Tax Treatment of Trade Debts
Deductibility of Impairment Loss on Trade Debts
Impairment losses or losses on debts incurred on financial assets are tax-deductible as long as the debts are relating to the trade or business and are revenue in nature.
Impairment Loss on Trade Debts under Financial Reporting Standard (FRS) 39
Under the accounting standard FRS 39 which sets out the principles for recognising and measuring financial instruments, general and specific provisions for bad and doubtful debts will no longer be made .
For income tax purposes, impairment losses on trade debts that are revenue in nature will be allowed deduction. Similarly, any reversal of such losses will be taxed.
Opting for pre-FRS 39 Tax Treatment
However, for companies that opted for pre-FRS 39 tax treatment, only specific provision for doubtful debts will be deductible for tax purposes.
General provision for doubtful debts is still not tax-deductible.
Claiming Tax Deduction
Companies claiming tax
deduction do not need to submit any supporting documents with their Income Tax Return. They must, however, keep the following documents and submit these to IRAS upon request:
· Details of debts (name and amount owing by each debtor) which were not incurred in respect of the trade or business such as loans and advances;
· Details of debts which were taken over in the case of a transfer or merger of business;
· Details of debts in respect of a trade that had ceased, including any activity granted with pioneer incentive that had ceased; and
· Segregation of debts relating to the different tax rate categories.
The following additional information is required for trade debts owing by related parties, where the amount of impairment loss exceeds $250,000:
· Relationship between the company and the trade debtor;
· Whether normal credit policy and terms were extended to the related party. If not, please provide the reasons for the extended credit policy and terms;
· Whether steps were taken to recover and enforce the debts. If not, please provide the reasons for not enforcing the debts; and
· Reasons the related party was unable to repay the trade debt.
FRS 109 replaces the existing FRS 39 and it applies to companies for financial years beginning on or after 1 Jan 2018. Companies that adopt FRS 109 will have to apply the FRS 109 accounting treatment for tax purposes.