Common Mistakes Made When Filing Income Tax

April 9, 2012

in Taxes

By Dennis Ng (guest contributor)

Do you know how to file your income tax? From my observation, many people fail to file their income tax correctly. Now, let me shed light on some common mistakes made when filing for one’s income tax. In doing so, I hope it would help prevent you from making the same mistakes.

Do foreigners need to report income tax?

If your annual income exceeds S$22,000, you would need to report your income to the Inland Revenue Authority of Singapore (IRAS). For permanent residents and foreigners, so long as you work for more than 183 days in Singapore within the year, and your annual income exceeds S$22,000, you would need to file for an income tax return. If you fail to file an income tax return when required, you might be fined. And if you try to evade tax altogether, you could even be jailed when convicted. Regardless of your nationality, any income sourced overseas need not be reported in Singapore—you are only required to report any income derived in Singapore.

So regardless of your nationality, if you own properties or stocks overseas, earn rental or dividends, you do not need to report these income in Singapore.

Husband and wife each has an income

If husband and wife each have an income, then each of them should report their income separately, instead of on a joint basis. In which case, reporting their income separately would work out to be better as Singapore provides special tax incentives for married women who work, in order to encourage them to continue working after marriage. Put simply, married working women enjoy tax reliefs that are not extended to men. Examples of such tax reliefs include maid levy relief which works out to be equivalent to double of the maid levy paid.

In addition, working mothers also enjoy child tax reliefs. If these working mothers have one child, the tax relief is based on 15% of the reported income, or 20% for the second child and 25% for the third child. If a married mother of two earns an annual income that exceeds S$50,000, she gets to enjoy child relief of S$7,500 for the first child and S$10,000 for the second child. On the other hand, the father can enjoy a separate child relief of S$4,000.

However, if the child takes on some work during the school holidays, for instance, and their annual income exceeds S$4,000, then both parents would not be able to enjoy any child tax relief.

Parent tax relief

First and foremost, your parents’ age must be above 55 for you to be able to enjoy parent tax relief. Secondly, if both parents are drawing an income, their annual income must not exceed S$4,000. Thirdly, if you have siblings, only one child can make claims for parent tax relief for the eligible parent. Here, the common mistake made is that more than one child attempts to claim parent tax relief on the same parent.

And if you are eligible to claim for parent tax relief and stay with your parents, then you are able to claim a parent tax relief of S$7,000 for each parent. If you do not stay with your parents, you can only claim S$4,500 of parent tax relief for each parent.

Common tax filing mistakes made by property investors

If you have a property which you rent out in whole or part, you are required by law to report any rental income received. If you provide furniture and electrical appliances to your tenants, any rent collected on such furniture and fittings should also be reported as part of your rental income.

So even if a property investor has enough cash to buy a property without obtaining any loan, it is probably a wiser decision to obtain a housing loan to partially finance the property purchased, reason being that any interest payable on the housing loan can be deducted from the rental income received in arriving at the net rental income of the property. Put simply, by taking on a housing loan on your investment property, you can reduce your income tax amount by reducing your overall rental income.

That said, money spent on renovating your property or buying furniture and electrical appliances, cannot be deducted from your rental income. While commission paid to the property agent for getting a tenant cannot be deducted, commission paid to the property agent for the renewal of tenancy agreement can be deducted. Lastly, you can also deduct property tax and fire insurance premiums from your overall rental income.

All in all, you should not just report the gross rental income, but remember to make claims for the allowable deductions from the rental income, to arrive at the net rental income.

Common mistakes made by self-employed when filing income tax

A common mistake made by the self-employed includes omission to report income. In this case, some self-employed omit reporting any income received in cash, simply because they do not have a good habit of record keeping. In the event IRAS conducts an investigation and discovers that certain income has been omitted, it can be considered an act of tax evasion and the consequences can be severe. Penalties include a fine or even a jail term. Owing to the severity of such mistakes, self-employed should best develop the habit of keeping complete and tidy records, where all revenue and expenses are spelt out in detail.

The self-employed should not be filing their income tax returns based on estimations or what can be remembered of their revenue and expenses. Should IRAS require you to submit evidence for your revenue and expenses, where you are unable to do so, you could be deemed to attempt to evade tax and be subjected to penalty and punishment.

To my understanding, some self-employed also mix their business expenses with their family and personal expenses. For instance, they might report payment for country club membership fees, personal insurance premiums or even personal travel or family travel expenses as business expenses. Needless to say, these deductions are forbidden as only expenses incurred for business can be deducted as such.

If you own a car, car-related expenses such as petrol costs, car maintenance expenses, car insurance premiums, parking charges, electronic road pricing (ERP) payments and car loan installment payments cannot be deducted as business expenses.

How long do you need to keep your records?

All records relating to your revenue and expenses must be kept for at least five years and not be discarded immediately, upon submission of your income tax return. In the event that IRAS requires you to submit supporting documents and evidence for your income and expenses, but fail to do so, you could be seen to be evading tax.

I hope the above will help you better understand your rights when filing for your tax, as well as highlight common mistakes that should be avoided to ensure that filing your income tax returns can be a hassle-free process.

By guest contributor Dennis Ng, Director of Leverage Holding and Master Your Finance.

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