So you know how to make money but have you done your tax planning yet?
Its Xmas, there is no Santa but the tax man is coming shortly
As an atheist, Christmas has little symbolism to me. There are no rituals or tradition to follow, no going to holy places no parties no feasts.
Sure I have two children now. My firstborn is now four and he is at that ripe age to believe that Santa Claus and Rudolph the reindeer are real. Therefore we celebrate Christmas for him by buying presents, having activities but that’s our way of letting him have fun but keeping him away from iPad and TV when its raining outside.
I am not Grinch, certainly not a cold heartless guy who wants to terminate Christmas. But I admit I am closer to Scrooge McDuck because you see, money is on my mind every Christmas.
To me, Christmas = year-end = new year in a few days = these things come to mind:
- How well did I do ($$$) in 2013?
- Will 2014 be fruitful ($$$)?
- How can I give less $$$ to the tax man who is just round the corner?
Tax planning in Singapore with SRS or Supplementary Retirement Scheme
For working Singaporeans who are making your way up the income ladder either with your trading or your career, I like to bring up the SRS to your attention. My special thanks to Yong Hui, my fellow blogger at IM$avvy (a government initiative) who has covered the background and mechanism of SRS in her original story “Save taxes while you plan for retirement“.
What is Supplementary Retirement Scheme?
- It is a way to defer tax payment especially for income earners who are marginally into a higher personal income tax bracket.
- The way to do it is to contribute to SRS to lower chargeable income.
- The amount contributed enjoys deferred taxation (50% of it becomes taxable when it is subsequently withdrawn from SRS account upon reaching statutory retirement age, or by early withdrawal)
- By deferring tax payment, individual can use the retained funds for investment or as a savings, to enjoy the power of compounding.
Example of SRS application
Let’s looking at a 40 year old working Singaporean.
After taking into various personal tax reliefs, his chargeable income is S$82,000 for the year of assessment 2014. For the first 80,000, his tax payable is $3,350. The remaining $2,000 would be taxable at a rate of 11.5 percent or S$230.
The individual has two options:
A) Submit the $82,000 chargeable income for assessment and pay a total tax of $3,350 + $230= $$3,580 OR
B) Submit an $80,000 chargeable income for assessment, set aside $2,000 into an SRS account and pay a tax of $3,350.
Important things to take note:
- The SRS is a designated account opened at any one of the three local banks UOB, OCBC and DBS/POSB (see footnote).
- It is not account at the CPF Board.
- Money at SRS account can be invested although money used has to be credited back to the SRS account until it is formally withdrawn.
- Because money in the SRS account can be placed into fixed deposit accounts that enjoy compounding interest, the earlier money is saved with the SRS, it more it benefits. E.g. our 40 year old Singaporean can enjoy at least 22 years of compounding interest if he decides to withdraw money from the SRS after the Statutory Retirement Age now at 62.
- Maximum sum that Singaporeans can contribute to SRS per year is $12,750. Maximum for foreigners is $29,750.
- 50% of money in SRS is exempt from tax assessment and 50% enjoys deferred tax so the more money set aside in SRS, the more savings to be enjoyed.
- There is a catch. If money from SRS is withdrawn early before statutory retirement, the sum is taxed (which is fine since one owes it to the tax man) but what is not fine is the government will additional 5% premature withdrawal penalty. Oh such a fine place Singapore is!
- Contribution to the SRS or Supplementary Retirement Scheme is voluntary.
Some work needs to be done to understand how the SRS account operates. Yong Hui wrote:
Unlike CPF that gives a return of 2.5% for OA and 4% for SA, the SRS account is a normal bank account, earning typical bank interest rates.
A quick check at my favourite UOB Branch – staff at retail counter informs me that SRS account does not automatically qualify for savings interest. To qualify for interest, account holder could place money into separate fixed deposit. Upon maturity, money is credited back into SRS. Check back with Yong Hui, she informed me that banks’ website communicated the following:
As for the interest rate of the SRS bank account, I did a quick check on the 3 local banks and here’s what I found
POSB – interest of 0.05% http://www.posb.com.sg/personal/investments/supplementary-retirement-scheme/default.page
OCBC – mentions in their article that the the interest rate for an SRS account is the same as a normal savings account which is currently less than 1 per cent per annum. http://www.ocbc.com/wealth-management/add-to-your-retirement-funds-and-enjoy-tax-incentives.html
UOB – website states that the SRS account earns daily interest on the uninvested cash balance in your UOB-SRS Account (similar to CPFIA interest rates). http://www.uob.com.sg/personal/investments/financial/uob_srs_account.html