Change in financial year end and tax planning

One of the questions that business owners ask us as accountants and bookkeepers is what should their financial year end be. Unlike a number of other countries where the companies financial year end hence the tax year is fixed, the management of a Singapore incorporated company is able to decide when the company’s financial year end should be subjected to various guidelines. The main concern of the management is about the tax impact of their decision, hence, this is where good bookkeeping services or accounting services will be able to assist you in making a decision. There are several matters to consider through:

ACRA and Statutory requirements for company year end

Under the Companies Act which was revised in August 2018, it’s stated that:

198(2) A company’s first financial year must not be longer than 18 months unless the Registrar on the application of the company otherwise approves.

and that subsequent financial year starts immediately after the end of the previous financial year and ends on the last day of a period of 12 months.

Currently, after the revision of the Companies Act, a company will need to specify their financial year end immediately during the incorporation process. However, ACRA does allow the financial year end of the current and immediate previous year end be changed provided that the statutory deadlines for the holding of Annual General Meeting, filing of Annual Return has not passed. So, the management of the company is still able to amend the year end even half-way or three-quarters into the current year if it is tax advantageous for them to do so.

After the revision of the Companies Act in August 2018, ACRA has issued new guidelines that a company’s financial period starting on or after 31 Aug 2018 will be taken to be a period of 12 months for each financial period.

Tax planning and why it matters

We have to draw a distinction here between tax planning and tax evasion. Tax evasion is when a company under-reports or doesn’t declare their income while tax planning is minimizing the tax impact while declaring all income truthfully.

Let’s go through an example where changing the financial year end will minimize the tax payable for the Company. For simplicity sake, the company is incorporated on 1 Jan and it projects its income to be the following for the first 3 calendar years:

table project net income

Note that in the first 2 columns, the Company is using a standard calendar year as its financial year end each year while in the last 2 columns, the Company is using a varying financial year end. The first financial year actually ends in the second quarter of the second year and comprises of 6 quarters. The second financial year is a standard 4 quarters while the third financial year is shorten to 2 quarters.

When we calculate the taxable income under the two different scenarios, the first fixed year end results in $545,000 of taxable income over the first 3 financial years while the second scenario will result in $365,000 of taxable income. That’s a 30% reduction in tax for the Company over 3 years.

The reason for the difference is because of IRAS tax exemption scheme for new start-up Singapore Companies. Where any of the first 3 years end in or after 2019. The Company will get 75% of the first $100,000 exempted from tax and 50% of the next $100,000 exempted from tax. Coupled with a longer financial first year, the Company is able to utilize the tax incentives more efficiently.

Bookkeeping and Accounting services

As we can see from the example above, a Company can save substantially on tax just by choosing its financial year end suitability. For most business owners and managers, however, they often fail to make good use of this planning because of lack of bookkeeping services or accounting services.

A good Xero cloud bookkeeper or Xero accountant will be able to provide timely and real-time financial information. That will allow accurate projections of the future income to be made and the good selection of financial year end for the Company will then be able to fully make use of the tax exemptions given.

Interested to know more? Drop us a note. We will love to get to know more about you.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>