This article summarises the scope of tax deduction under Section 14Q of the Income Tax Act (“ITA”) including a recent development made by the IRAS which provides an expansion in scope of qualifying renovation or refurbishment costs allowable for claim under Section 14Q of the ITA.
Deduction under Section 14Q
Generally, expenditure incurred on renovation or refurbishment works (R&R costs) carried out on the business premises of a taxpayer is not allowable as a tax deduction if such expenses are capital in nature.
Such R&R costs will not qualify for capital allowances under Section 19 or 19A of the ITA if these expenses are incurred in relation to the business setting within which the business is carried on and not on the provision of “plant or machinery”. For example, expenditure incurred on the installation of doors, floor tiling, ceiling works or sanitary fittings will not qualify for capital allowances claims since such items are usually considered as part of the business premise and not a plant.
However, a taxpayer can claim a deduction for qualifying R&R costs incurred on renovating or refurbishing its business premises under Section 14Q of the ITA. Hence, Section 14Q provides for a specific deduction for R&R costs that would otherwise have been non-deductible or non-allowable for capital allowances claim.
The Section 14Q deduction is applicable to qualifying capital expenses incurred on or after 16 February 2008. The amount of deductible R&R costs is limited to S$300,000 for each taxpayer for every three-year period starting from the basis period in which the R&R costs are first incurred, and a deduction is claimed by the taxpayer. The deduction is granted over a period of three consecutive years on a straight-line basis from the year of assessment (YA) relating to the basis period in which the qualifying R&R costs are first incurred and claimed by the taxpayer. Investment holding companies are not eligible to claim Section 14Q deductions.
Under Section 14Q(9), no deduction is allowed for any renovation or refurbishment expenditure relating to the following:
(a) any renovation or refurbishment works, the plans of which require the approval of the Commissioner of Building Control under the Building Control Act unless otherwise approved by the Minister or such person as he may appoint;
(b) any designer or professional fees;
(c) any antique;
(d) any type of fine art, including any painting, drawing, print, calligraphy, mosaic, sculpture, pottery or art installation;
(da) any works carried out in relation to a place of residence provided or to be provided by the person to his employees, where the expenditure is incurred on or after 18th December 2012; or
(e) such other item as may be prescribed by the Minister by regulations.
IRAS E-Tax Guide
While Section 14Q has been legislated in the ITA to prescribe the tax treatment on deductibility of R&R costs, the ITA does not specifically define the types of renovation expenditure incurred by taxpayers that would constitute R&R costs allowable for claim under Section 14Q.
In this regard, the IRAS first issued an e-tax guide on “Tax Deduction for Expenses Incurred on Renovation or Refurbishment Works Done to your Business Premises” on 18 June 2008. This e-Tax Guide explains the tax deduction granted under Section 14Q and provides examples of qualifying R&R costs allowable for claims, which aim to mitigate the risk of incorrect claims made by taxpayers. Companies are required to ensure that Renovation & Refurbishment (“R&R”) costs are qualifying expenditure before claiming a deduction for such costs in their tax returns.
Recent Update to the E-Tax Guide
On 25 January 2018, the IRAS published an updated version of the e-Tax Guide on “Tax Deduction for Expenses Incurred on Renovation or Refurbishment Works Done to your Business Premises”.
The key changes introduced in the latest e-Tax Guide are summarised as follows:-
1. List of qualifying R&R costs has been expanded
a) Hacking work on premises;
b) Water meter installed to enable renovation works;
c) Hoarding works; and
d) Insurance for renovation works qualifying for Section 14Q deduction.
2. List of non-qualifying R&R costs has been expanded
The changes introduced in the latest e-Tax Guide provide clarity on the determination of R&R costs allowable for Section 14Q claims and essentially making such claims less contentious moving forward. However, it is important that taxpayers work with their renovation contractors on proper documentation of the renovation works so that all Section 14Q claims are supportable.
This certainty in tax treatment should also allow companies that renovate or refurbish its business premises to claim, where appropriate, more Section 14Q deduction in their tax returns due to the expansion in scope of qualifying R&R costs. The additional tax savings would be most helpful to SMEs.