Summary of rules and practices
The Office of Tax Simplification admits that there is a need to improve and review the existing rules and benefits for accommodation. Such reviews require the simplification of the rules and practices with regard to job-related accommodation. A recast of such rules can not only lead to simplification. The living accommodation is provided for an employee or a member of the employee’s family by reason of employment unless the employer in question is an individual or the provision is executed in the employee’s domestic, family or personal relationships course.
An exemption occurs when the employer is a local authority, or if the accommodation is provided to the employee by the authority, or if the conditions on which it is provided are perceived to be more favorable compared to similar accommodation provided by the authority to non-employees who experience similar circumstances as employees. If the accommodation provided is deemed necessary for the proper performance of the employee at work, then an exception occurs. Therefore, the rule when living accommodation is provided with the aim of boosting employee`s performance does not apply. A similar application occurs if it is customary for the employer to provide living accommodation to employees. If accommodation is availed by a company and the employee is a director of the said company, or even an associated company, then the above mentioned exemption applies if the employee has no form of material interest in the company and if he/she is a full-time employee or if the company is a non-profit-making organization founded for charitable operations only.
Another rule is that living accommodation is not provided to an employee who faces a security threat or who have special security arrangements. A similar case applies if the employee is residing in the accommodation in line with the aforementioned arrangements. It is a formal practice to exempt living accommodation if the accommodation provided is a Chevening House or there are other promises entrusted to the house in accordance with the Chevening Estate Act of 1959.
The living accommodation is treated as an income of an employee if it is provided within the tax year or within a period when the employee is still employed. In general, this period is referred to as a taxable period. There is a rule that the cash equivalent of living accommodation is calculated if the accommodation does not exceed 75,000 according to section 105. The same is calculated with reference to section 106 if the living accommodation exceeds 75,000. A general rule of calculating the actual cost of providing living accommodation is set out in section 104 and it provides the criterion to be used to determine if it exceeds 75,000.
If the cost of providing accommodation does not exceed 75,000, then the amount of the cash equivalent is calculated. A general rule is that the cash equivalent is the difference between the accommodation rental value and the amount provided by the employee to the person at whose cost the accommodation is provided during the taxable period. If there is a dispute in regards to the yearly amount of living accommodation, then the dispute should be settled by the General Commissioners. Normal practice is to treat the question as an appeal by the commissioners. Finally, a person is said to be providing accommodation if the person actually provides accommodation or if the person is the employer.
1. Draft report: an international comparison of accommodation benefits with Singapore
The following section presents research which I carried out on taxation of living accommodation in Singapore, which is the country I would like to work in after I graduate. The analysis I carried out focuses on the treatment of accommodation benefits provided to an employee by an employer in the country. The main aim of this analysis is to compare the tax treatment in the UK and Singapore in regard to accommodation benefits. Most of the references used were obtained from PricewaterhouseCoopers website as well as the governments` websites.
After the announcement of the Budget Statement 2013, the Inland Revenue Authority of Singapore issued guidelines summarizing changes to the taxation of employer-provided accommodation benefits. These changes were meant to make the taxation of housing benefits fairer and simpler. The changes were proposed in 2013 and they were intended to take effect from January 1, 2014. These changes have had a great impact on the way companies provide housing support to employees in Singapore given the fact that the tax burden has shifted to the citizens (Accountlaw-tax.com.sg, 2014).
Valuation of accommodation benefits
The earlier concession gave employers/employees an opportunity to benefit from generous tax savings. The taxable benefit of employer-provided accommodation was calculated as the lower of the annual value or the total rental paid for premises or 10% of the employee’s gross compensation. Furniture and fittings provided on the premises were taxed based on nominal itemized values in line with the Inland Revenue Authority of Singapore. Since the beginning of 2014, the ‘10% rule’ no longer applies and the taxable benefit of employer-provided accommodation is calculated based on:
· Total rental paid, without separation of furniture and fittings
· Annual total value of the property provided; which means less rent is paid by the employee
· All imputer fittings and furniture
The taxable benefit is equivalent to the yearly rental amount paid by the employer. The taxable benefit is based on the yearly value of the property.
· Instead of furniture and fittings being itemized they are now imputed benefits that are calculated at 40% of the total annual value of the property if the accommodation is unfurnished and 50% for a furnished property. In the above figure, if the rental amount paid was $500 less every month, then the result would be that the value of benefit would hypothetically be higher than the rental amount paid. This is a relatively inequitable result. It means therefore that companies that offer accommodation benefits must revisit their current arrangements so as to determine if there is an additional tax burden. In such a situation the companies can consider the following actions:
· Review the housing arrangements under the new rules
· Suggest appropriate alternatives after conducting cost analysis for particular individuals or groups of employees.
· Compile the annual accommodation value for tax reporting
for 30+ pages
for 50+ pages
for 100+ pages
The new rules have definitely simplified the process of calculation of accommodation benefit but they may have increased taxation of employer-provided accommodation. This has resulted in increased administrative costs as employers spend more resources and time obtaining the necessary annual value. As illustrated, the new method may still allow for tax savings to be enjoyed, compared to providing a cash housing allowance to employees (Internations.org, 2014). Such an observation is based on the idea that the annual value of the property provided may be lower than the actual rental that is paid to the landlord.
Exempt accommodation benefits are:
i. An accommodation that is provided by a religious or non-profit-making organization; the kind of benefits that are provided by a registered religious institution to a practitioner in the institution or for pastoral duties like teaching, studying, or delivery of religious beliefs
ii. An accommodation that is not an employee`s usual place of residence. The benefit does not apply to a person living in a place that is not their usual residence during the course of their work, or when traveling but still in the course of duty.
iii. An accommodation which is located in a remote area. Procedures and mechanisms that are used to decide whether a place is remote depend on the actual distance to the workplace and if there is any sort of water stretch between the workplace and the accommodation.
iv. Lodgings which are necessary to carry out the employment. If there is a need for employer-provided accommodation to an employee during the course of work, then the total value of accommodation is reduced taking into consideration the stipulated percentage.
v. Private lodgings. These are lodgings that are private but used in professional purposes. In such a case, the employer does exclude the rooms that are reserved for professional purposes when carrying out the employment as agreed between the employee and the employer.
vi. Accommodation, provided by an employer, in which an employee is forced to use. Such a situation arises when the accommodation is provided by the employer and the employee is obliged to dwell in it. There are numerous options in case of such a scenario depending on the terms of an agreement between the employee and the employer.
2. Consistency with Adam Smith’s ‘canons of taxation’
Canon of Equity
Adam Smith laid out four major principles of taxation. The principles are considered to be the foundation of any form of sound public finance. Every good tax system is based on a particular set of principles and the Singapore tax system is no exception. There ought to be a balance between the interests of the tax authorities and those of the taxpayers. The principle of equality means equality of sacrifice. People should pay taxes which are proportionate to their incomes. The principle of equality embraces progressive taxation whereby the percentage of taxation should increase with an increase in the income of a taxpayer and vice versa. Taxation of an employee’s benefits-in-kind in Singapore aims at providing social and economic justice to the people. The rich in Singapore pay more taxes than low-income earners.
The adjustments made by the Inland Revenue Authority of Singapore that summarized significant changes in the taxation of accommodation benefits were seen as a positive signal towards the achievement of a favorable taxation system in regard to benefits-in-kind. Redistributive taxation that is used in Singapore helps in the induction of distortions by bringing out the difference between what the consumer pays and what the produce spends. In Singapore, taxation of benefits-in-kind for people of the same level is treated in the same manner (horizontal equity) while people of unequal levels are treated differently depending on the level of a person (vertical equity). This is in line with ‘canon of equity’ where the rich are meant to pay more than the poor (Revenue.ie, 2014). This is a relatively fair method of taxation whereby people pay taxes based on their earnings.
Canon of Certainty
While tax systems in many other jurisdictions are in most scenarios criticized for lack of certainty in operations and outcomes, Singapore as a country has tried to put up measures to deal with this issue. There needs to be certainty with regard to the amount that the taxpayer should pay in a particular financial year. When the taxpayer is certain and definite about the amount of a tax on benefits-in-kind that he/she should pay, then he/she becomes more flexible and it’s possible for him/her to adjust his/her budget accordingly. In Singapore, the citizens know exactly what, when and how to pay the tax. This has to prevent the public and other relevant stakeholders from any form of unnecessary suffering. The government and the tax authorities led by the Inland Revenue Authority of Singapore know exactly how much they expect from the taxpayers in regard to the tax. This kind of certainty is in line with Adam Smith’s taxation principle of certainty. There are well set out guidelines on how to treat taxation in regard to local and international companies (Iras.gov.sg, 2014). The same applies to local and foreign workers. All taxpayers know the exact amount they have to pay to the local government in the form of tax on benefits-of kind in each financial year. This means that the taxpayer can also adjust his/her expenditure depending on the income he/she gets and the amount of expenditure involved.
The state has the opportunity of knowing in advance the amount it will receive and at what time. Such certainty reduces chances of arbitraries, which in return reduces chances of misuse of funds. When everything is made clear about the taxation method on benefits-in-kind, then the taxpayers enjoy clarity, simplicity and an absolute benefit. The Inland Revenue Authority of Singapore has adopted the mechanisms related to this principle of the formulation of tax procedures and laws. Such adoption has made it possible for the taxpayer to have full knowledge about his/her tax payment, which actually includes the amount, the payment mode, and the due date. Presence of canon of certainty in Singapore has reduced the chances of tax evasion.
Canon of Convenience
This is a form of extension of a canon of certainty. While the canon of certain states that the parties involved should be well aware of the tax amount, mode of payment and the due-date, canon of convenience states that the entire process should be convenient, easy and taxpayer-friendly. The mode of payment, as well as the time of payment, should be convenient to enable the taxpayer to pay the tax at the time it is due. If the manner and time of payment are not convenient, that can lead to corruption and tax evasion. Through canon of convenience, the Inland Revenue Authority of Singapore has taken the interests of the country’s taxpayers into consideration.
The mode and timing of paying taxes in the country are convenient to the taxpayers. The kind of convenience provided has eliminated unnecessary troubles in the whole system and as a result, all ill-effects have also been eliminated. Since the tax is levied at the time and in the manner which is convenient to the taxpayers, it shows that Singapore’s taxation of benefits-in-kind is consistent with the canons of taxation. Such taxation is levied at the time when the contributor is expected to receive an income. In Singapore, such tax is payable by cheque, which makes the mode of payment flexible and convenient.
Canon of Economy
Canon of the economy tends to imply that the expenses of the collection of taxes should not be excessive. Such expenses should be kept as little as possible and consistent with administrative efficiency. In Singapore, the government and the Inland Revenue Authority of Singapore have embraced this fact by employing competent staff and by reviewing their salaries to ensure that they are not way too high to absorb all the tax income collected. The government of Singapore has put up measures to ensure that the procedures used in taxing benefits-in-kind do not hamper capital growth or cause it to immigrate to a foreign country. The sole purpose of collecting tax is the generation of revenue for the country. Collected revenue, in its turn, is spent on public welfare projects. This is the reason why the government of Singapore has devised measures to ensure that the cost of collecting taxation on benefits-in-kinds is kept as low as possible. When leakages are avoided, most of the money will be channeled directly to the treasury and will be spent on government projects to improve the welfare of the citizens. If the canon of the economy is not applied in the process of collecting taxes, then the funds ultimately collected will not be sufficient to finance all the government processes.
3. Sources of tax information
As an employee
· On the internet
A lot of invaluable tax information is available online. There are many talented bloggers who dedicate a lot of time trying to break down the complex and new tax regulations so as to report on the most current discussions in the world.
As an employer
Conferences present a great learning opportunity for tax experts. Tax professionals can learn new skills throughout the year. They enable the novices to meet and learn about taxation from the specialists. It also enables industry specialists to learn alongside other participants in the field. Topic-based and industry-based roundtables enable the participants to address particular and common industry problems, while conferences provide a suitable way for professionals to educate the public about the current regulations (Singapore.asiaxpat.com, 2014). The employees get rare opportunities to network, share information, and to learn in conferences.
· Getting the right tools
According to the tax and regulatory study carried out by the Institute of Financial Operations, most of the organizations surveyed indicated that they change tax state by themselves. This means they are constantly monitoring updates and going through numerous pages of rules to get the right interpretations. The software has been used to make work easier and to reduce the burden. Such software provides organizations with comprehensive information regarding the industry. Such reporting is enhanced using real-time data flow and the kind of segregation that exists between the states/countries for the purposes of comparison (Kpmg.com, 2014). There are many tax preparation software companies that deal with tax preparation reporting and they are of great help. Several commercial software packages carry out transactions and analysis providing the end user with multiple data sets and alternatives to draw conclusions from.
· Commercial tax services
Several companies publish income tax information that is updated regularly. Libraries receive the publications to be used by people for reference purposes.
As a tax advisor
· The internet
Tax information can be obtained on the internet from the government websites or from tax collection authorities’ websites. Such websites are updated regularly and they can be a great source of reliable information. Such websites present tax forms, publications as well as other relevant information necessary for a tax advisor. Before using such information to make decisions, it must be ensured that the information is accurate and up to date
· Government publications
The government maintains comprehensive taxpayer publications plans that are designed to provide current tax information to the interested parties. Such publications classify the tax rates and details in accordance with industries; it makes it easier for the interested parties to compare the information presented.