Kai Holdings Pte Ltd (KHPL), a Singapore-incorporated company, has been in the business of manufacturing medical devices since 1999. It is wholly owned by Then Kai (75%) and his brother Quen Kai (25%). During the year ended 31 December 2020, it incurred the following capital expenditure which were capitalized in the Balance Sheet:

(1) Manufacturing equipment costing $1,290,000. The equipment does not qualify for 1-year accelerated capital allowances.

(2) The factory floor had to be reinforced at the cost of $15,000 before the new manufacturing equipment (see (1) above) could be installed on site. No approval from the Commissioner of Building and Control was required.

(3) Acquired a testing equipment from its 60% owned subsidiary in Singapore at the prevailing market price of $54,000. The subsidiary had acquired the equipment in year ended 31 December 2017 at the cost of $105,000. The equipment qualified for accelerated allowances over 3 years and allowances for Years of Assessment 2019 and 2020 have been deferred by the subsidiary. Both companies have opted to elect the provisions of Section 24.

(4) Renewed the Certificate of Entitlement on the company's delivery truck at $45,000 and upgraded the air conditioning system in the truck for $8,600.

(5) Upgraded the kitchen appliances (refrigerator, microwave and stove) at the cost of $36,000 in the staff pantry ($27,000) and staff accommodation ($9,000). Each appliance costs $4,500. (In financial year 2019, office furniture costing $33,000 was acquired. Each furniture costs $3,300.)

(6) KHPL is in the process of upgrading its computer hardware and software. For the current phase in financial year 2020, KHPL has been invoiced for equipment costing $170,000 which were delivered in December 2020. The equipment was undergoing testing and have not been put to operational use as at 31 December 2020.

(7) KHPL incurred $892,000 to acquire the economic and legal ownership of an industrial design for the manufacture of pacemakers. The amount comprise $740,000 for the design, $98,000 for legal fees and stamp duty relating to the acquisition and $54,000 for the filing and registration of the patent with the relevant Registry. KHPL will opt for 10-year write down allowances.

(8) KHPL incurred costs of $106,000 to renovate the factory area in the existing factory building. The works comprise electrical reconfiguration, upgrade to power supply as well as minor structural works. Approval from the Commissioner of Building and Control for the renovation works was required.

(9) Survey fees incurred of $15,800 on extension to existing factory building. Application for the new extension to qualify for Land Intensification Allowance has been submitted to the Economic Development Board ("EDB") but approval has yet to be granted as at 31 December 2020.

Capital allowances on all plant and machinery acquired in prior years have been fully claimed by YA 2020 apart from the furniture mentioned in (5) above and the following:

(10) An automated manufacturing equipment costing $800,000 which does not qualify for 1-year accelerated allowances. The equipment was purchased under an interest-free instalment arrangement in financial year 2017 on the following terms:

Cash down-payment paid on 1 September 2017 of $80,000.

Monthly repayment over 24 months of $30,000, with the first repayment made on 1 September 2017 and the last repayment on 31 August 2019.

(11) Cost of existing factory building of $10,400,000 (construction was completed in financial year 2000) which comprise of the following:

Land cost: $5,400,000

Purchase price of building: $3,800,000

Modifications and renovation to building (construction costs, electrical installations, plumbing, etc.): $1,200,000

The building qualifies for industrial building allowances and the nonqualifying area, including the reception area, comprise no more than 5% of the total floor area of the factory building.

During the year ended 31 December 2020, the company also wrote off the following equipment:

• The building qualifies for industrial building allowances and the nonqualifying area, including the reception area, comprise no more than 5% of the total floor area of the factory building. During the year ended 31 December 2020, the company also wrote off the following equipment:

KHPL has adjusted profits of $2,300,000 for YA 2021 based on tax adjustments arising from items charged/expensed off to the Profit and Loss Account for the year ended 31 December 2020 but not including any special and further deductions allowed under Section 14. The company incurred Section 14Q compliant renovation costs of $288,000 in year ended 31 December 2018 and none in other years prior to financial year 2020. KHPL also made a cash donation of $24,000 to the institution of public character. KHPL earned interest income of $18,000 on a loan to the Singapore subsidiary.

Required:

(a) Analyse and explain why the provisions of Section 24 is being elected in respect of the testing equipment acquired by KHPL from its wholly owned subsidiary (see point 3). As at YA 2021, the subsidiary has unabsorbed trade losses of $ 540,000 but it is expected to turn in a modest profit from financial year 2030 onwards while KHPL will continue to be profitable after winning a substantial contract in year 2020.

(b) Apply the conditions of claim and calculate the assessable income for KHPL for YA 2021. All items of expenditure given in the question are to be accounted for to distinguish between qualifying and non-qualifying expenditure for capital allowances claim. Where an expenditure is not deductible/claimable for income tax purposes or does not qualify for capital allowances/other allowances, insert "0" against the expenditure. You are to show all workings clearly. The company has always claimed maximum accelerated allowances available.

Answer rating: 100% (QA)

a Provisions of Section 24 for Testing Equipment Section 24 of the Singapore Income Tax Act allows for the transfer of unabsorbed capital allowances a... View the full answer