Unexpected market circumstances and economic downturns often lead to substantial business losses. Regardless if it is a global pandemic or unpredictable market conditions, these factors significantly impact a company’s financial stability and hinder its ability to generate profits. As a result, it becomes crucial for business owners in Singapore to understand how to effectively handle and mitigate these losses.
Offsetting Trading Losses Against Different Types of Earnings
Offsetting trading losses against various earnings is allowed in Singapore. Companies are permitted to offset trading losses against all types of income in the same accounting period. Meaning, trading losses can be offset against income from dividends, interest income, rental incomes, or any other type of income.
The tax treatment of business losses in Singapore allows for the utilisation of tax losses to be carried forward indefinitely and offset against future trading profits. This means that if a company incurs a trading loss in a particular year, it can carry forward that loss and deduct it from its future trading profits.
There are qualifying conditions for the carry forward of business losses. One such condition is the shareholding test, which compares the percentage of shareholdings of a company held by the same persons at relevant dates. To meet the shareholding test, there should be no substantial change in the shareholders and their shareholdings. The percentage of shares held by common shareholders at the relevant dates should be 50% or more.
Group relief is also available in Singapore, allowing a company to transfer unutilised trading losses to another company within the same group. The transferred losses can be deducted against the assessable income of the claimant company, subject to certain conditions. The transferor and the claimant companies must be incorporated in Singapore, belong to the same group, satisfy the 75% shareholding threshold, and have the same accounting year end.
Understanding the provisions relating to the treatment of business losses is important in order to optimise cash flow and effectively manage losses.
Carry Forward Unused Tax Losses
Carrying forward unused tax losses refers to a provision that allows businesses to offset their current or previous period losses against future taxable profits. As mentioned, companies are permitted to carry forward tax losses indefinitely and use them to offset against future trading profits. Here is an overview of the treatment of carry forward unused tax losses in Singapore aside from the ones mentioned above:
Loss Carry-Back Relief
– Singapore introduced a loss carry-back scheme in 2006 to support small corporate taxpayers, sole proprietors, and partnership firms during economic downturns.
– Under this scheme, unabsorbed trade losses can be carried back for up to three years of assessment immediately preceding the year in which the trade losses were incurred.
– The aggregate amount of trade loss that can be carried back is capped at 200,000 SGD.
– Qualifying conditions and shareholding tests similar to loss carry forward apply for the loss carry-back relief.
Investment Holding Companies
– Pure investment companies, which derive income solely from holding investments such as dividends, interest, or rental income, may not be able to carry forward losses.
Tax Exemption Scheme for Startups
– New startup companies in Singapore can claim tax exemption on their chargeable income under certain conditions.
– There is a full tax exemption on the first 100,000 SGD of normal chargeable income for each of the first three consecutive years of assessment.
– An additional 50% exemption is given on the next 200,000 SGD of normal chargeable income for each of the first three consecutive years of assessment.
– Startups must consider the implications of trade loss treatment when deciding between carrying back or carrying forward losses to optimise their tax liability.
It is important to consult a qualified tax professional or seek professional advice from an accounting services firm in Singapore to understand the specific details and requirements related to carrying forward unused tax losses in Singapore.
Disqualified Loss Items
Disqualified loss items refer to certain types of loss items that do not qualify for transfer or offset against other income or profits for tax purposes in Singapore. Here are the details regarding disqualified loss items:
Loss items of foreign branches
Losses incurred by a company’s foreign branches are not eligible for transfer or offset against other income. They cannot be utilised to reduce the tax liability of the Singapore-incorporated company.
Loss items in respect of income wholly exempt from tax
If a company generates income that is fully exempt from taxation in Singapore, any losses associated with that income cannot be carried forward or transferred to offset against other taxable income.
Loss items in respect of specific categories of activities or trade
There are activities or trades where Singapore tax rules have specific provisions to quarantine unused losses and capital allowances. For example, income from finance leases under Section 10D or income from hiring motor vehicles under Section 10H of the Income Tax Act may have such restrictions.
Loss items of companies benefiting from Economic Expansion Incentives
Companies that have received incentives under the Economic Expansion Incentives Act, such as investments in new technology companies, technopreneur investment incentive scheme, or overseas investment and venture capital incentive, may have restrictions on utilising certain losses for tax purposes.
Expenses of dormant companies
Losses arising from expenses incurred by dormant companies that remain unused at the end of the year cannot be carried forward or transferred to offset against other income.
Unutilised Section 14Q deduction
Section 14Q deduction refers to certain allowances for prescribed activities. If there are unutilised deductions under Section 14Q in a particular year of assessment, those losses cannot be carried forward to future years or transferred to offset against other income.
Current year unutilised losses of specific types of companies
Losses incurred by investment holding companies under Section 10E or excess of expenses over the investment income of investment holding companies may not be carried forward or transferred for offsetting against other income in the same year or future years.
The above list provides a general overview of disqualified loss items in Singapore. For specific and detailed information regarding your company’s situation, it is best to consult an accounting services firm or refer to the relevant provisions of the Singapore Income Tax Act.
How to Recover and Avoid Losses in Business
Here are some strategies for handling business losses:
Assess the situation
Begin by assessing the extent and causes of your business losses. Identify the specific areas or factors that have contributed to the financial setback. This analysis will help you gain a clear understanding of the challenges you are facing.
Cut costs
Assess your expenditures and pinpoint areas where you can reduce expenses. Renegotiate contracts with suppliers, optimise your inventory management, and find ways to streamline your operations without compromising quality and customer satisfaction. Doing so helps you regain financial stability.
Review pricing and profit margins
Evaluate your pricing strategy so that it aligns with the market trends and your target customers’ willingness to pay. Analyse your profit margins to ensure they are enough to cover your costs and generate a reasonable profit. Improve profitability by adjusting your pricing and exploring alternative pricing models.
Explore new revenue streams
Diversify your revenue streams or expand your product and service offerings. See if you can introduce complementary products and services, target new customer segments, or explore partnerships to generate additional revenue.
Strengthen customer relationships
Focus on nurturing existing customer relationships and implement strategies to improve customer retention and loyalty. This includes providing exceptional customer service, personalised offers, loyalty programs, and proactive communication. Satisfied and loyal customers trigger a valuable source of steady revenue.
Enhance marketing efforts
Review and update your marketing strategies to reach a broader audience and attract new customers. Invest in targeted marketing campaigns, leverage digital marketing channels, and explore social media platforms to expand your brand’s reach and increase visibility. Effective marketing generates leads and increases sales.
Seek professional advice
Consider consulting with business advisors, accountants, or financial experts for guidance and expertise in managing business losses. They give valuable insights, help you develop a recovery plan, and provide recommendations according to your specific situation.
Focus on innovation and adaptation
Embrace innovation and adapt to changing market conditions. Identify areas where you can improve efficiency, develop new products or services, and leverage emerging technologies to gain a competitive edge. Being proactive and flexible helps you overcome challenges and achieve sustainable development.
Preserve cash flow
Implement effective cash flow management strategies to make sure you have sufficient liquidity to cover essential expenses. Monitor cash flow regularly, negotiate favourable payment terms with suppliers, and consider alternative financing options.
Prioritise employee engagement
Foster a positive work environment, encourage open communication, and recognise and reward employee efforts. They tend to go the extra mile in helping with its recovery.
Conclusion
Dealing with business losses requires resilience, adaptability, and a proactive approach. Navigate through these difficult times and position for future growth by implementing updated business strategies and outsourcing accounting services whenever necessary.
