What is rental income?
Ever wonder about the tax treatment of rental income? In this article, we will explore rental income from a personal income tax and corporate income tax perspective and their respective tax treatment.
Rental income refers to the full amount of rent and other associated payments you receive when you rent out your property. This may include the rental fee for the premises, rental fees for the equipment/furniture within, or the service fee for maintenance.
Difference between Property Tax and Income Tax
Before we explore rental income further, we would like to distinguish between property tax and income tax on rental property. Property tax is a tax on property ownership. If you own a property, this tax will apply regardless of whether you rent it out or use it for your own use.
Income Tax is a tax on your rental income, an earning you derived from allowing another party to occupy your property.
Personal Income Tax on Rental Income (Individuals)
What is the amount of taxable rent income?
For property owners who have rental income, you are supposed to declare this income to IRAS. The taxable net rental income is the amount of gross rental income less allowable expense. Some of the allowable expenses will include mortgage interest, costs associated with securing a tenant, expenses relating to repairs and maintenance of the property, fire insurance coverage, and property management fees. These deductible expenses should be incurred when deriving the taxable income.
After computing the rental income net of any deductible expenses, the amount should be filed in the tax return of your personal income tax. For individuals who have multiple property ownership, it is essential to maintain a clear record of current expenses pertaining to each property. It is also paramount to ensure that non-allowable expenses are excluded in your computation to provide an accurate tax return. Examples of non-allowable expenses include personal expenses and travel expenses.
To ensure clarity, we advise property owners with multiple income sources from various properties to maintain clear and separate documentation for each property. Essential documentation for each property may include rental agreements or tenancy agreements stating the rental deposit, invoices pertaining to minor repairs and replacements of furnishings, maintenance fees, and service charges, and a clear log of any monthly maintenance charges. This will ensure that all the actual expenses are justifiable with the relevant source document for tax return filing. For a detailed listing of expenses allowed, it will be advisable to check against the IRASA’s website or speak to your tax consultant for more information.
Simplified 15% Claims Deduction
For busy property owners, IRAS had allowed a pre-determined deemed rental expenses calculated based on 15% of the gross rent. This amount will be pre-filled on the online tax form. For this deduction, there will be no need for any records to be kept for rental expenses. Otherwise, one would be required to retain all supporting documents for at least 5 years. This may include but not limited to tenancy agreements, bank mortgage statements and invoices.
Filing of Tax return
Individuals are supposed to file this rental income together with their personal income tax return in April every year. The annual income tax returns will include all sources of income, such as employment, rental income, and other taxable income. After allowing for personal tax deduction, the chargeable income is taxed on the personal income tax rate. These income taxes are paid in monthly installments.
Corporate Income Tax on Rental Income (For Companies)
Things will get slightly complicated for companies in the investment property industry. Be it a commercial property holder or owner of residential properties, the corporate income tax of a company may include rental income if it decides to rent out any of the said properties. As for the capital gains regarding the sales or disposal of a property, the Inland Authority of Singapore had left this open, and practitioners usually rely on the badges of trade to determine if a company's disposal of a property should be viewed as a capital gain or revenue income.
Similar to the above scenario of personal rental income, corporate income tax disregards actual personal expenses. Private motor vehicle expenses are also disallowed. In short, only business expenses are regarded as deductible expenses. These business expenses may include management fees, minor repairs, and other business-related expenditures.
Filing of Tax return
Companies are supposed to file their corporate income tax return as per other companies. They would be required to file their estimated chargeable income 3 months after the end of their financial year and the final corporate annual income tax return on the 30th of November. The corporate tax rate stands at a flat rate of 17%.
As a company may have more business expenses, it is important that it has an accurate financial statement adhering to the relevant standard. An interesting point to note is that the financial statements may adopt a method of accounting known as the accrual method. The use of the accrual method will require experienced tax accountants to reconstruct a tax computation working to determine the tax payable.
An experienced tax accountant will likely check for these areas:
Business Income
Ensure that all business income is duly included and brought to tax. There may be a variation of business income such as income from operations, interest and dividends. Be sure to bring to tax all taxable income.
Claimable Expenses
Some of a company's allowable expenses may include legal expenses, travel expenses, and other operating expenses. A tax accountant will ensure the tax computation does not contain non-allowable expenses, depreciation, and expenses outside the basis period.
Accrual Basis Adjustment
As most financial statements are recorded using the accrual method, further adjustments may be needed to bridge this gap. You may read here for more information on Accrual Basis of accounting.
Capital allowances
Companies may purchase certain assets that may qualify for a capital cost allowance claim. A capital allowance is akin to "tax depreciation" for qualifying capital assets.
Additional info: Stamp duty
The tenant usually pays the stamp duty on rental units. However, there are cases where the parties negotiate for the landlord to bear the cost. To avoid disputes, tenants should always state the payee of the stamp duty in the tenancy agreement.
Stamp duty is paid to IRAS before the signing of the tenancy agreement.
File your rental income
Both individuals and corporations are required to declare their rental income. Rental income is a taxable source of income, although there are allowable expenses that may reduce the final chargeable income. Individual and corporate setups may differ in expense deductibility, and it is always best to seek clarification if you are unsure. At OakTree, we provide tax computation and tax filing services for individuals and companies. Get in touch with us to ensure that the tax you paid is the correct amount.
References
https://www.propertyguru.com.sg/property-guides/stamp-duty-for-rental-units-in-singapore-9522
https://www.iras.gov.sg/taxes/property-tax/property-owners/your-situation/renting-out-my-property
https://aurapartners.com.sg/blog-how-to-compute-rental-income-tax-in-singapore/
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DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily represent the views and opinions of any individuals or organizations with which the author may be affiliated, either in a professional or personal capacity, unless explicitly stated.
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