Tax Deductibility of Interest Expenses in Singapore
In Singapore, interest expenses incurred on loans or borrowings specifically taken up to finance income-producing assets are generally tax deductible against the income produced. This means that businesses can reduce their taxable income by deducting the interest paid on these loans.
However, there are some conditions and considerations:
Direct Link: The loan must be directly linked to the acquisition of the income-producing asset. This means that the funds must be used specifically for that purpose.
Income-Producing Asset: The asset financed by the loan must generate taxable income.
Total Asset Method: If a portion of the loan is used to finance both income-producing and non-income-producing assets, the interest expense must be allocated between the two. The Inland Revenue Authority of Singapore (IRAS) typically uses the Total Asset Method for this allocation.
Total Asset Method
The Total Asset Method is a method used to allocate interest expenses between income-producing and non-income-producing assets when a portion of a loan is used for both purposes. This method is commonly used by the Inland Revenue Authority of Singapore (IRAS) to determine the deductible interest expense for tax purposes.
Here's how the Total Asset Method works:
Calculate Total Assets: Determine the total value of all assets financed by the loan, including both income-producing and non-income-producing assets.
Calculate Ratio: Divide the value of income-producing assets by the total value of all assets. This will give you the ratio of income-producing assets to total assets.
Allocate Interest: Multiply the total interest expense by the ratio calculated in step 2. This will determine the portion of the interest expense that can be deducted against income-producing assets.
Example:
Loan Amount: $100,000
Income-Producing Assets: $60,000
Non-Income-Producing Assets: $40,000
Interest Expense: $10,000
Calculate Ratio: 60,000 / 100,000 = 0.6
Allocate Interest: 10,000 * 0.6 = $6,000
In this example, $6,000 of the interest expense can be deducted against the income-producing assets, while the remaining $4,000 is considered a personal expense and is not deductible.
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