One of the perks of starting a business in Singapore is getting grants to offset various costs of running the business – among which, development of business capabilities and employee welfare. Companies which apply for grants may find themselves needing to pay tax on some grants but not on others. What is the difference?
Tax Principle
Before talking about grants, we need to talk about the guiding principle for what is and isn’t taxed. Income from revenue is taxable after subtracting business expenses and tax reliefs. Aside from tax-exempted income, income from capital gains is not taxed, and this includes assets such as equipment. To ensure consistency, this principle applies for grants as well.
According to IRAS, the government gives out two types of grants. The first type of grants are given out to help defray operating costs, or supplement trading receipts. These grants are treated as revenue in nature and are taxed. The second type of grants are those which help the company acquire assets. These grants are treated as capital in nature and are therefore not taxed. There are exceptions, and these will be specified by IRAS to be exempted from tax.
Companies are broadly subjected to a 17% corporate income tax rate on their taxable income, which includes taxable grants as part of their total income.
Read Also: Guide To Understanding The Refundable Investment Credit
#1 Government Paid Leave Schemes
Government-Paid Leave Schemes share the cost of maternity/paternity leave as well as childcare leave for parents. Roughly half of the days are paid for by the employer, while the remainder is paid for by the government, subject to a cap of $500 per day, or $2,500 per week if the leave must be taken as a block.
Since the payouts in this case serve to directly offset the cost of employee salary, it is counted as revenue and therefore could be taxable.
For male employees, paternity leave is capped at $10,000 per child. Maternity leave is capped at $20,000 for the first and second child, and $40,000 for subsequent child.
Childcare leave for employees is capped at $1,500 for employees with children under 7 years old, and $1,000 for employees with children above 7 years old.
The amount of payout given in the grant is based on the employee’s gross rate of pay, and effectively adds to the amount of taxable income.
Read Also: 10 Things Employers Need To Know About The Government Paid Childcare Leave (GPCL)
#2 Enterprise Development Grant (EDG)
The EDG is given to help companies offset the cost of upgrading, innovation or overseas ventures. This is given to help Singapore companies sharpen its competitive advantage in the region.
Some of these expenditures are revenue in nature, and others are capital in nature, especially in the case where the grant is given to help the company acquire assets for digitisation purposes or in expanding the company.
In general, this grant is taxable, unless it is awarded for the following categories:
- Automation
- Product development
- Mergers and acquisitions
- Overseas Marketing Presence
- Pilot project and test bedding
The amount awarded in this grant differs on a case-by-case basis, based on project scope, outcomes and competency of the service provider. The amount of taxable income from this grant depends on how much of the grant was awarded, and for which categories.
#3 Progressive Wage Credit Scheme (PWCS)
The PWCS was introduced to help companies offset the cost of increasing the wages of lower income workers. For wages below $2,500 and $3,000, the government will co-fund wage increases by 50% and 30% respectively. This is capped at $4,000 after wage increase.
A generous wage increase of 20% for someone earning $2,500 will mean a $500 pay raise, of which the government will co-fund 50% ($250 X 12 = $3,000 for one year).
The total addition to taxable income depends on how much government co-funding is paid out to match the increase in wages.
Read Also: How Companies Can (Legally) Reduce Their Corporate Income Tax In Singapore
#4 SkillsFuture Enterprise Credit (SFEC)
SFEC is a $10,000 grant which is given to offset costs for businesses to develop their business and productivity. Up to $7,000 can be used for enterprise transformation, and up to the full $10,000 can be used for workforce transformation.
Since this grant is focused on offsetting the cost of initiatives rather than acquisition of capital assets, it is treated as revenue in nature and therefore taxable. This grant adds up to $10,000 of taxable income.
Not All Taxable Income Results In Tax
While something is taxable, it may not result in tax that has to be paid. Deductible business expenses (including staff salaries) are subtracted from taxable income, and tax is only applied on what remains. In other words, companies are only taxed on profit after subtracting operating costs. Companies may also apply for other forms of tax incentives and reliefs which can further reduce the amount of taxable income.
While grants for start-ups also count as taxable income, start-ups are also given a 75% tax exemption on the first $100,000 of taxable income, and 50% tax exemption on the next $100,000 of taxable income for the first three years. This effectively mitigates most of the tax that startups have to pay in the first two years.
Companies that are not profitable can also claim against taxes paid in the previous year using Loss Carry-Back Relief.
Read Also: From Loss Carry-Back Relief To BIPS: How To Save Corporate Income Tax In Singapore
Building a Sustainable Future
Be part of the Singapore Green Plan 2030 and achieve your business’ sustainability goals. Fund your green initiatives today with the OCBC SME Sustainable Financing Framework.
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