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15s1 Topic 6 CF, GR, CB

NANYANG TECHNOLOGICAL UNIVERSITY


NANYANG BUSINESS SCHOOL
AC2301 PRINCIPLES OF TAXATION

TOPIC 6 - CARRY FORWARD, GROUP RELIEF, AND CARRY BACK


Selected tax provisions
Income Tax Act (OPTIONAL): sections 23, 35, 37, 37C and 37E.
STG, chap

8-500 (omit Exceptions);

9-100 to 9-200 (omit Sole-proprietors and partners and Business of hiring


out motor cars);

9-300 to 9-400;

9-500 (omit Loss items that are not transferable, Example 7, and Companies
not eligible for Group Relief on pp.345-346); and

9-700 (omit Historical Note and Example 9 on pp.351-353)

APPENDIX 1 - Self-study questions 1, 2 and 3 (with suggested solutions)

Oct 2015

15s1 Topic 6 CF, GR, CB

Question 1
Sky Enterprises Pte Ltd (Sky), Ekin Pte Ltd (Ekin) and Luke Pte Ltd (Luke) are three
Singapore-incorporated and resident companies. Since 1 April 2014, the corporate
group structure, together with the ultimate individual shareholders, has been as
presented in the diagram below:

Mr Chew
35%

Ms Yeo
45%

Mrs Lee
20%

SKY
80%

20%

EKIN
90%

10%

LUKE
Note: % refers to the percentage of issued and fully paid-up ordinary shares.
The above shareholding structure is not expected to change in the foreseeable
future.
Historically, Skys shareholders and their shareholding percentages have been as
follows:
Shareholder

Mr Arthur
Mr Chew
Mrs Lee
Mr D Veloo
Miss Threepio
Ms Yeo

Percentage of issued and fully paid-up


ordinary shares owned
Prior to 1.4.2013
20
0
20
30
20
10
100

1.4.2013 to 31.3.2014
0
10
20
40
0
30
100

There have been no changes in the immediate shareholders of and their


shareholdings in Ekin and Luke since 2007. There have been no changes in the nature
of the respective businesses carried on by Sky, Ekin and Luke since 2008.

Oct 2015

15s1 Topic 6 CF, GR, CB

The following information relates to the tax positions of Sky, Ekin and Luke:

YA 2015
Adjusted profit/(loss) for YE 31.12.2014
Capital allowances
250% deduction for approved donations
Prior Year Item
Unabsorbed business loss
- YE 31.12.2012

Sky
$
(80,000)

Ekin
$
150,000

Luke
$
400,000

70,000

50,000
10,000

60,000

90,000

Based on the tax computation previously submitted to the IRAS, Skys chargeable
income for the Year of Assessment 2014 amounted to $200,000, with the tax
assessed of $23,800 [i.e., ($200,000 x 17%) less 30% tax rebate] already paid to the
IRAS.
Required
(a) Comment on whether Ekin is able to set off its prior-year business loss of $90,000
against its taxable income in the Year of Assessment 2015.
(b) Advise Sky, Ekin and Luke as to whether and to what extent the Group Relief and
Carry-Back Provisions may be used to mitigate the income tax exposure of the
three companies in the Year of Assessment 2015. Assume that no waiver (should
it be required) of the Shareholdings Test is obtained. You should present relevant
income tax computations to support your advice.

Oct 2015

15s1 Topic 6 CF, GR, CB

Question 2 (adapted)
Adios Pte Ltd (D Co), Arrivederci Pte Ltd (R Co), Auf Wiedersehen Pte Ltd (W Co) and
Au Revoir Pte Ltd (V Co) are all companies incorporated and resident in Singapore.
The following diagram presents the corporate group structure to which these
companies belong:

D Co
100%

80%

R Co

W Co
90%
V Co

Note: % refers to the percentage of beneficial ownership of ordinary shares.


The corporate structure above has prevailed since 1999. The ordinary shares of W Co
and V Co are beneficially held to the extent of 20% and 10% respectively by minority
shareholders. The shareholders of, and their shareholdings in, D Co for various
periods of time are as follows:
Up to and
including 31.3.2014
000 shares

From 1.4.2014
to 31.3.2015
000 shares

From 1.4.2015
000 shares

700
1,000
300
0

1,200
300
300
2,200

1,200
0
0
2,800

Shareholder
Mr Grazie
Ms Danke
Ms Gracias
Mdm Merci

The following tax data pertains to the various companies for the Years of Assessment
2015 and 2014:
D Co
R Co
W Co
V Co
$
$
$
$
YA 2015 (YE 31.3.2014)
Adjusted profit/(loss)
(600,000)
(100,000)
2,000,000
500,000
Capital allowances
250,000
650,000
1,400,000
100,000
YA 2014 (YE 31.3.2013)
Adjusted profit
Capital allowances

850,000
230,000

1,000,000
300,000

2,400,000
1,500,000

450,000
150,000

On 31.3.2014, R Co permanently ceased its manufacturing business which it had been


carrying on since its incorporation in 2000. On 1.4.2014, it commenced a new
business as a provider of IT consultancy and this new business is expected to be very
profitable from the start.
Required:
Advise R Co on the most tax-beneficial utilisation of its unabsorbed loss and capital
allowances of $100,000 and $650,000 respectively for the Year of Assessment 2015.

Oct 2015

15s1 Topic 6 CF, GR, CB

Your answer should clearly indicate the amounts (if any) of the unabsorbed items that
you recommend R Co to carry back, carry forward and/or transfer to another company
under the Group Relief scheme, and explain how these amounts were arrived at. You
are NOT required to present the tax computations of any of the companies.

Question 3 (adapted from 1314s2 question)


From 1 July 2014, the Vulture Group comprises Vulture Incorporated (Vulture), Hawk
Pte Ltd (Hawk), Eagle Pte Ltd (Eagle) and Sparrow Pte Ltd (Sparrow). The corporate
group structure is as presented below:
Vulture
100%

100%

Hawk

Eagle

80%*

20%

Sparrow

Note: % refers to the percentage of beneficial ownership of ordinary shares.


* These shares were held by Mr Paul Wing, Mdm Sally Claw, and Ms
Jane Feather up until 30 June 2014 see details below.

Vulture is a company incorporated and tax-resident in the United States. Its ordinary
shares are beneficially owned by Mr John Beak (90%) and Ms Jane Feather (10%).
Vulture carries on business in both the United States and, through a branch, in
Singapore.
Hawk, Eagle and Sparrow are all Singapore-incorporated and tax-resident companies
carrying on business in Singapore. Recently, Sparrow underwent a corporate
restructuring exercise that entailed the following:

Up until 30 June 2014, Sparrows ordinary shares were beneficially held by Mr Paul
Wing (40%), Mdm Sally Claw (20%), Ms Jane Feather (20%), and Eagle (20%). On
1 July 2014, the individual shareholders (i.e. Mr Wing, Mdm Claw and Ms Feather)
sold all of their respective shareholdings in Sparrow to Hawk; and

On 31 December 2014, Sparrow ceased permanently its business as a canteen


operator and on 1 January 2015, it commenced a new business of manufacturing
bird feed.

Oct 2015

15s1 Topic 6 CF, GR, CB

The following presents certain Singapore income tax related data for the four
companies in the Vulture Group:
Vulture
Hawk
(Singapore
branch)
$
$
Year of Assessment 2015
Adjusted
profit/(loss)
for
31.12.2014

YE 5,000,000

Eagle

Sparrow

400,000

800,000

(1,000,000)

Capital allowances YA 2015

700,000

900,000

200,000

600,000

Year of Assessment 2014


Chargeable income

150,000

330,000

450,000

800,000

Assume that no waiver of the Shareholdings Test for the set-off of unabsorbed items
will be granted by the IRAS in the event that the test is not satisfied.
Required
Advise Sparrow on how it can tax-efficiently utilise its Year of Assessment 2015
unabsorbed capital allowances of $600,000 and unabsorbed trade loss of $1,000,000,
including the options (where possible) to elect for group relief and/or carry-back. You
are NOT required to present the full income tax computation of any of the companies.

Oct 2015

15s1 Topic 6 CF, GR, CB

Question 4
(14s2 question)
This question combines Topic 6 with Topic 7 DTR. For Topic 6, do ONLY part (a).
The Pasta Group comprises five private limited companies incorporated and taxresident in Singapore. These companies are Pasta, Spaghetti, Macaroni, Vermicelli
and Lasagne. All the companies carry on their respective businesses in Singapore
although, as mentioned below, Spaghetti also carries on business through a branch in
MamaMia Republic while Lasagne ceased to carry on its business on 31 December
2014.
The corporate group structure of the Pasta Group is depicted in the diagram below and
this structure has been in place since 1 January 2005. Since that same date, 70% of
Pastas ordinary shares have been beneficially held by Mr Roberto Rotini, with the
remaining 30% by Mr Fabio Fusilli.

Pasta

65%

Spaghetti

72%

Macaroni

80%

Vermicelli

28%

72%

Lasagne
Note: % refers to the percentage of beneficial ownership of ordinary
shares. The remaining 35%, 28% and 20% of the ordinary shares in
Spaghetti, Macaroni and Vermicelli respectively are held by various
minority shareholders.
On 31 December 2014, Lasagne ceased permanently to carry on its business and
became dormant. Its only item of plant, which had a tax written down value of
$600,000 as at 31 December 2013, was transferred over to Macaroni for a
consideration of $350,000 on 31 December 2014. The consideration of $350,000 was
reflective of the open market value of the plant as at the date of the transfer. Macaroni
immediately put the plant to use for the purposes of its business.
The following information pertains to the companies in the Pasta Group:
Pasta
$

Spaghetti
$

Macaroni
$

Vermicelli
$

Lasagne
$

YA 2015 (YE 31.12.2014)


Singapore business:
- Adjusted profit/(loss) [1]
- Capital allowances [1]
Foreign income

Oct 2015

750,000
220,000

200,000
30,000

(400,000)
[2] 40,000

100,000
190,000

400,000
[2] 0

[3]

15s1 Topic 6 CF, GR, CB

YA 2014 (YE 31.12.2013)


(agreed with the IRAS)
YA 2014 unabsorbed items
c/f to YA 2015:
- Unabsorbed allowances
- Unabsorbed loss
Chargeable income

50,000
120,000
120,000

150,000

380,000

340,000

Notes:
[1] The amounts exclude unabsorbed items (if any) from YA 2014.
[2] Capital allowances of $40,000 and $0 for Macaroni and Lasagne respectively
exclude the allowances (if any) relating to the item of plant transferred from
Lasagne to Macaroni on 31.12.2014.
[3] Spaghetti derived the following foreign income in YE 31.12.2014:
-

Business profits of $250,000 from the operations of its branch in MamaMia


Republic. The amount of $250,000 is net of MamaMia Republic income tax and
was credited into Spaghettis Singapore bank account on 31.12.2014;

Interest income of $100,000 from a deposit placed with a financial institution in


EtnaLand. The amount of $100,000 is net of 5% EtnaLand withholding tax and,
on 31.12.2014, was used in EtnaLand to pay a supplier who had supplied
goods to Spaghettis branch in MamaMia Republic; and

Rental income of $100,000 from leasing a piece of equipment to a company


resident in EtnaLand. The amount of $100,000 is net of 8% EtnaLand
withholding tax and was received in Singapore on 31.12.2014.

Both MamaMia Republic and EtnaLand share many similarities in their income tax
systems. Neither country has concluded a tax treaty with Singapore. Both countries
adopt the Classical Two-Tier Model for the taxation of corporate profits and
dividends, with the corporate tax rate at 25% and the dividend withholding tax rate
at 3%. However, neither country imposes any withholding tax on remittances of
branch profits.
Due to an impending economic downturn in 2015 and beyond, all the companies in the
Pasta Group are not expected to be in a tax-paying position in the near future.
Required
(a) Advise on how the Group Relief and/or Carry-Back schemes may be used to
mitigate the total income tax liability of the Pasta Group for the Years of
Assessment 2014 and 2015. Your answer should also include a recommendation
as to whether a section 24 election should be made in respect of the transfer of the
plant from Lasagne to Macaroni on 31 December 2014. You are NOT required to
present full income tax computations for any of the companies for this part of the
question.
(b) Compute Spaghettis income tax liability for the Year of Assessment 2015, making
the most tax-efficient claim for relief from double taxation.

Oct 2015

15s1 Topic 6 CF, GR, CB

APPENDIX 1
Self-study Questions (with suggested solutions)
Question 1
(extract from 12s1)
NOTE: The original 12s1 exam question tested content on Topic 6 and also Topic 7
DTR. This extract has been prepared for Topic 6 self-study purposes only.
Co F is incorporated and tax-resident in CraziLand where it carries on its business. Up
until 30 June 2014, Co Fs issued ordinary shares had been beneficially held by Mr
Rabid (55%) and Mdm Neurotic (45%). On 1 July 2014, Mr Rabid transferred his entire
shareholding in Co F to Ms Psychotic.
Co F has investments in three Singapore-incorporated and tax-resident companies, Co
L, Co P1 and Co P2, all of which carry on business in Singapore. Since 2002, the
corporate structure involving the four companies is as depicted below:

Co F
90%

90%

10%
Co P1

Co P2

80%
Co L

Notes:
% refers to the percentage of beneficial ownership of issued ordinary shares.
The remaining 10% of the issued ordinary shares in each of Co L, Co P1 and Co
P2 have been, and continue to be, held by Mr Rabid.
The following presents tax-related information pertaining to Co L, Co P1 and Co P2 for
the Years of Assessment 2015 and 2014:
Co L
$

Co P1
$

Co P2
$

(40,000)
0
(50,000)

10,000
400,000
(9,000)

10,000,000
0
(1,000,000)

900,000

100,000

50,000

Year of Assessment 2015 (YE 31.12.2014)


Adjusted profit/(loss)
Foreign-sourced income
Capital allowances YA 2015
Year of Assessment 2014 (YE 31.12.2013)
Chargeable income (after partial exemption)

Oct 2015

15s1 Topic 6 CF, GR, CB

Required:
Advise on whether any of the following independent proposals may be effected in
respect of Co Ls unabsorbed items arising in the Year of Assessment 2015:
(i)

transfer to Co P1 under the group relief scheme;

(ii)

transfer to Co P2 under the group relief scheme;

(iii)

carry back to the Year of Assessment 2014.

Question 2
(extract from 14s1 question)
NOTE: The original 14s1 exam question tested content on Topic 6 and also Topic 7
DTR. This extract has been prepared for Topic 6 self-study purposes only.
Hertford Holdings Pte Ltd (HERT) is incorporated and resident in Singapore where it
carries on its business. Since its incorporation in 2010, the ordinary shares of the
company are beneficially held by Ms Broxbourne (60%) and Mr Enfield (40%), and this
shareholding structure is expected to remain unchanged for the foreseeable future.
HERT is the ultimate holding company in a corporate group that also includes Ware
Pte Ltd (WARE), St Margarets Pte Ltd (MARG), and Rye House Pte Ltd (RYE), all of
which are also Singapore-incorporated and resident companies carrying on their
respective businesses in Singapore. The following diagram presents the corporate
group structure:

HERT
60%

80%

WARE

MARG
60%

40%

RYE

Note: % refers to the percentage of beneficial ownership of ordinary


shares. The remaining 40% and 20% of the ordinary shares in WARE
and MARG respectively are held by various minority shareholders.

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15s1 Topic 6 CF, GR, CB

The following information pertains to the companies in the corporate group:

Year of Assessment 2015


Adjusted profit/(loss) for YE
31.12.2014
Capital allowances YA 2015
Year of Assessment 2014
Chargeable income

HERT
$

WARE
$

50,000

800,000

NIL

50,000

18,000

270,000

MARG
$

RYE
$

(160,000) 1,000,000

190,000

500,000

100,000

700,000

Required
Advise on how the Group Relief and/or Carry-Back schemes may be used to mitigate
the total income tax liability of the corporate group as a whole for the Years of
Assessment 2014 and 2015. You are NOT required to present full income tax
computations for any of the companies for this part of the question.
Suggested dsolution
Group relief
MARG and HERT
- Members of the same co group (80% direct shareholding by HERT in
MARG)
- Not tax-efficient to transfer unabsorbed items to HERT because it would
cause HERT to lose its partial exemption, foreign tax credits, and corporate
tax rebate
MARG and WARE
- Not members of the same co group (HERT holds 80% in MARG but only
60% in WARE)
MARG and RYE
- Members of the same co group (HERT holds 80% in MARG and effectively
84% (60% x 40% + 60%) in RYE)
- Transfer $350,000 ($190,000 + $160,000) of unabsorbed items to RYE,
resulting in a tax reduction of $59,500 ($350,000 @ 17%) for RYE
Carry back
-

Carry-back from YA2015 to YA2014 is permitted for MARG since no


substantial change in shareholdings as at 1.1.2014 and 31.12.2014, and
business continuity test is (assumed) satisfied
However, only $100,000 UCA can be carried back, resulting in a tax
reduction of only $17,000 ($100,000 @ 17%), with the balance of
unabsorbed items of $250,000 to be carried forward to YA2016

Conclusion
Elect for Group Relief to transfer unabsorbed items from MARG to RYE

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15s1 Topic 6 CF, GR, CB

Question 3
(adapted from past question)
Companies P, Q, R and S are all companies incorporated and tax resident in
Singapore. The companies all carry on business in Singapore and there has been no
change in their respective businesses since their incorporation. The shareholding
structure involving the four companies is indicated in the diagram below. The
percentages in the diagram refer to the percentages of beneficial ownership of issued
ordinary shares in the respective companies.

The remaining 30% shares of Company S are held by minority shareholders. Prior to
31 May 2015, all the shares of Company P are held by an individual, Mr How. On 31
May 2015, Mr Why bought over 60% of the shares of Company P from Mr How.
Company Q has been investing heavily in machines for use in its business in recent
years and it had claimed capital allowances in those years the expenditures were
incurred. As a result, Company Q has unabsorbed capital allowances of $500,000 and
$300,000 brought forward from the Years of Assessment 2014 and 2015, respectively.
The other three companies do not have any unabsorbed capital allowances, trade
losses or approved donations brought forward from prior years.
For the Year of Assessment 2016, Company Q has adjusted trade profit and non-trade
profit of $200,000 and $10,000, respectively.
Required
(a) Advise whether Company Q can set off the unabsorbed capital allowances brought
forward from Years of Assessment 2014 and 2015 against its taxable income for
the Year of Assessment 2016, and calculate the brought forward unabsorbed
capital allowances that will be carried forward to future years.
(b) Assume that Company Q had made a cash donation of $100,000 to the Singapore
Cancer Society, an approved institution of public character, in the financial year
ended 31 December 2015. Quantify the tax benefit arising from this donation and
discuss the options (carry back, current year utilisation, carry forward and group
relief) for Company Q with regard to this tax benefit.

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15s1 Topic 6 CF, GR, CB

Suggested solution
(a)

YA2014 UCA B/F:


- Relevant dates: 31.12.14 and 1.1.16
- 60% change in shareholders. Shareholders test not met.
- Cannot be set off against taxable income in YA2016. $500,000
forfeited
YA2015 UCA B/F:
- Relevant dates: 31.12.15 and 1.1.16
- No change in shareholders. Shareholders test met.
- Can be set off against taxable income in YA2016
$300,000 YA2015 UCA set off against $210,000
$90,000 YA2015 UCA C/F to future years

(b)

Tax benefit is 300% (Golden Jubilee year) x $100,000 = $300,000


C/B: Approved donation cannot be C/B.
Current year utilisation not possible as there is no assessable income in
YA2016.
Group relief:
Applying ordinary shareholders test, ONLY P and R are members of the
same group as Q.
- P: direct shareholding of 100% of Q
- R: P is common shareholder. P holds 100% of Q, and P holds 79%
(70%x 70% + 100% x 10% + 20%) of R
- To also state the conditions for Group relief election to be made.
- Assuming these conditions are met, Q may transfer current year UD
of $250,000 to either P or R. Assess based on the tax situations of
P and R.
C/F:
If group relief not elected, UD will be C/F, subject to shareholder test.
The UD must be utilised by YA2021.

Oct 2015

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