Singapore: Updated GST guidance, treatment of termination expenses (COVID-19)

GST guidance addresses what amounts can be claimed as expenses incurred in the termination and winding-up of a business.

Treatment of termination expenses (COVID-19)

The Inland Revenue Authority of Singapore (IRAS) updated guidance regarding the goods and services tax (GST) and provided new guidance on eligible GST claims and incidental exempt supplies.

Given the economic implications of the coronavirus (COVID-19) pandemic, the GST guidance addresses what amounts can be claimed as expenses incurred in the termination and winding-up of a business.

Section 3(5) of the GST law provides that anything done in connection with the termination or intended termination of a business is treated as being done in the course or furtherance of that business. Hence, expenses relating to the termination of business would be regarded as business expenses. If a GST-registered business is making only taxable supplies before the winding-up, the business would be allowed to claim full input tax on termination expenses, since these expenses are attributable to that fully taxable business. While the IRAS guidance takes the view that GST on termination expenses is not directly attributable to past supplies, the expenses are residual in nature and thus fully claimable pursuant to section 3(5).

On the other hand, if the business makes both taxable and exempt supplies (that is, a partially exempt business) before its closure, and there is no taxable supply in the prescribed accounting period when termination expenses are incurred, the business is able to claim such input tax as residual input tax based on its input tax recovery formula. For instance, a bank would be able to claim the GST on the termination expenses based on the fixed input tax recovery rate, according to the banking license issued by the Monetary Authority of Singapore. However, if a business is claiming GST based on the standard formula, no input tax on termination expenses would be claimable if there were no taxable supply made during the prescribed accounting period in which the expenses were incurred.

The IRAS guidance highlights liquidation fees as an example of termination expenses, but clarifies that rent and utilities are not.

The IRAS has further clarified that GST for non-termination expenses is not claimable unless the expenses are directly attributable to the making of taxable supplies. For instance, repair expenses incurred for the sale of equipment would be claimable. Rent and utilities are not directly attributable to the making of taxable supplies, which means that GST on these expenses is not claimable—even if taxable supplies (such as the sale of equipment) are made in the prescribed accounting period. This would also suggest that audit services for the period when taxable supplies were made would not be claimable if the invoice for the audit fee was received subsequently and in the prescribed accounting period when no supply was made. 

KPMG observation

The IRAS guidance states that a business must be making fully taxable supplies to fully claim GST on termination expenses. Tax professionals believe this ought to include a business making only exempt supplies listed in regulation 33 of the GST (General) Regulations or making exempt supplies that meet the de minimis rule pursuant to regulation 28 of the GST (General) Regulations.

As regards a partially exempt business, which claims GST based on the standard formula, no GST on termination expenses is claimable in the prescribed period when no taxable supply is made. Such a business would be worse off when compared to one that can claim GST on termination expenses based on the special input tax recovery formula (thus creating what some see as an unlevel playing field).

As termination expenses can include professional fees apart from liquidators’ fees and data storage expenses, it raises the question if GST incurred on such expenses would be claimable or treated as non-termination expenses and thus excluded from the claim. Tax professionals have observed it would be useful if the IRAS were to provide more examples.

Read an August 2021 report [PDF 421 KB] prepared by the KPMG member firm in Singapore


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