtaining any tax advantage, the company with unabsorbed CA, losses or donations can apply to the Comptroller for a waiver of the shareholders’ continuity test.

 

Example

You can study the example below to get a feel of unabsorbed capital allowances and losses.

Company Pte Ltd’s financial year-end is 30 June. It has unabsorbed CA for YA 2018 and YA 2019 of $225,000 and $300,000 respectively.

 

Accounts up to:Capital allowancesUnabsorbed Losses
30 June 2019 (YA2020)$200,000$350,000 (incurred in 2018)
30 June 2020 (YA2021)$175,000$350,000 (incurred in 2018)
30 June 2021 (YA2022)$125,000

 

 

Shareholders and shareholdings as at 31 December 2019

ShareholdersShareholdings
Ali35%
Bob35%
Charlie30%

 

Shareholders and shareholdings change on 30 October 2021

ShareholdersShareholdings
Ali20%
Bob20%
Dorothy60%

 

Calculation of YA 2020 tax

Shareholders’ continuity test – relevant dates

YA 2018 capital allowances b/f:31 December 2018 and 1 January 2020
YA 2019 capital allowances b/f:31 December 2019 and 1 January 2020
Conclusion: No substantial change in shareholders

 

 

 $$
Adjusted profits $450,000
Less: YA 2018 capital allowances b/f$225,000 
Less: YA 2019 capital allowances b/f$225,000$450,000
Chargeable income Nil
   
Unabsorbed CA carried forward to YA 2021  
YA 2019 allowances ($300,000 – $225,000)$75,000 
YA 2020 allowances ($200,000)$200,000$275,000

 

Calculation of YA 2021 tax

Shareholders’ continuity test – relevant dates

YA 2019 capital allowances b/f:31 December 2019 and 1 January 2021
YA 2020 capital allowances b/f:31 December 2020 and 1 January 2021
Conclusion: No substantial change in shareholders

 

 

 $$
Adjusted profits $200,000
Less: YA 2019 capital allowances b/f$75,000 
Less: YA 2020 capital allowances b/f$125,000$200,000
Chargeable income Nil
   
Unabsorbed CA carried forward to YA 2022  
YA 2020 allowances ($200,000 – $125,000)$75,000 
YA 2021 allowances ($175,000)$175,000$250,000

 

 

Calculation of YA 2022 tax

Shareholders’ continuity test – relevant dates

YA 2020 capital allowances b/f:31 December 2020 and 1 January 2022
YA 2021 capital allowances b/f:31 December 2021 and 1 January 2022
YA 2019 losses b/f:31 December 2018 and 1 January 2022
Conclusion: YA2020 capital allowances and YA 2019 losses are disregarded.

 

 

 $$
Adjusted profits $500,000
Less: YA 2021 capital allowances b/f$175,000 
Less: YA 2020 current year CA$125,000$300,000
Chargeable income $200,000
   

 

The $350,000 unabsorbed losses incurred in 2018 is forfeited as there is a substantial change in shareholders.

 

Contact us if you have any questions or require us to file your taxes for you.

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