When you incorporate a new company, one of the very first decision to make is to decide on the financial year end of the new company furnished with ACRA. This article deals with the factors to consider when deciding on the FYE of your newly incorporated company.
Financial Year End of a Company
The Financial Year End(“FYE”) of a company refers to the company’s accounting period which normally end every 12 months. A company’s FYE does not need to end at the end of a calendar year (i.e. 31 December of each year) and can fall on any day during the year. Typically, a company’s FYE ends at the end of a particular month during the year e.g. 31 March, 30 June or 30 Sept.
When you incorporate a company, you will need to submit the last day of your company’s first financial year end to ACRA under S19(1)(b) of the CA.
1. How to determine a company’s FYE ?
According to S198(1) of the Companies Act (“CA”), a company’s first financial year end starts on the date of incorporation and ends on
- The last day of a company’s first financial year end that was provided to ACRA.
- The first anniversary of the date of incorporation of the company if the last day of the FYE was not provided to ACRA
A company’s first FYE must not be longer than 18 months after incorporation unless approved by ACRA under S198(2) of the CA.
Subsequent FYE of a company is deemed to be the date of anniversary of the previous FYE under S198(1)(b) of the CA.
In the case of a leap year, where the date of incorporation or the FYE of a company falls on 29 February, the anniversary of the date in the following year is to be taken as 28 February which is not a leap year under S198(7) of the CA.
2. What are the considerations when deciding on a FYE ?
When deciding on a company’s FYE, a few factors should be considered in Singapore:
- Eligibility for tax exemption or incentive scheme
- Whether your company is a subsidiary of another company ?
1. Eligibility for tax exemption or incentive scheme
The FYE decided by a company can affect any tax incentives enjoyed by the company which can help to reduce the corporate tax liability of your company.
One of the scheme that the company should check is their eligibility for the Start-Up Tax Exemption scheme (SUTE).
The Start-Up Tax Exemption scheme (SUTE) was introduced by the Singapore government to support entrepreneurship and help the local enterprises grow.
Qualifying conditions for SUTE
To qualify for the scheme, a company must satisfy the following qualifying conditions:
- The company must be incorporated in Singapore.
- The company must be a tax resident for that year of assessment (“YA”) i.e. control and management must be exercised in Singapore.
- The company’s total share capital is beneficially held directly by no more than 20 shareholders throughout the basis period for that YA where
- All the shareholders are individuals or
- At least one shareholder is an individual holding at least 10% of the issued share capital of the company.
Type of companies not eligible for SUTE
The following 2 types of companies are not eligible for the SUTE scheme.
- A company whose principal activity is that of investment holding; and
- A company which undertakes property development for sale, for investment, or for both investment and sale.
Tax exemption from SUTE
Under this scheme, qualifying companies will be given the following tax exemption for the first 3 consecutive Years of Assessments (YA) where the YA falls in:
Year of assessment | tax exemption |
|---|---|
YA 2020 onwards |
|
YA 2019 and before |
|
*Normal chargeable income refers to income to be taxed at the prevailing corporate tax rate.
The table below summarizes the amount of tax exemption that can be enjoyed by a company under the SUTE (where any YA of the first 3 YAs falls in or after YA 2020):
chargeable income | % exempted from tax | maximum amount exempted from tax |
|---|---|---|
First $100,000 | 75% | S$75,000 |
Next $100,000 | 50% | S$50,000 |
Maximum exemption for each YA for the first 3 YAs. | S$125,000 |
The year of assessment (“YA”) is the year in which your income is assessed for tax. It is the calendar year after your FYE. E.g. if your company was incorporated on 1 January 2020 and your first FYE is set on 31 December 2020, the first YA of your company assessed to tax will be in YA 2021.
In this case, your company could enjoy a significant amount of tax exemption on the first $100,000 (as illustrated in the table above) for YA 2020.
To maximize the tax incentive, it is recommended that newly-incorporated companies should consider setting their FYE on the last day of the 11th month from the date of incorporation. For example. if the company is incorporated on 2 Dec 2019, the first FYE should be set at 30 Nov 2020 and not 31 Dec 2020. This is because any accounting period longer than 12 months will be counted as having enjoyed 2 YAs by IRAS for tax exemption purposes. As a result, only 1 more year of tax exempt status under the SUTE scheme is left for the company.
2. Whether your company is a subsidiary of another company ?
If the company is a subsidiary of another company, it makes sense to align the FYE of the company to that of the FYE of the holding company.
In addition, there are other tax schemes which can be used by the 2 companies such as the Group relief scheme which enables companies within the same group to deduct unutilised capital allowances/trade losses/donation of one company against the assessable income of another local company within the same group.
Group relief scheme is a system which treats companies in the same group as if they are one single company. Under the GR system, the following items (referred to as “loss items”) of one company can be deducted from the assessable income of the other company of the same group:
- Current year unutilised capital allowances
- Current year unutilised trade losses
- Current year unutilised donations
You may only change the FYE for the current or immediate previous financial year through the Bizfile+ website.
In addition, under S198(5) of the CA, approval from ACRA is needed to change the FYE of your company if:
- The change in FYE will result in the company’s financial year being longer than 18 months; or
- The FYE of the company was previously changed within the last 5 years.
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