The Minister for Finance delivered the 2014 Budget on 21 February 2014.
In general, the changes introduced by the 2014 Budget do not have
significant implications for the wealth management industry. However, a key
highlight worth mentioning is the extension and refinement of the existing tax
incentive schemes for funds. These incentive schemes for funds are
commonly used by family offices who set up in Singapore to ensure that the
investment vehicles holding the family's portfolio are not exposed to
Singapore income tax.
We highlight some of the key Budget changes below.
1. Extending & Refining Tax Incentive Schemes For
Funds and the Recovery of Input GST for
To encourage funds to be domiciled in Singapore, Singapore has in place tax
incentive schemes for funds which are managed by Singapore-based fund
managers ("Qualifying Funds"). Under such schemes, specified income
derived by Qualifying Funds from designated investments are exempt from
The existing tax incentive schemes for Qualifying Funds are the:
Resident trust fund exemption (Section 13C);
Non-resident fund exemption (Section 13CA);
Resident corporate fund exemption (Section 13R); and
Enhanced tier fund tax incentive (Section 13X).
In addition to the above, prescribed funds that are managed by prescribed
fund managers in Singapore are, by way of an administrative concession,
allowed to claim a substantial portion of their input GST on prescribed
expenses (e.g., the payment of fund management fees) at an annual fixed
recovery rate. Prescribed funds refer to Sections 13C, 13G, 13R, 13X funds or
designated unit trusts.
Changes introduced by the Budget 2014 announcements
The Section 13CA non-resident fund exemption, Section 13R resident
corporate fund exemption and Section 13X enhanced tier fund incentive
schemes, have been extended for 5 years till 31 March 2019.
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The administrative concession for Qualifying Funds to recover input GST has also been extended till 31 March 2019.
The Section 13C resident trust fund exemption scheme will be allowed to lapse after 31 March 2014. However, the Section 13CA scheme will be expanded to include trust funds with resident trustees. This change will be effective from 1 April 2014.
The list of designated investments under the 13CA, 13R and 13X schemes is expanded to include:
a. Loans to qualifying offshore trusts;
b. Interests in certain limited liability companies; and
c. Bankers acceptance.
This expansion will apply to income derived on or after 21 February 2014.
With effect from 1 April 2014, the investor ownership levels for Qualifying Funds under the Section 13CA non-resident fund exemption and Section 13R resident corporate fund exemption schemes will be computed based on the prevailing market value (as opposed to historical value) of the issued securities of these funds. Currently, these incentive schemes impose limits on the investor ownership levels in Qualifying Funds, and ownership levels are computed based on the historical value of the Qualifying Fund's issued securities.
The Monetary Authority of Singapore ("MAS") will release further details on these various enhancements by end May 2014.
Comments: In line with the Singapore government's efforts to promote the fund management industry, the extensions to the schemes were largely expected in light of their impending expiry on 31 March 2014. The proposed extensions will ensure that Singapore remains an attractive base for fund management and administration activities against growing competition from other financial centres.
In the context of the wealth management industry, the extension of the tax incentive schemes for funds will continue to position Singapore as an attractive destination for high net-worth families seeking to establish family offices to manage family funds. Depending on the family office structure to be adopted, and subject to the relevant qualifying conditions being met, families can choose to rely on either the 13CA, 13R or 13X schemes to ensure that family investment vehicles continue to be exempt from Singapore income tax even though the funds are managed by a Singapore-based family office.
2. Treating Basel III Additional Tier 1 Instruments as Debt for Tax Purposes
With the 2014 Budget announcements, instruments issued as Basel III Additional Tier 1 instruments will be treated as debt for tax purposes, and distributions on such instruments will be deductible for issuers and taxable in the hands of the investors, subject to existing rules. The tax treatment will apply to distributions accrued in the basis period for the Year of Assessment ("YA") 2015 and after.
Comments: Prior to the 2014 Budget, there was uncertainty as to how Singapore banks could treat these instruments for tax purposes. To obtain
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certainty, Singapore banks might have had to consider applying for advance tax ruling from the Inland Revenue Authority of Singapore ("IRAS"). This clarification will come as a relief for Singapore incorporated banks, who are required by the MAS to meet minimum capital adequacy ratios that are 2% higher than the Basel III minimum requirements with effect from 1 January 2015 and to meet the Basel III minimum requirements by 1 January 2013.
3. Refining the Designated Unit Trust Scheme
The Designated Unit Trust (“DUT”) scheme was introduced to foster the development of the domestic retail unit trust industry. Under this scheme, specified income derived from designated investments are exempt from Singapore income tax at the trust level, but is taxed upon distribution in the hands of certain investors. The DUT scheme is available to both retail unit trust and prescribed non-retail unit trusts (which are targeted at more sophisticated investors).
Changes introduced by the Budget 2014 announcements
With effect from 21 February 2014, the scheme will be limited to unit trusts offered to retail investors, though existing non-retail unit trusts that were approved under the scheme prior to 21 February 2014 may continue to retain their DUT status. Also, from 1 September 2014, subject to the fulfilment of conditions, retail unit trusts no longer have to apply for the DUT scheme to enjoy the benefits of the scheme. This scheme will be reviewed on 31 March 2019.
Comments: Although the scheme no longer applies to the prescribed non-retail unit trusts, this is a positive development given that retail unit trusts no longer need to apply to qualify under the scheme, so long as they are able to take a position that the qualifying conditions are met. For clients that prefer certainty, it should still be possible to write in to IRAS to get guidance and clarification where the need arises.
4. Corporate Income Tax Rebate
To relieve rising business costs due to a tighter labour market and high rentals, it was announced in the 2013 Budget that companies will be given a 3-year corporate income tax rebate of 30% (capped at S$30,000) per YA, from YA 2013 to YA 2015.
This rebate was not extended in the 2014 Budget. Therefore, companies can only claim this rebate for this YA and the next.
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