Second Reading Speech by Raymond Lim, Acting Second Minister For Finance on The Income Tax (Amendment) Bill 2004, at The Parliament, 17 Nov 200419 Nov 2004
Mr Speaker, Sir, I beg to move, "That the Bill now be read a second time".
2. The Income Tax (Amendment) Bill 2004 comprises 4 groups of changes. The first provides for the income tax changes announced in this year's Budget Statement in February 2004. The second group comprises tax changes that form part of the Marriage and Parenthood package, announced in the Prime Minister's National Day Rally Speech in August 2004. Thirdly, the Bill includes legislation that spells out the income tax treatment of limited liability partnerships incorporated or registered in Singapore or overseas. And finally, it covers other amendments to the Income Tax Act arising from regular reviews to improve our income tax system.
3. The Income Tax (Amendment) Bill was released for public consultation on two occasions this year. The first consultation was conducted in June. A second consultation, on the income tax treatment for limited liability partnerships, was held from July to August. The draft Bill has been revised to incorporate suggestions from businesses and members of the public.
TAX POLICY CHANGES FROM 2004 BUDGET STATEMENT
4. Let me first highlight the key tax policy changes that were announced in the 2004 Budget Statement.
(a) Reduction of Corporate Tax Rate
5. With effect from Year of Assessment 2005, the income tax rate of companies, trustees and non-resident persons will be reduced from 22% to 20%. Three other tax rates which are presently pegged to the company income tax rate are also correspondingly reduced. These are:
i. the general rate of withholding tax;
ii. the rate of deduction of tax from Singapore franked dividends paid on or after 1 January 2004; and
iii. the rate of tax to be used to compute the maximum effective tax rate for a body of persons.These changes in tax rates are reflected in the Bill under clauses 24, 32, 36, 37, 38, 40 and 41.
(b) Tax Exemption for New Companies
6. As part of Government's efforts to encourage entrepreneurship, the first S$100,000 of the normal chargeable income (excluding Singapore dividends) of qualifying new companies will be fully exempt from income tax. This exemption will apply to each of the first 3 Years of Assessment of qualifying companies that fall within YA 2005 to YA 2009. Clause 32 of the Bill provides for this tax exemption. Where a company does not meet the qualifying conditions, it would still be eligible for partial tax exemption under the existing scheme.
(c) Reduction in Rate of Tax on Royalties to Non-residents
7. To facilitate the use of intellectual property in Singapore, the rate of tax on royalties to non-residents will be reduced from 15% to 10% of the gross amount. This reduced rate will apply for royalties that are due and payable to non-residents on or after 1 January 2005. This change is covered by Clauses 29, 32, 38 and 42 of the Bill.
Enhancement of Approved International Shipping Enterprise Scheme
8. To retain and attract international ship owners and operators to Singapore, the scope of tax exemption for a company under the Approved International Shipping Enterprise (AISE) Scheme is extended. The exemption will now cover income derived from chartering of ships to residents or permanent establishments in Singapore, as well as charter payments made to non-residents (excluding any permanent establishments in Singapore) by AISEs for the charter of any vessel used for offshore oil and gas activity. The scheme is further enhanced through an expansion of the list of qualifying ships under the scheme to include any vessel used for offshore oil or gas activity. Clauses 5, 9 and 10 provide for these changes.
(e) Tax Exemption for Foreign-sourced Income and Domestic-sourced Investment Income of Individuals
9. Since 1 January 2004, all foreign-sourced income received in Singapore by resident individuals (except those received through a partnership in Singapore) has been exempted from tax. This exemption is intended to facilitate the remittance of offshore funds by resident individuals for investment and management in Singapore.
10. In addition, specified Singapore-sourced investment income derived on or after 1 January 2004 by individuals from financial instruments has been exempted from tax as well. This does not include investment income from financial instruments derived through a partnership in Singapore or derived as gains or profits from the carrying on of a trade, business or profession. The exemption for domestic-sourced investment income is granted to ensure that the tax exemption for foreign-sourced income does not bias individuals against investing in Singapore instruments. It also simplifies and aligns our tax treatment of different kinds of investment income. Clause 9 provides for these exemptions.
(f) Other Changes
11. Mr Speaker, Sir, I will not subject members to a repeat of the remaining tax policy changes announced in the 2004 Budget Statement.
MARRIAGE AND PARENTHOOD TAX CHANGES
12. Let me now move on to the second group of tax changes covered by this Bill. These are the various tax measures in the marriage and parenthood package announced during the National Day Rally and elaborated by the Steering Group on Population.
(a) Parenthood Tax Rebate
13. First, the Parenthood Tax Rebate replaces the current Special Tax Rebate with effect from the Year of Assessment 2005. The amount of rebate given is $10,000 for the second child and $20,000 each for the third and fourth child. We have also removed the condition that the mother must be below a certain age for parents to enjoy the rebate for their second child, and the 9-year cap to use up the rebate. The Parenthood Tax Rebate will be extended to parents of adopted children. Parents with unexpired Special Tax Rebate (STR) balances in Year of Assessment 2004 will have their balances converted to the Parenthood Tax Rebates. Clause 31 provides for this change and transitional arrangements for taxpayers with unexpired STR balances.
(b) Working Mother's Child Relief
14. Next, the Working Mother's Child Relief will replace the Enhanced Child Relief and Further Tax Rebate with effect from Year of Assessment 2005. The objective of this tax relief is to encourage more women to rejoin the workforce after having children. The amount of relief that the mother can claim is 5% of her earned income for her first child, 15% for her second child, 20% for her third child and 25% for her fourth child, capped at a maximum of $25,000 for each child inclusive of other child reliefs. We have removed the condition that the mother must have 3 GCE O Levels or equivalent qualifications to qualify for the Working Mother's Child Relief, which was a condition for the Enhanced Child Relief. Like the Further Tax Rebate and Parenthood Tax Rebate, the Working Mother's Child Relief is only claimable by parents of Singapore Citizen children. Clause 31 removes the Further Tax Rebate and makes transitional arrangements for taxpayers with existing rebate balances, and Clause 55 amends the Fifth Schedule to introduce the Working Mother's Child Relief.
(c) Grandparent Caregiver Relief
15. Third, we will introduce a new Grandparent Caregiver Relief of $3,000 from Year of Assessment 2005 to provide greater support to working mothers whose parents are helping to take care of their children, and also to recognise the important role that grandparents play in bringing up the next generation. This relief is for working mothers with children aged 12 or younger if their parent, parent-in-law, grandparent or grandparent-in-law is not carrying on any trade, business, profession, vocation or employment and is helping to take care of the children. Clause 28(i) introduces this tax relief.
(d) Removal of Relief for Delivery and Hospitalisation Expenses for 4th Child
16. We have also removed the relief for delivery and hospitalisation expenses for the fourth child from 1 August 2004 because parents will now be able to use their Medisave for such expenses. Clause 28(b) removes this relief.
TAX CHANGES FOR LIMITED LIABILITY PARTNERSHIPS
17. Let me take this opportunity to highlight the income tax legislation to provide for the introduction of limited liability partnerships. I shall briefly explain the two key provisions.
(a) General Tax Treatment of the LLP
18. A LLP is fundamentally viewed as a partnership notwithstanding that it has legal rights similar to that of a company. Hence, under the Income Tax Act, the partners of an LLP will generally be treated the same way as partners in general partnerships. Specifically, an LLP's profits will not be taxed at the partnership level, but instead each partner will be assessed to tax on his share of LLP profits based on his marginal tax rates. To prevent streaming of disproportionate amounts of capital allowances or losses from the LLP to set-off against a partner's non-LLP incomes, we put a cap on such claims up to the amount of his contributed capital. Any excess will be carried forward to be offset against his LLP income for the following year. Clause 25 adds a new section on the tax treatment of a limited liability partnership.
(b) Duties of Liquidator
19. Currently, the Income Tax Act only specifies that a liquidator of a company being wound up cannot distribute any assets unless the taxes payable by the company have been provided for. With the introduction of the LLP Bill in 2005, it is necessary for the Income Tax Act to be amended to specify the duties of the liquidator with respect to the liquidation of LLPs. In addition to providing for the taxes payable, the liquidator will also be answerable for all matters required under the Income Tax Act in relation to the affairs of the LLP. Clause 44 provides for this amendment.
OTHER TAX POLICY CHANGES
20. I shall now deal with other tax policy changes which require amendments to the Income Tax Act. Our existing tax policies and incentive schemes are reviewed regularly to ensure they remain relevant. Let me highlight two major changes to our incentives and policies that came about as a result of this review process.
(a) Taxing Stock Options for Taxpayers Leaving Singapore
21. Currently, when taxpayers who have been granted stock options in Singapore leave Singapore, they will be subject to the ?deemed exercised? rule. Under this rule, they will be taxed on the deemed gain from their unexercised or restricted Employee Stock Options (ESOPs) and unvested or restricted shares from Employee Share Ownership (ESOW) plans at the time of exit from Singapore.
22. The amendments to the Act, provided by Clauses 5, 47 and 49 of the Bill, will now allow employers to alternatively choose to track the individuals, after their exit from Singapore, to determine the actual gains accruing to such individuals at the time they exercise their ESOPs or at the time of lifting of the restriction on shares acquired under ESOPs, or vesting or lifting of restriction on the shares under any ESOW plan. Tax would then be assessed based on the actual gains. The "deemed exercised" rule still remains as an option.
(b) Removal of Combined Assessment and Change to Wife Relief
23. Combined assessment is currently the default mode of tax assessment for married couples. Separate assessment was only introduced as an option for married women from 1962. However, separate assessment provides more advantageous tax treatment than combined assessment in the overwhelming majority of cases. That being the case, clauses 11, 23, 28, 43, 45 and 53 of the Bill will amend the Act to remove combined assessment with effect from Year of Assessment 2005.
24. To ensure that no one will be worse off after the removal of combined assessment, the Act is also amended to allow husbands or wives to transfer to their spouses any unabsorbed capital allowances, trade losses and donations in spite of the separate assessment. Clauses 2, 7, 8, 22, 26, 27 and 28 provide for these changes.
25. I shall now briefly outline two key legislative changes related to improving our tax administration.
(a) Inland Revenue Interactive Network
26. IRAS will be replacing its information system, the Inland Revenue Integrated System (IRIS), with a new system, the Inland Revenue Interactive Network (IRIN). Through IRIN, customer service will be enhanced as electronic services, such as the furnishing of electronic notices, can now be provided to taxpayers via individualised portals. The Income Tax Act will be amended to provide electronic transactions and notices with the same legal force as paper documents. The electronic service of notices will be provided to taxpayers on an "opt in" basis. Clauses 2, 3, 4, 48 and 50 will enable IRIN e-notices to be legally enforceable when IRIN is implemented.
(b) Empower Minister to Appoint Deputy Chairmen for Income Tax Board of Review
27. To increase the efficiency of the Income Tax Board of Review (ITBR), the Income Tax Act will be amended to:
i. Empower the Minister to appoint Deputy Chairmen to the ITBR, who may preside over hearing committees in the same capacity as the Chairman;
ii. Require appellants and IRAS to state reasons for objecting to members of ITBR being part of the hearing committee for specific cases;
iii. Clarify that it is the Chairman who may nominate the members to constitute the hearing committee; and
iv. Specify that the Chairman may decide on whether to allow a person to proceed with his appeal if the appeal is lodged late.These changes are covered by Clauses 51 and 52 of the Bill.
28. Finally, eight other changes have been incorporated in this Bill. As they are either technical in nature, or relate to improvements in tax administration, I will not put members through the details of these remaining changes.
29. Mr Speaker, Sir, I beg to move.