UNDERSTANDING TAX DETUCTIONS

When it comes to taxes, one key question often arises:

What expenses can I deduct?

Under Section 10(1) of the Singapore Income Tax Act (SITA), tax is imposed on income — specifically, gains or profits that are revenue in nature. Before determining your taxable income, you can deduct qualifying expenses under the SITA.

Expenses that do not qualify will be added back to net profit, increasing taxable income and tax liability. Two key sections govern deductions:

• S.14: The general deduction rule (allowable expenses)
• S.15: The prohibited list (non-deductible expenses)

S.15 overrides S.14, meaning any expense explicitly prohibited under S.15 cannot be deducted.

S.14(1) allows deductions for expenses that are:

"Wholly and exclusively incurred in the production of income."

a. Outgoings and Expenses

• Must be normal and customary for the business.
• Must be revenue in nature (day-to-day costs), not capital in nature (long-term asset-related).

b. Wholly and Exclusively

• Wholly relates to the amount spent.
• Exclusively refers to the purpose of the expense.

Expenses incurred solely for business purposes qualify for deduction. If partly for personal use, only the business-related portion may be deductible, provided it is appropriately apportioned.

Key points:

• Expenses must be incurred in the relevant basis period.
• Liabilities must be certain and not contingent. General provisions are not deductible as they are anticipatory.

c. In the Production of Income
The expense must directly relate to income generation during business operations. Costs incurred before income starts or after business ends are not deductible.

Checklist: Is an Expense Deductible?

An expense qualifies for deduction if it meets all three conditions:

1. It is revenue in nature
2. It is incurred wholly and exclusively for business purposes.
3. It is not prohibited under Section 15.

Capital Expense vs Revenue Expense

Distinguishing between capital and revenue expenses is critical because capital expenses are not deductible, while revenue expenses can reduce taxable income.

Capital vs. Revenue Expenses

• Capital expenses: One-off costs to acquire, improve, or extend long-term assets with enduring benefits.
• Revenue expenses: Recurring costs to operate, maintain, or preserve business activities.

Conclusion

To manage taxable income effectively, remember:

• Deductions apply to revenue expenses incurred wholly and exclusively for business purposes, provided they are not prohibited under Section 15.
• Accurately distinguishing between capital and revenue expenses ensures compliance and tax efficiency.

By keeping clear records and understanding these principles, businesses can reduce taxable income and avoid unnecessary tax liabilities.