Monday, January 9, 2012
The Inland Revenue Authority of Singapore (IRAS) has published a revised version of its e-guide on the income tax treatment of trusts, following the several new provisions included in the Income Tax Act (ITA) after the publication of its first e-guide on this topic in 2006.
In the e-guide, the IRAS points out that, currently, the ITA has specific provisions that deal with the tax treatment of various types of trusts, including real estate investment trusts, approved unit trusts, foreign trusts, and registered business trusts. It is confirmed that the tax treatment of trusts which is specifically provided in the ITA will continue to be governed by the latter’s respective provisions.
It is pointed out that the ITA provides that the income of a trust is the statutory income of the trustee and is chargeable to tax on the trustee. Where a beneficiary is entitled to the trust income or a share of it, the beneficiary may be taxed on the entitlement, and allowed a credit for tax already imposed at the trustee level.
On the other hand, the IRAS may also agree not to charge the trustee with any tax on the trust income to which the beneficiary is entitled, and subject the beneficiary to tax on the distribution received (“tax transparent treatment”).
The e-guide confirms the changes made to the tax treatment of trusts following questions that were raised in the past. For example, there were requests for the extension of concessions and exemptions currently available to various income types derived directly by taxpayers to trust distributions received by beneficiaries.
The first change therefore enables such beneficiaries, who are residents of Singapore and entitled to the trust income, to be accorded the concessions, exemptions and foreign tax credits as if the beneficiaries had received the trust income directly. The IRAS employs the tax transparency treatment such that no tax is imposed at the trustee level and the beneficiaries are subject to tax on the distributions received.
While trusts are increasingly being employed as vehicles to carry on trade or business, it was also considered necessary, from a policy viewpoint, to harmonize the tax treatment of trusts used for such purposes with that of a company.
A second change in the e-guide therefore ensures that the income from a trade or business carried on by the trustees is subject to a final tax at the trustee level. Distributions made out of such income are in the nature of capital and are not subject to any further tax in the hands of the beneficiaries.