Dolce Singapura Pte Ltd: A Patisserie Business in Singapore

Background of Dolce Singapura Pte Ltd

Question 1Dolce Singapura Pte Ltd (DSPL), a Singapore incorporated company, runs a very popular patisserie business in Singapore. It was incorporated on 15 December 2017 and its first set of accounts was for the period ended 31 July 2018. Its shares are held equally by Dolce Ong, a Singapore citizen and Caramel Wang, a Taiwanese based in Singapore.Both individuals are also the directors of the company and they hold their directors’ meetings in Singapore.Dolce had previously ran a successful home-based baking business.Both friends agreed to incorporate the company in 2017 to take over a bakery from its previous owner who was retiring from the business.For the financial year ended 31 July 2019, the company made a net profit before tax of $620,000 on turnover of $5,000,000. The profit was arrived at after taking into consideration the following income and expenses:

$Income: Rentalincome from renting out excess space at its Singapore factory premises.The business premises are currently under-utilized and as such, the under-utilized space was rented out from 1 October 2018.100,000Interest accrued on a 6-month fixed deposit maturing on 30 September 2019. The fixed deposit was placed with DBS Bank, an approved bank in Singapore.20,000Interest charged on late payment by customers.12,300Dividend income from shares held in Big Onion Catering Limited (“BIC”), a company taxresident in Country X which has a headline tax rate of 10%.Country X does not impose dividend withholding tax.The proceeds from the dividend, paid out of after-tax profits in Country X, were used to settle an overseas supplier’s invoice for baking supplies on 25 July 2019.The goods were received in Singapore only on 2 August 2019. DSPL is not entitled to relief for any foreign tax suffered on the dividend.15,000Enterprise Development Grant from Enterprise Singapore to help defray the costs incurred in the registration of a patent on a baking equipment developed by Dolce.30,000Special employment credit from Ministry of Manpower in relation to DSPL’s employment of older Singaporean workers.20,000Expenses: Annualproperty tax and maintenance charges for factory premises.The total area of the factory premises is 10,000 square feet of which 2,000 square feet is rented out.80,400Depreciation 164,000Legal fees for:?Debt recovery from customers in respect of goods sold in financialyear 2019.?Drafting of lease agreement with tenant, including stamp duty (see “Rental” under Income above)Due diligence audit fee in relation to acquisition of bakery business. 3,0008,48018,000Bad debt written off in respect of outstanding debt taken over from bakery business.The debtor has gone bankrupt.3,000Staff costs comprising:?Staff salaries, bonus and employers’ CPF contribution: $800,000?Foreign workers’ levy: $18,000?Cash allowance for staff medical and dental consultation: $7,200?Insurance premium on staff hospitalization plan: $5,000The company has not implemented any portable or transferable medical schemes.830,200Interest expense on $1.6m bank loan used for following:?$80,000 for purchase of shares in BIC;?$20,000 for purchase of shares in Top Flour Pte Ltd (“TFPL”), a Singapore tax resident company (TFPL paid a dividend of $5,000 to DSPL on 15 November 2019); and?$1,500,000 to complete the purchase of factory premises.The bank loan commenced on1 August 2018.112,000Hire purchase interest on purchase of new company van. 15,000Mileage claims on employees’ personal cars used for business purposes. 7,715Reimbursement of staff transport claims due to overtime work including $2,000 on chauffeured private hire cars.The remaining relates to taxifares.8,400Donation made to Tan Ah Moi Home for the Aged, an Institution of Public Character on 15 January 2019 comprising:?Cash donation of $10,000?Food supplies costing $4,00014,000Notes:(1)The company incurred the following non-structural renovation expenses during the year and which were capitalized to the Balance Sheet:?Tiling and electrical installation in office and shop units: $78,000?Upgrade of electrical installationat rental unit: $20,000(2)Legal and application fees of $128,000 in relation to the registration of a patent on a baking equipment designed by Dolce Ong.The costs were capitalized to the Balance Sheet.(3)The company is entitled to capital allowances claim of $135,000 for Year of Assessment 2020.(4)The company made its first sale on 15 September 2018.In its first financial year ended 31 July 2018, it incurred the following set-up expenses:?Incorporation expenses: $20,000?Food licence fee (annual): $600?Salaries and statutory CPF contributions of cooks, kitchen helpers and accounts personnel: $90,000?Food supplies used in trial manufacturing run: $55,000?Demolition and hacking work in respect of non-structural renovation to premises: $25,000?Interior designer fees: $15,000?Flooring and tiling works, fixed partition and electrical works to re-configure part of the factory floor: $185,000Mr Manfred Tay, the accountant, has prepared the following tax computation for your review:Dolce Singapura Pte LtdIncome Tax computation for Year of Assessment 2020$$$Net profit before tax620,000 Less:Rental income(100,000)Interest accrued(20,000)Interest charged on late payment(12,300)Dividend income(15,000)Enterprise Development Grant (capital)(30,000)Special employment credit0 (177,300)442,700 Add:Annual property tax and maintenance charges (income producing)0 Depreciation164,000 Legal fees for debt recovery0 Legal fees for lease agreement8,480 Due diligence audit fee (trade)0 Bad debt written off (no recovery possible)0 Medical expense restriction($5,000 -1%*[$800,000+$7,200])0 Interest expense (all income producing)0 Hire purchase interest (capital)15,000 Mileage claims7,715 Reimbursement of staff transport claims0 Donation14,000 Section 14A ($128,000 + $100,000)(228,000)Section 14Q -incurred in YA 2019[($25,000+$185,000)/3*2]210,000 (140,000)Section 14Q -incurred in YA 2020($78,000+$20,000), capped at $90,00090,000 (30,000)300,000 (188,805)Adjusted profit253,895 Less:Capital allowances(135,000)118,895 Add:Rental income100,000 Interest on fixed deposit 20,000 Interest charged on late payment12,300 Dividend income (not remitted)0 132,300 Statutory income251,195 Less: Approved donations ($10,000 x 2.5)(25,000)Assessable income226,195 Less: Start-up tax exemption75% of 1st $100,000(75,000)50% of balance $100,000(50,000)(125,000)Chargeable income101,195 Tax @ 17%17,203.15 Less: Corporate tax rebate @ 25% (4,300.79)Net tax payable12,902.36 Required:(a)Examineand analysethe tax computation prepared by Manfred and prepare a report to explain to him where his errors were.In your explanation, where applicable, you should:?State why the adjustment was incorrect;?State clearly the correct basis of taxation or claim for deduction; and?State why an expense is not deductible.(b)Applythe relevant exemptions and deduction rules and constructthe correct tax computation for the Year of Assessment 2020. Every line item of income and expense given must be accounted for in the tax computation.Where no adjustment is required, please insert “0”. In arriving at statutory income, all items of income from the non-trade source must be accounted for.All related expenses should also be accounted for.If the expense is not deductible, please insert “0”. Show all workings clearly as application marks will be awarded even if the answer is incorrect.(c)On 15 September 2019, Neo Foods Pte Ltd approached the shareholders of DSPL about taking a 95% equity stake in theircompany through new share capital injection.It is their intention to help DSPL grow their business both locally and overseas through franchising.DSPL is forecasted to be highly profitable in the financial year ended 31 July 2020 and thereafter. Please advise when the share transfer should take place, stating clearly the reasons for your recommend