Tax Treatment of Trade Debts
The directors must take reasonable steps to ascertain what action has been taken in relation to the writing off of bad debts and the making of provisions for doubtful debts and to cause all known bad debts to be written off and adequate provision to be made for doubtful debts.
Deductibility of Impairment Loss on Trade Debts
Impairment losses or losses on debts incurred on financial assets are tax-deductible as long as the debts are relating to the trade or business and are revenue in nature.
Impairment Loss on Trade Debts under Financial Reporting Standard (FRS) 39
The accounting standard FRS 39 sets out the principles for recognising and measuring financial instruments.
For income tax purposes, impairment losses on trade debts that are revenue in nature will be allowed deduction. Similarly, any reversal of such losses will be taxed.
Opting for pre-FRS 39 Tax Treatment
However, for companies that opted for pre-FRS 39 tax treatment, only specific provision for doubtful debts will be deductible for tax purposes.
General provision for doubtful debts is still not tax-deductible.
Claiming Tax Deduction
Companies claiming tax deduction do not need to submit any supporting documents with their Income Tax Return. They must, however, keep the following documents and submit these to IRAS upon request:
Details of debts (name and amount owing by each debtor) which were not incurred in respect of the trade or business such as loans and advances;
Details of debts which were taken over in the case of a transfer or merger of business;
Details of debts in respect of a trade that had ceased, including any activity granted with pioneer incentive that had ceased; and
Segregation of debts relating to the different tax rate categories.
The following additional information is required for trade debts owing by related parties, where the amount of impairment loss exceeds $250,000:
Relationship between the company and the trade debtor;
Whether normal credit policy and terms were extended to the related party. If not, please provide the reasons for the extended credit policy and terms;
Whether steps were taken to recover and enforce the debts. If not, please provide the reasons for not enforcing the debts; and
Reasons the related party was unable to repay the trade debt.
Bad Debt
A bad debt situation occurs when money owed cannot be collected. You can apply to the Comptroller of GST for bad debt relief for a refund of output tax previously accounted and paid by you.
On the other hand, if you as a customer do not pay your suppliers within 12 months from the payment due date, you will be required to reimburse the Comptroller for your previously claimed input tax (if any). See If I have applied for GST before paying my supplier for details.
Eligible for Bad Debt Relief
To qualify for bad debt relief, you must meet the following criteria:
You supply goods or services for monetary consideration and have accounted for and paid GST on the supply;
You have written off all or part of the supply consideration as bad debt in your accounts;
The 12-month period from the date of supply has elapsed, or the debtor becomes insolvent before the 12-month period elapses;
You have taken reasonable steps to recover the debt;
The value of the supply is at or below its open market value; and
For goods, ownership must have passed to your customer
Time Limit for Claiming Bad Debt Relief
Claims for bad debt relief must be made within 5 years of the date of your supply.
Repaying IRAS after Recovering Bad Debts
When you collect bad debts, that is, when you receive payment from customers after you claim bad debt relief, you are supposed to pay back the tax fraction amount to the Comptroller.
Dealing with Debtors
Recovering debts from companies in Singapore involves similar strategies to individual debtors, but with some legal nuances. Here's a breakdown for you:
Approaches for Creditors:
Internal Communication:
Start by reviewing your internal processes for overdue invoices.
Send clear and timely reminders to the debtor company.
Negotiation:
Attempt an amicable settlement by reaching out to a designated contact person within the debtor company. Negotiate a realistic repayment plan with concrete terms.
Debt Collection Agencies:
Consider engaging a licensed debt collection agency in Singapore. They specialize in corporate debt recovery and can handle the process efficiently.
They'll typically start with a formal Letter of Demand outlining the debt and demanding payment by a specific date.
Legal Action:
If negotiations and debt collection agencies fail, legal action may be necessary.
A lawyer can help you file a lawsuit in the Singapore courts to obtain a judgement against the debtor company.
With a judgement, you can enforce debt collection through bailiffs who can seize assets or garnish bank accounts.
Additional Considerations:
Company Winding Up:
In some cases, the debtor company may be undergoing liquidation. Research the company's status with the Accounting and Corporate Regulatory Authority (ACRA).
If they are winding up, you'll need to file a claim with the company's liquidator.
Security Interests:
Did you have any collateral or security agreements in place with the debtor company? These can give you priority in recovering your debt during liquidation proceedings.
Seeking Legal Advice:
Consulting a lawyer specializing in commercial debt recovery is recommended, especially for complex cases or significant sums. They can guide you through the legal process and ensure your rights are protected.
Remember, the most effective approach depends on the specific situation. Consider the size of the debt, the debtor company's financial health, and your risk tolerance when deciding the best course of action.
How Bestar can Help
Tax Advice: Bestar is a tax consultancy firm that can advise on the tax implications of trade debts in Singapore. The services offered by Bestar in relation to tax treatment of trade debts in Singapore include:
Bad Debt Provisions: Understanding how to claim tax deductions for bad debts written off.
Good Debt Provisions: The treatment of provisions for potential future bad debts.
GST Implications: The Goods and Services Tax (GST) treatment of trade debts, including output tax and input tax.
Finding Out More About Bestar. Search Bestar's Website: Look for our website to see our services related to tax treatment of trade debts in Singapore. Our website also has contact information so you can inquire directly.
Contact Bestar.
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