Onsen Waters Pte Ltd (OWPL), a Singapore incorporated company, is the sole distributor of water purification units manufactured in Japan for home and commercial use. These units are sold in the South East Asian Region through local franchisees managed by OWPL. In Singapore, OWPL sells the product through its main office and retail outlets. The company was incorporated in September 2014, with its first financial year ending on 31 July 2015. The company has been wholly owned by Onsen (Japan) Inc until 31 December 2016. On 1 January 2017, a share allotment was issued to OWPL’s managing director, Ms Gemma Shui who owns 10% shareholdings in OWPL after the said issuance.

For the year ended 31 July 2017, OWPL reported a net profit of $540,000, after taking into account the following income/gain and expenses/losses: Income

(i) Rental income of $48,000 from a residential property in Country Z. The property was occupied by OWPL’s country representative in Country Z until his last day of service in April 2016. The property was rented out on a short-term lease for one year from 1 August 2016 as OWPL could not recruit a replacement country representative to oversee the representative office. The rental income was deposited into a bank account in Country Z which is used to settle expenses incurred in Country Z relating to the property (see (iii) below under Expenses). The rental income will be subject to tax in Country Z at 10% and Country Z’s headline tax rate is 18%. There is no tax treaty between Singapore and Country Z.

(ii) Interest income of $16,000 received on a deposit placement with a bank in Country Y. The interest income was credited into another bank account in Country Y which is used to settle an amount owing to a trade creditor in Country Y on 31 December 2016. There is no tax suffered on the interest income in Country Y.

(iii) Profit of $50,000 from sale of motor car purchased in financial year 2015. The car was used by an expatriate managing director until 15 December 2016 when he completed his employment contract with OWPL.

(iv) Enterprise Development Grant of $20,000 in respect of marketing and business development activity in Country Z.

Expenses

(i) Depreciation charge of $96,050.

(ii) Voluntary top-up of Medisave accounts of Singapore citizen and permanent resident employees for 25 qualifying employees amounting to $54,500. The maximum deduction for each employee is $1,500 per year. The company does not provide any other medical benefits to its employees.

iii) Expenses of $12,760 incurred in respect of the residential property in Country Z:  Legal fees of $5,000 and stamp duty of $960 for drafting of lease agreement.

 Property tax of $6,800.

(iv) Interest expense paid to Singapore banks in respect of following:

 Loan to acquire the residential property in Country Z: $15,000.

 Working capital loan: $8,000.

(v) Representative office expenses of $165,000 comprising office rental ($50,000),

staff salary ($110,000) and motor car hire charges ($5,000).

The representative office in Country Z was set up to enable OWPL to penetrate the market in Country Z by providing product information to potential customers as well as act as a liaison between OWPL and its franchisees in Country Z. It is not authorized to negotiate nor confirm sales orders; these will be carried out by OWPL in Singapore. The representative office is a legally registered office in Country Z but it is not an incorporated entity in Country Z.

(vi) Mileage claims of $10,500 by staff for use of their personal motor cars for business purposes.

(vii) Goods and services tax (GST) of $4,340 expensed off in respect of following:

 Entrance fee to Tanglin Club (used for business entertainment): $3,150.

 Monthly subscription fee to Tanglin Club: $140.

 Gifts to customers and staff where the value of each gift exceeds $200: $1,050. OWPL is not a GST registered company.

(viii) Expenses for Ms Gemma Shui and 2 employees who participated in a trade mission to Cambodia ($5,000 per person): $15,000. The approved number of employees for S14B claim is 2.

(ix) The company incurred the following non-structural renovations during the year:

 Reconfiguring the reception and meeting rooms at the company’s main office (electrical re-wiring, fixed partition works and flooring works): $24,000.

 Reinstatement (electrical re-wiring, re-painting, demolition and removal of fittings) of retail shop upon termination of lease. These reinstatement costs are contractually provided for in the lease agreement. The lease was not renewed due to low foot traffic thus resulting in poor sales: $15,000. Section 14Q compliant renovation works were carried out in YA 2016 and 2017 at the costs of $18,000 and $243,000 respectively.

Other information

OWPL is entitled to claim capital allowances of $299,000 for YA 2018.

Required: (a) Determine whether the rental income derived in Country Z and interest income derived in Country Y were received in Singapore in Year of Assessment (YA) 2018 for Singapore Income Tax purposes, stating the basis for your answer. (4 marks)

(b) Prepare an income tax computation for OWPL to compute its minimum net tax payable for YA 2018. All items of income and expenses given in the question are to be accounted for unless otherwise stated. Where no adjustment is required, insert in “0”. In arriving at statutory income, all income from non-trade sources should be addressed and all deductible expenses relating to non-trade sources should be clearly identified and deducted against the related source. You will be required to: (i) Analyse and apply the income tax exemption where applicable. (ii) Distinguish between revenue and capital expenses from the taxation perspective as compared to accounting perspective and determine their deductibility. (iii) Differentiate between special and double deduction and apply such deductions where applicable. (iv) Formulate taxation for companies, being familiar with various sources of income, deductions, capital allowances and tax reliefs. (21 marks)