Presently, for income tax, only realised gains or losses arising from the disposal of financial assets are subjected to tax or allowed as a deduction if such gains or losses are derived on revenue account. If gains or losses are derived on capital account, the gains or losses are not taxable or allowed as a deduction. The provision for diminution in value is also not allowed as deduction. For taxpayers with financial liabilities, such as loans taken or bonds issued, the interest expense incurred on such liabilities is allowed as a deduction under S14(1)(a) of the ITA when the financial liabilities do not constitute accretion to capital.

With the adoption of the FRS 39, the income tax treatment of financial assets and liabilities has been changed to align closer to the accounting treatment.

For financial assets on revenue account:

(a) for the assets classified as fair value through profit or loss, all gains or losses recognized in profit or loss will be taxed or allowed as a deduction even though they are unrealized;

(b) for the assets classified as available-for-sale, all gains or losses which are recognized in balance sheet will not be taxed or allowed as a deduction. At the time when the assets are disposed of, the cumulative gains or losses recognized in equity that are transferred to the profit and loss account will be taxed or allowed as a deduction;

(c) for the assets classified as held-to-maturity and loans and receivables, the “interest income” based on the amount shown in the accounts, which is calculated using the effective interest method under FRS39, will be taxed.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expenses over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instruments.

For financial assets on capital account, the taxpayer should submit a list of these assets to the Comptroller of Income Tax (CIT) for his determination whether they are indeed assets on capital account. Where the CIT has agreed that they are assets on capital account, the gains or losses will not be taxed or allowed as a deduction.

Further details can be seen in IRAS circular

http://www.iras.gov.sg/ESVPortal/resources/frs39circular2ndedition.pdf

Updated July 2006