ACC307: Heavenly Breeze Pte Ltd (“HBPL”) is in the Business of Manufacturing Fragrances for Air Purifiers: Taxation of Companies and Partnerships Assignment, SUSS, Singapore

Question 1

Heavenly Breeze Pte Ltd (“HBPL”) is in the business of manufacturing fragrances for air purifiers, candles, and reed diffusers. It was incorporated on 17 November 2010 and its first set of accounts was for the period ended 31 October 2011. Its share capital of $1,000,000 (at $1/share) was held equally by Ms. Spice Tan and Mr. Bouquet Ong until 4 January 2018.

On 5 January 2018, Foral plc (“Floral”), a company incorporated and tax resident in Country K took up a 60% shareholding in HBPL after Spice and Bouquet sold 40% and 80% of their shareholdings to Floral. Shares in Floral are held by Mr. Ambrose Lee (30%) and Floom Inc. (70%), both of which are tax residents in Country K. Floom is a publicly listed company in Country K.

For the year ended 31 October 2019, the company made a net loss of $290,000 on gross revenue of $16,150,000. The loss was arrived at after taking into consideration the following income and expenses:

During the year, the following expenditure was capitalized to the Balance Sheet:

Capital allowances on all qualifying plant and machinery acquired in previous years have been fully claimed apart from 10 furniture workstations acquired in the financial year 2018 at the cost of $4,500 each (total cost = $45,000).

Since YA 2018, it has been the company’s policy to claim maximum capital allowances on its eligible fixed assets, where applicable. The company does not have a policy of deferring capital allowances claim.

Required:

• Apply the relevant exemptions and deduction rules and construct the tax computation for the Year of Assessment (“YA”) 2020 to calculate the tax payable for HBPL, if any. Where there is no tax payable, please show clearly the unabsorbed loss item from the respective category. Every item of income and expense gave must be accounted for in the tax computation. Where no adjustment is required, please insert “0”. In arriving at statutory income, all items of income from the non-trade source must be accounted for. If an item of non-trade income is not taxable, please state the reason why – tax-exempt, unremitted foreign income, income not earned yet, or income taxable in Year of Assessment XXXX. All related expenses should also be accounted for. If the expense is not deductible, please insert “0”.

Show all workings clearly as application marks will be awarded even if the answer is incorrect.

• On the basis that HBPL is likely to have unabsorbed loss items, please analyze how the company may utilize any unabsorbed loss items arising from Year of Assessment 2020 efficiently. HBPL has the following assessable income for the following Years of Assessment:

YA 2017: $69,000

YA 2018: $86,000

YA 2019: $145,000

In your answer, you are to address the following:

The conditions to be satisfied;

Whether the conditions are met or not and how they are met or not;

For the shareholdings test, identify the relevant common shareholders and their shareholdings on the relevant comparison dates;

State the amounts that can be utilized in the relevant YA; and

How many residual unabsorbed loss items may be utilized?

HBPL contemplates that the company will continue to incur losses for the financial year 2020.

• HBPL is contemplating various options to finance the settlement of the remaining purchase price of the newly acquired factory building as well as the costs of upgrades to be made to the building. The factory will be utilized fully for HBPL’s manufacturing business. The Finance Manager is looking at the following financing options:

Debt financing from a Singapore bank;

Proceeds from new share capital injection from a shareholder, Floral;

Proceeds from the sale of shares in either Aroma and/or Reboot (the current market value of the shares in Aroma and Reboot are S$800,000 and S$1,000,000 respectively. The shares have been held in 2012 and they were acquired through initial public offerings using proceeds from share capital injection. HBPL’s percentage shareholdings in both companies is not more than 10%. HBPL does not own other equity investments.); and

Proceeds from the cumulative dividends received from Aroma and Reboot over the years (estimated at S$570,000). The dividends have been left in an overseas bank account all this while.

Analyze the above options and discuss the Singapore Income Tax implications of each of the above options. In your analysis, you should explain the taxability of any receipt derived from that option as well as the deductibility of any expenses that may be incurred under the respective options. You should also provide your recommendations on the most tax-effective way of financing the transaction stating the basis of your recommendations. All analysis and recommendations are to be made purely from the Singapore Income Tax perspective.