Estimated Chargeable Income Calculations

7 Steps to Calculating Estimated Chargeable Income (ECI)

Your financial year has ended.

Your first tax obligation is to file your Estimated Chargeable Income (ECI).

But what is ECI? How do you calculate it?

In this article, we will share why it is important to file the correct ECI, and how to calculate it.

What is Estimated Chargeable Income (ECI)?

ECI, as the name suggests, is the estimated income for the financial year ended. As a business owner, you need to file ECI with IRAS because they want to raise an early assessment.

Since it is only estimated, you do not need to be 100% accurate. If your actual chargeable income is different, IRAS will raise an amended assessment.

The Importance of Filing ECI

Filing ECI is important if you are in a tax payable position. IRAS granted businesses which file ECI early instalments in their tax payments.

Instead of paying a lump sum of taxes, you will be paying your taxes over a few months. This will help in your business cash flows.

ECI Instalments

Source: Inland Revenue Authority of Singapore

But do note that if you meet the following conditions, you do not have to file ECI:

  • Your ECI is nil.
  • Your revenue is less than $5 million.

Unless you are very sure, it is better for you to go through the below process to calculate your ECI.

Steps in Calculating ECI

To calculate your ECI, you need to have your year end accounts in place. In particular, you should have the following documents:

  • Statement of Profit and Loss;
  • Fixed Assets Addition and Disposal; and
  • Previous Year Tax Computation and Notice of Assessment

These items need not be final. If you need help in getting the first 2 items, do visit our guide on bookkeeping tips.

The starting point in calculating your ECI is your net profit before tax.

We will use the below simple profit and loss statement as an example.

Profit and Loss Statement

Step 1: Adding Back Non-Tax Deductible Items

The first step is to add back non-tax deductible items. Not all items that you incurred are deductible in tax. Some common examples are:

  • Depreciation / Amortisation
  • Private expenses not relating to generating income
  • Fines and penalties due to non-compliance
  • Expenses relating to S-plate private motor vehicles (Petrol, parking, maintenance)
  • Capital expenses or losses (e.g. loss on disposal of assets)
  • Expenses that are capital in nature (e.g. professional fees relating to capital transactions)
  • Donations
  • Productivity and Innovation Credit (PIC) items which you have claimed cash payout

The above list is not exhaustive. You can find out more about more about expenses deductibility from IRAS website. Otherwise, comment below, and we will assist you.

Based on the Profit and Loss Statement, I have identified the following non-deductible expenses:

Non-Tax Deductible Expenses

I marked these expenses as “Added Back”.

Next, there might be specific expenses within other categories that are non-deductible as well. For example, I might have non-business expenses under entertainment, or capital expenses under repairs and maintenance.

For this article, let say I have identified the following additional non-deductible expenses:

Non-Tax Deductible Expenses

A Note About Medical Expenses

Medical expenses are tax-deductible expenses as long as they are capped at 1% of total remuneration.

Total employee remuneration includes:

  • Employees’ salaries, allowances and bonuses;
  • Directors’ remuneration;
  • CPF contributions

But exclude the following:

  • Directors’ fees;
  • Medical expenses;
  • Cash allowances in lieu of medical expenses
  • Benefits-in-kind;
  • Skills Development Levy (SDL)
  • Foreign Worker Levy (FWL)

In this example, our total employee remuneration is:

Employees Remuneration

The tax deductible medical expenses are:

Deductible Medical Expenses

Given that the medical expenses amount to S$8,000, this means that $7,395 amount ($8,000 – $605) is not deductible.

Note: Under some circumstances, the cap can increase to 2%.

Add your non-deductible expenses to net profit before tax.

Net Profit After Adding Non-Deductible Expenses

Step 2: Deduct Non-Taxable Income

Like expenses, there are also non-taxable income. Some common non-taxable incomes include:

  • PIC cash payout
  • Income of capital nature (e.g. gain on disposal of assets)
  • Income earned in foreign jurisdiction not remitted into Singapore

Again, the above list is not exhaustive. Visit IRAS website on Taxable and Non-taxable income for more information.

Based on the example, we have identified that PIC cash payout is a non-taxable income.

Deduct the non-taxable income from the number you get in Step 1.

Net Profit after deducting non-taxable income

Step 3: Deduct Further and Enhanced Deductions

You might be eligible for further or enhanced deductions. Common examples of further / enhanced deductions include:

If you have any of the above items, deduct the amount from the number you get in Step 2. You can click on the above links to find out more about these expenses and how to calculate it.

For this example, we have $3,500 worth of PIC-qualifying expenses where we did not claim cash payout. Such expenses qualify for 300% enhanced deductions under the PIC scheme.

We will deduct such amount in our tax computation:

Adjusted Profit Before Capital Allowances

At this step, we have calculated the adjusted income before capital allowances. If you do not have the following:

  1. Approved donations made to IPC
  2. Purchase or dispose fixed assets during the financial year
  3. Unclaimed capital allowances from previous years of assessment
  4. Unutilised capital allowances, losses, and donations

The adjusted income before capital allowances will be your estimated chargeable income. If not, read further on how can you reduce your chargeable income further.

Step 4: Calculate and Deduct Your Capital Allowances

While you are not able to claim deductions on capital items, you may do so with capital allowances. The calculations for capital allowances are different.

To begin, list down all your fixed assets acquisitions. Exclude assets that you cannot claim capital allowances such as:

  • Private motor vehicles
  • Lightings and fittings
  • Doors, roller shutters, and gates
  • Fixed partitions, walls, walls tiles and other finishes
  • Water and gas pipings
  • Container office
  • PIC-qualifying assets where you have claimed cash payout

You can read more about capital allowances over at IRAS website.

There are three types of capital allowances for most businesses:

  • Section 19A: Where you claim capital allowances over 3 years
  • Automation Equipment / PIC: Where you claim capital allowances over 1 year
  • Small value asset: Where you claim capital allowances over 1 year for assets no more than $5,000 (less than $30,000 in total)

Note: There is also Section 19 capital allowances. But you can ignore that as most businesses do not use Section 19 capital allowances.

Let’s assume that you acquire the following assets:

Fixed assets addition

First, determine what type of capital allowances (ca) should you apply to these assets.

Type of capital allowances

Then, calculate the capital allowances which you may claim. Also, factor in the PIC enhanced allowances (if you did not claim cash payout for such asset).

Finally, add these amount together, and you will get your capital allowances.

Current Capital Allowances calculations

For the fixed assets addition in YA 2017, we can claim a total of $109,767 allowances.

Step 5: Add Past Year Capital Allowances (Optional)

Look at your tax computation for the previous year.

Check if there is any:

  • Assets where you claimed capital allowances over 3 years and still have positive tax written down value?
  • Assets where you defer claiming of its capital allowances?

If your answer to the above is yes, then you can further reduce your tax payable.

To calculate the past year capital allowances, divide the cost of these assets by 3. Make sure you check that the total capital allowances claimed is no more than the cost of the asset.

In this example, I have 2 assets acquired in the past:

Past assets capital allowances

Do note the difference in calculations for “Office furniture” to take account into rounding differences.

Step 6: Add Back or Deduct Balancing Allowances and Balancing Charges (Optional)

Note: You can skip this step if you did not dispose any fixed assets.

When you dispose fixed assets, there are additional adjustments to be made.

Balancing allowance and charge is the difference between sales proceeds and the tax written down value of the asset.

Tax written down value (TWDV) is the difference between the cost of fixed asset and capital allowances claimed. You can think of TWDV as the net book value in tax.

When your sales proceeds is more than your TWDV, you will have a balancing charge. Balancing charge is like a “negative” capital allowances. It will increase your chargeable income.

When your sales proceeds is lower than your TWDV, you will have a balancing allowance. Balancing allowance is like capital allowance. It will reduce your chargeable income.

Fixed Assets Disposal

Note that the $200 over here is negative as it is a balancing charge.

Combining Step 4 to 6, this is our capital allowances schedule:

Capital allowances schedule

We can claim a total of S$119,901 worth of capital allowances:

Adjusted Profit After Capital Allowances

Step 7: Deduct any unutilised capital allowances, unutilised losses, unutilised donations and donations

Check your last year tax computation and NOA. Do you have any unutilised capital allowances, losses and donations? If yes, deduct them from the amount you get in Step 6.

In this example, I am going to assume that there is no unutilised capital allowances, losses, or donations.

Finally, if you have made a donation this year, you can deduct 2.5 times of the amount as well. The donation must be made to approved IPC. You can check that amount in your tax portal.

We assume that we have S$10,000 worth of deductible donations.

Final Estimated Chargeable Income

With this, you have calculated your estimated chargeable income of S$330,394.

To file it, you can go to your tax portal. You also need to fill in your revenue.

Busy right now? Download the PDF copy of this guide together with the Excel spreadsheet containing the workings.

Conclusion

Estimated Chargeable Income is an estimation. You do not have to be exact.

But you should try to make it as accurate as possible. Afterall, you wouldn’t want to pay higher taxes only to recover it from IRAS later.

If you find the above steps too difficult, I would like to invite you to try out our software – TinkerTax. TinkerTax automates the following for you:

  • Determine the deductibility of your expenses and taxability of your income;
  • Calculate your non-deductible medical expenses;
  • Raise relevant questions to clarify the nature of your profit and loss item and adjust them in your tax computation;
  • Calculate your capital allowances;
  • Calculate your balancing allowances and balancing charges;

Using TinkerTax, you should need no more than 15 minutes to get your ECI. Moreover, it is free.

Try out TinkerTax by clicking the below button to sign up for an account.

Sign Up for a TinkerTax’s Account

If you have any feedback, do comment below. We love to hear your thoughts.

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Thiam Hock

Co-founder at Tinkertax
Thiam Hock is the co-founder of Tinkertax, a web application that help SMEs to calculate and file their taxes. He is in charge of the development and marketing of the platform. In his free time, he loves to drink coffee and cycle with his wife.
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Comments
  • jason says:

    Great article! Helps SME a lot

  • Adams says:

    Very good info. Thank you.

    I am a new startup company in Singapore incorporated in July 2017. First FYE ends June 2018. Revenue below $1 million but ECI is not NIL.

    Should my company file ECI immediately (within 3 months) of current FYE end?
    If have to, this would be ECI for YA 2019, am I right?
    What if the company does not file the ECI until next FYE? But files before filing NOV 2019 for YA 2019 form c/c-s?
    If the company’s estimated chargeable income is less than 100,000 SGD this FYE, should it still file?

    Thank you

    • Thiam Hock says:

      Hi Adam,
      Thanks for your comment.
      Yes, you are right that the ECI that you will file for your company at your FYE June 2018 will be for YA 2019. As much as possible, you should file your ECI within 3 months after the financial year end, i.e. September 2018.
      You should always file your ECI if your ECI is not nil. That’s a requirement set out by IRAS and it is best to follow.

      If your company did not file for ECI within 3 months, the downside is that you will not get to enjoy the instalment plan in paying taxes. Also, you may wish to note that from YA 2020 onwards, all companies need to file ECI within 3 months.

      Let me know if you need help in calculating ECI. You can try out TinkerTax which will help you calculate it for free.

  • YH says:

    Thanks for the write up, it’s really helpful for someone like me learning about tax on their own.

    Keep it coming!

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