GJ Tang Foods Pte Ltd (GTF), a Singapore incorporated company, is in the food catering business. It was incorporated on 15 December 2015 and its first set of accounts was for the period ended 31 July 2016. Its shares were held equally by siblings, Glory and Joy Tang who are also the directors of the company. The directors hold their directors meetings in Singapore. For the financial year ended 31 July 2017, the company made a net profit before tax of $620,000 on turnover of $5,000,000. The profit was arrived at after taking into consideration the following income and expenses:

Income:

1) $60,000

Rental income from renting out excess space at its Singapore business premises. The business premises are currently under-utilized (although GTF has future expansion plans) and as such, the under-utilized space has been rented out since 1 February 2016. The initial one-year lease was renewed with the current tenant on 1 February 2017 for a further 2 years.

2) $20,000

Interest accrued on a 6-month fixed deposit maturing on 30 August 2017. The fixed deposit was placed with OCBC Bank, an approved bank in Singapore.

3) $15,000

Dividend income from shares held in Big Onion Catering Limited (BIC), a company tax resident in Country X which has a headline tax rate of 10%. Country X does not impose dividend withholding tax. The proceeds from the dividend, paid out of after-tax profits in Country X, were used to settle a suppliers invoice on 15 June 2017. GJ Tang Foods is not entitled to relief for any foreign tax suffered on the dividend.

4) $5,000

Capability Development Grant from Enterprise Singapore. The grant is to support the companys effort in developing its marketing strategy.

Expenses:

1) $14,000

Annual direct expenses related to area rented out.

2) $164,000

Depreciation.

3) $3,000

Legal fees for Debt recovery from customers.

4) $8,480

Legal fees for Drafting of lease renewal agreement with tenant, including stamp duty (see Rental under Income above).

5) $3,500

Accountancy fees for preparation of tax return for expatriate general manager.

6) $3,000

Income tax borne on behalf of the companys expatriate general manager per the terms of the employment contract.

7) $10,000

Medical insurance premium. The company has implemented the Portable Medical Benefits Scheme (PMBS). In this regard, the total staff salaries, bonus and CPF for the year is $300,000.

8) $112,000

Interest expense on $1.6m loan used for following:

• $100,000 for purchase of shares in BIC; and
• $1,500,000 for purchase of business premises of which $500,000 relates to the area rented out.

9) $15,000

Hire purchase interest on new company van.

10) $7,715

Mileage claims on employees personal cars used for business purposes.

11) $4,000

Reimbursement of staff taxi claims due to overtime work including $2,000 on Grab cars.

12) $14,000

Donation made to Tan Ah Moi Home for the Aged, an Institution of Public Character on 15 January 2017 comprising:

• Cash donation of $10,000.
• Food supplies costing $4,000.

Notes:

(i) The company incurred the following non-structural renovation expenses during the year and which were capitalized to the Balance Sheet:

• Flooring and tiling works, fixed partition and plumbing works to reconfigure part of the kitchen area; the renovation works commenced in the previous year: $185,000.
• Replacement of damaged roof with similar roof tiles at rental unit: $20,000.

(ii) The company is entitled to capital allowances claim of $135,000 for Year of Assessment 2018.

(iii) The company made its first sale on 15 September 2016. In its first financial year ended 31 July 2016, it incurred the following set-up expenses:

• Incorporation expenses: $20,000.
• Professional fees in respect of applying for food catering licence: $4,000.
• Food licence fee (annual): $195.
• Salaries and statutory CPF contributions of cooks, kitchen helpers and accounts personnel: $90,000.
• Food supplies for trial menu tasting: $55,000.
• Demolition and hacking work in respect of non-structural renovation to premises: $25,000.
• Interior designer fees: $15,000.

Required:

(a) Explain if the expenses incurred in financial year ended 31 July 2016 can qualify for tax deduction, stating clearly any conditions that are to be satisfied. At the minimum, your answer should address the following:

• The deduction rule relating to set-up expenses in general.
• The conditions to be satisfied to enable deduction of set-up expenses.
• For each of the expense incurred in financial year 2016, please state whether deduction will be allowed or not. Where the expense is deductible, state clearly when deduction should be claimed. Where the expense is not deductible, please explain why not.

(b) Prepare the tax computation for the Year of Assessment 2018 applying the relevant exemptions and deduction rules. Every item of income and expense given 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 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. You do not need to explain the deductibility of the expenses incurred in financial year 2017.

(c) On 1 March 2018, Neo Foods Pte Ltd approached the siblings about buying over their shareholdings. Joy will relinquish all her shares while Glory would like to maintain an 8% stake in the company. GTF is forecasted to be highly profitable in the financial year ended 31 July 2018 and going forward. Please advise when the share transfer should take place, stating clearly the reasons for your recommendation.

(d) Glory feels that the transport claims by staff (whether for taxi fares or mileage claims) are too cumbersome to administer. She would like to replace transport reimbursements with a flat cash allowance to be given to affected staff members. You are to write a report to Glory to explain the difference in tax treatment between the current arrangement (pure reimbursement) and the proposed fixed allowance in the following areas:

• Tax-related issues from the companys perspective only; and
• Any CPF-related issues.