What is capital gains tax and how does it affect Singapore companies or individuals? In Singapore, there is no capital gains tax. This is to help attract investors to set up a company or their regional hub here.
Capital gains generally refers to profits made from the sales of any capital assets where the sale price is higher than the purchase price of the assets.
A capital asset includes investments such as bonds, stocks, mutual funds, real estate, fine arts and other collectibles. As a capital gain represents a profit or a gain in income, tax will be implemented into it in certain jurisdictions.
In other jurisdictions, there are different types of tax rates that apply to different types of capital assets. Capital gains are taxed differently depending on the holding period of the capital asset, which can be long-term and short-term. The holding period is normally determined from the day the capital asset is purchased until the date it is being sold.
Details of types of the two types of holding period:
- Short-term holding period: 1 year or less. Capital gains are taxed at ordinary income tax rates, ranging from 10% to 39.6% for the year 2013
- Long-term holding period: More than 1 year. Capital gains are taxed at long-term capital gains rates, which are usually lesser than ordinary tax rates, ranging from 15% to 20% depending on the marginal tax bracket.
Furthermore, high income taxpayers may have a 3.8% unearned income Medicare contribution tax applied to their capital gains. Thus the highest a tax rate could apply to capital gains income is 39.6+3.8= 43.4% on short term gains taxed at ordinary rates or 23.8% (20% + 3.8%) on long-term gains.
Advantages of capital gains tax:
- Potentially Lower Rates – As discussed earlier, we can see that long-term capital gains taxes (15%-20%) are lower than the ordinary income tax rate (10%-39.6%).
- Does Not Apply To Inventory – Capital gains rate does not apply to inventories even if it is being held for more than a year, as inventory is not considered a capital asset. For example, assume that your business buys and sells land. If you hold a piece of land for more than one year before selling it, the gains counts as ordinary income and not capital gains income as the land is inventory to your business.
- Deferred Taxation – Capital gains tax applies only when gain or loss are being realised. For example, assume that your business buys and sells land. If the value of your land increases by SGD 8,000 during the year, but you don’t sell it, there will not be any income taxes charge. Capital gain tax will only be charged when you have actually sold the land and made a profit.