Tax Concession

ADMINISTRATIVE CONCESSION FOR INTEREST INCURRED TAXPAYERS ON LOANS TO RE-FINANCE EARLIER LOANS BORROWINGS INTRODUCTION 1.

BY OR

When ascertaining the income which is taxable for any Year of Assessment (YA), a person can claim deduction for expenses: (a) (b) (c) which are incurred wholly and exclusively in producing the income; which are incurred in the basis period for the YA; and whose deduction is not otherwise prohibited by the Singapore Income Tax Act (SITA).

2.

An expense commonly claimed by taxpayers is interest paid or payable. The deductibility of interest expense is presently governed by section 14(1)(a) of the SITA. Briefly, for the Comptroller to allow a taxpayer’s claim for deduction of interest expense, he must be satisfied that: (a) (b) the general conditions in paragraph 1 above have been met; and the interest was payable on capital employed in acquiring the income.

3.

Currently, there are many taxpayers who have financed their acquisition of income-producing assets with loans or borrowings. Some of them may, for various reasons, subsequently re-finance the earlier loans or borrowings. For the purpose of this Practice Note, re-financing refers to the situation where a taxpayer takes out a new loan and uses the whole of that proceeds to repay an existing loan. Based on a strict interpretation of the provisions in section 14(1)(a), the interest incurred on a loan taken up to re-finance an earlier loan or borrowing is not deductible for tax purposes as the subsequent loan is taken up to repay an existing one and the interest incurred is therefore not payable on capital employed in acquiring the income. Accordingly, the Comptroller can disallow all claims for deduction of interest incurred on loans taken up to re-finance earlier loans or borrowings. IRAS however recognises that the above tax treatment may not reflect the commercial realities in some cases. For example, a taxpayer may re-finance an earlier loan to reduce his overall cost...