No rebates this year but tax rate still attractive

Some tax savings have already been factored into the new rates

By Lee Su Shyan, The Sunday Times, 4 Mar 2012

Many individual taxpayers have grown used to looking forward to Budget time, anticipating goodies from the Finance Minister.

Last year, taxpayers cheered the scrapping of the annual television licence fee and radio licence fee. Although the amounts were not large, at $110 and $27 respectively, it came as a pleasant surprise nonetheless.

One feature in recent years has been an income tax rebate of 20 per cent, capped at $2,000 for the year. In some years, it has been a 10 per cent rebate, in others 15 per cent.

For someone with a tax bill of around $10,000, that would bring the amount paid down to $8,000, a substantial reduction.

The announcement of an income tax rebate during the Budget helps take away some of the sting of having to pay one's taxes as the tax filing season gets under way soon after.

But although a one-off tax rebate gives more flexibility to the Government, it disappeared from this year's Budget, disappointing many taxpayers.

But disappointment aside, some tax savings have in reality already been factored into the new tax rates.

Take a look at the accompanying table, where Ernst & Young has calculated the income tax payable under the previous and the new personal income tax rates. The new rates will apply to last year's income. We are now filing our tax returns to pay tax on last year's income.

Assuming a level of taxable income - income from which personal reliefs have been deducted - of $150,000, there is no change in tax payable, even though the rebate has disappeared. That is because the tax rates have been changed.

In fact, for those individuals earning less than $150,000, there is even a tax saving, even when the rebate is taken into account. Someone on a $100,000 annual income is better off now, with savings of $200.

Still, it is true that those who earned more than $150,000 last year will wind up with a heavier tax bill as Finance Minister Tharman Shanmugaratnam has said that the aim is to make the income tax system more progressive.

For someone who earned $350,000, his extra tax is $1,600 more, with the effective tax rate (tax paid divided by the income) inching up from 11.03 per cent to 11.43 per cent.

For those who earned half a million dollars or more, the tax bill has gone up from $71,800 to $73,400.

But if these highly paid earners are thinking of decamping to Hong Kong, the tax experts also say that Singapore's tax bill is still lower.

Even with its recent Budget, which offered generous personal allowances, the grass is not greener in Hong Kong.

Ernst & Young has calculated that for someone who earns between $90,000 and up to $455,000 from employment and investment income, working in Singapore is more attractive tax-wise than in Hong Kong.

The Budget, as expected, did not give in to demands from top earners to cut the top rate of income tax of 20 per cent. Many of these wealthy people have argued that the top rate should be the same as that for firms, which are taxed at 17 per cent.

With no changes on that front, what a businessmen can consider is whether he wants to remain a sole proprietor or set up a company.

A sole proprietor will have to pay personal income tax rates on his income, whereas if he sets up a company it will be at the corporate income tax rate.

Ernst & Young has worked out that if a sole proprietor has income exceeding $146,700, it may make sense tax-wise to set up a company, assuming similar expense deductions, because of the lower tax rates.