Few days ago, I was clearing
my credit card bills and happened to look through my hardcopy tax income for YA
2015 in the same folder. I merely took a quick glance and was just about to chuck
it aside until something struck me that maybe I should take a closer look
again.
I zeroed into the
amount of tax I had to pay for Year of Assessment (YA) 2015 – which I pay with GIRO through OCBC360
to clock as online bill payment – and wondered if there are any means to reduce
my personal tax payment.
Considering that my annual income will tend to increase
progressively (hopefully for as long as I work), it essentially means I will
have to pay proportionately higher tax. For most working adults, I don’t deny
that tax is a nemesis to financial building. Well, we all have to play a part
towards nation building right?
Out of curiosity, I googled
the Inland Revenue Authority of Singapore (IRAS) and CPF website and browsed through a
few financial blogs before I make my own assessment. Below is what I’ve found
out.
The current resident tax rate for YA 2012 to YA 2016 is shown below.
For those who are
unaware, IRAS has released the latest resident tax rate for FY17 with some
revisions.
Under the new YA 2017,
the only revision is the higher tax for those in higher income brackets.
Specifically, the revised tax rates will come into effect if your chargeable
income is more than $160,000 and for the next $40,000, you have to pay 18% (up
to $7,200) from 17% previously (up to $6,800). There are also new income
brackets with a wider spread, in particular, the chargeable income on the first
$240,000 and $280,000 (see red box above).
I became intrigued to
find out more and deep-dived into the various deductions that individuals can claim
to reduce taxes. To my astonishment, there is a long list
of reliefs, deductions and rebates that one can claim to reduce taxes!
As there are too many of them, I’m just going
to narrow down and use the general reliefs and rebates that are widely common for
most taxpayers. For this article, I will also illustrate the different profiles
to show how you can pay less tax with the
CPF Cash Top-Up Relief.
CPF Retirement Sum Topping-Up Scheme
The CPF Retirement Sum Topping-Up Scheme aims
to encourage Singaporeans and Permanent Residents to put aside money for
retirement purposes, either in your own CPF accounts or those of your family
members (parents/parents-in-law, grandparents/grandparents-in-law, spouse
and/or siblings).
Using Cash to Make a Top-up to Yourself or Your Loved Ones
Under the scheme, you can enjoy dollar-for-dollar tax relief! You
have the option to make a cash top-up to your own or your loved ones’ Special
Accounts (for recipients below age 55) or Retirement Accounts (for recipients age
55 and above). In total, you may enjoy tax relief of up to $14,000 per calendar year if you make top-ups for:
a. Your parents, parents-in-law, grandparents,
grandparents-in-law;
b. Your spouse or siblings, if they
do
not have income exceeding $4,000 in the year preceding the year of
top-up
(e.g. salary or tax exempt income such as bank interest, dividends and
pension); or are
handicapped;
c. Yourself (or your employer makes a
cash top-up for you)
Some pointers to note
- Tax relief is only for cash top-ups. In other words, the relief does not apply
when the top-up is carried out by transferring funds from your CPF Account
(i.e. OA) to your own or a family member's Special Account (SA) or Retirement
Account (RA).
- There is no tax relief if you make top-up for your spouse/siblings who have
an annual income exceeding $4,000 in the year preceding the year of top-up.
- There is no tax relief for cash top-up if the Full Retirement Sum (FRS) of
the individual/recipient's RA is already $161,000 (from 1 Jan 2016, the FRS for an individual who is below age 55 and has
CPF Special Account (SA) is capped at $161,000)
- The maximum CPF Cash Top-up relief is
$14,000 (maximum $7,000 for self and maximum $7,000 for family members). See
table below.
Amount of
Cash Top-up to Own / Family Members’ SA/RA
|
Amount of
Relief
|
$7,000 and below
|
Dollar-for-dollar tax relief
|
More than $7,000
|
Capped at $7,000
|
For better illustration, let’s see
three typical profiles which qualify for income tax reduction.
Mr Lim is
33 years old, married with no kids. He is an operations manager at an F&B
SME who draws a basic salary of $5,500 per month with a 13th month
bonus. As such, his gross annual income in 2016 works out to $71,500. He tops
up $7,000 into his SA and $7,000 into his father-in-law’s RA who is a retiree.
Under the CPF relief cap, Mr Lim’s salary has
not exceeded the $6,000 per month cap required to attract CPF contributions.
Any excess contribution beyond $6,000 is considered voluntary and does not
quality for CPF relief.
Do note the difference when Mr Lim decides to top
up $7,000 cash into his own CPF SA and another $7,000 into his father-in-law’s
RA who is a retired teacher. The comparison table for Mr Lim’s income tax
statement for YA 2016 will look something like this:
|
Without CPF Cash Top-Up
|
With CPF Cash Top-Up
|
Employment Income
|
$71,500
|
$71,500
|
Assessable Income
|
$71,500
|
$71,500
|
Less: Personal Reliefs
|
|
|
|
$1,000
|
$1,000
|
|
|
$3,000
|
$3,000
|
|
|
$14,300
|
$14,300
|
|
|
-
|
$14,000
|
Chargeable
Income
|
$53,200
|
$39,200
|
Tax on the First $40,000
|
$550
|
-
|
Tax on the Next $40,000 @7%
|
$13,200 x 7%
= $924
|
-
|
Tax on the First $30,000
|
-
|
$200
|
Tax on the Next $10,000 @3.5%
|
-
|
$9,200 x 3.5%
= $322
|
Total Tax Payable
|
$550 + $924
= $1,474
|
$200 + $322
= $552
|
1Earned Income -
Available to individuals who are gainfully employed or carrying on a trade,
business, profession or vocation.
2NSman Self - All
eligible operationally ready National Servicemen (NSmen) are entitled to NSmen
tax relief.
3CPF/Provident
Fund - Available to all Singaporeans/PRs employees – calculated based on
Ordinary Wage and Additional Wage.
As you can see, Mr Lim is eligible for $14,000
tax relief when he contributes $14,000 to his own and wife’s SA. The tax was
lowered to $552 from $1,474. That is a whopping 63% reduction!
Let’s see another example.
Jane is 24
years old and works in a digital marketing firm. She earns $3,400 per month.
Her gross annual income in 2016 amounts to $40,800. She tops up $2,000 into her
SA.
Do note the difference if Jane decides to top
up $2,000 cash into her own CPF SA. The comparison table for Jane’s income tax
statement for YA 2016 will look something like this:
|
Without CPF Cash Top-Up
|
With CPF Cash Top-Up
|
Employment Income
|
$40,800
|
$40,800
|
Assessable Income
|
$40,800
|
$40,800
|
Less Personal Reliefs
|
|
Earned Income
|
$1,000
|
$1,000
|
CPF/Provident Fund
|
$8,160
|
$8,160
|
CPF Cash Top-Up Relief for Self
|
-
|
$2,000
|
Chargeable
Income
|
$31,640
|
$29,640
|
Tax on the First $30,000
|
$200
|
-
|
Tax on the Next $10,000 @3.5%
|
$1,640 x 3.5%
= $57.40
|
-
|
Tax on the First $20,000
|
-
|
$0
|
Tax on the Next $10,000 @2%
|
-
|
$9,640 x 2%
= $192.80
|
Total Tax Payable
|
$200 + $57.40
= $257.40
|
$192.80
|
After CPF employee deduction (20% of wage),
Jane will be left with a net income of about $32,640. If she put in $7,000, it
may be a mouthful for her as she doesn’t earn as much as Mr Lim. However, she calculated
an acceptable amount that she is willing to top up and yet not compromise on
her day-to-day cash flow. She then decides to voluntarily top up $2,000 to her
SA. Under YA 2016, her tax was reduced to a lower income tax bracket of $20,000
instead of $30,000 (if she hasn’t made the cash top up). As a result, Jane’s tax
was lowered to $192.80 from $257.40 and that is a 25% reduction!
For a young working adult, the few hundred
savings can make a difference. Moreover, Jane is only 24 years old and she has
a long way to go before she reaches 55. Just imagine the compounding effect Jane stands to gain in her Special Account which
attracts up to 5% if she top up her SA on a regular basis!
CPF members currently earn interest rates of up to 3.5% per annum on their OrdinaryAccount (OA) monies, and up to 5% per annum on their Special and MedisaveAccount (SMA) monies. Retirement Account (RA) monies currently earn up to 5%per annum. The above interest rates include an extra 1% interest paid on thefirst $60,000 of a member’s combined balances (with up to $20,000 from the OA).
Let’s see one more example.
Christopher,
40, is a director at a private firm. He is married with a 9-year-old kid. His
monthly basic income is $9,500 and gross annual income in 2016 is $114,000. He
tops up $7,000 into this SA and $7,000 into his wife’s SA who is a housewife.
Christopher’s monthly salary has exceeded the $6,000
CPF salary ceiling. For example, if you earn $6,500 in a calendar month, only
$6,000 would attract CPF contributions; the remaining $500 would not. Likewise,
any excess contribution beyond $6,000 is considered voluntary and does not
quality for CPF relief.
The CPF
Ordinary Wage (OW) ceiling was raised from $5,000 to $6,000 from 1 Jan 2016, to
keep pace with wage growth in recent years. The CPF Additional Wage (AW) was
also increased in tandem from $85,000 to $102,000 (equivalent to 17 months of
CPF salary ceiling to $6,000. As such, the
maximum amount of mandatory and voluntary contributions that a CPF member
(including employees and self-employed persons) can receive in a year is capped
at the CPF Annual Limit.
Therefore, the comparison table for
Christopher’s income tax statement for YA 2016 will look something like this:
|
Without CPF Cash Top-Up
|
With CPF Cash Top-Up
|
Employment Income
|
$114,000
|
$114,000
|
Assessable Income
|
$114,000
|
$114,000
|
Less Personal Reliefs
|
|
Earned Income
|
$1,000
|
$1,000
|
CPF/Provident Fund
|
$14,400
|
$14,400
|
NSman Self
|
$1,500
|
$1,500
|
|
|
$4,000
|
$4,000
|
CPF Cash Top-Up Relief for Self and Spouse
|
-
|
$14,000
|
Chargeable
Income
|
$93,100
|
$79,100
|
Tax on the First $80,000
|
$3,350
|
-
|
Tax on the Next $40,000 @11.5%
|
$13,100 x 11.5%
= $1,506.50
|
-
|
Tax on the First $40,000
|
-
|
$550
|
Tax on the Next $40,000 @7%
|
-
|
$39,100 x 7%
= $2,737
|
Total Tax Payable
|
$3,350 + $1,506.50
= $4,856.50
|
$550 + $2,737
= $3,287
|
NSman
Self - Ex-NSmen or NS-liable ex-regular
servicemen above the statutory age are given the base quantum of $1,500.
As you can see, Christopher is eligible for
$14,000 tax relief when he contributes $14,000 to his own and wife’s SA. The tax
was lowered from $4,856.50 to $3,287 and that is a 32% reduction!
Based on the three profiles above, what I am
trying to illustrate is that while nobody can evade tax, you can take advantage
of the CPF Retirement Sum Topping-Up Scheme
to pay less tax.
However, there are both advantages and
disadvantages if you top up cash into your CPF accounts.
Advantages (+):
1. You get to enjoy up to 5% guaranteed
no-risk interest rate for as long as your money compound and grow in the SA!
Surely better than any fixed bank deposits available in the market!
2. You get to enjoy tax relief of up to
$14,000 which effectively trims your payable tax and likely ‘downgrade’ your income tax bracket so you pay
significantly lesser tax!
3. The earlier you start, the more money
you can grow to reach the CPF Minimum Sum faster! After all, the monies in CPF
still belong to you!
Disadvantages (-):
4. For those who don’t earn much and have
lots of bills to pay, it may be challenging to cough out large sums of $7,000
or $14,000 and put in the SA which will be locked up for a substantial period
of time. During emergency, cash liquidity is very important.
5. The process is irreversible. You can
only withdraw the monies when you reach age of 55, provided you meet the CPF Minimum
Sum.
6. The interest rates in CPF are reviewed
quarterly (for OA, SA and MA) and yearly (for RA). It is anyone’s guess whether
the same rates will be maintained, reduced or increased going forward.
Be Rewarded for Topping Up Early
When you top up early, your CPF savings earn
more interest!
If you are keen to top up cash into SA, you have
to do it within the Year of Assessment (YA), starting on 1 Jan and ending on 31
Dec so that you will be eligible for the CPF tax relief.
Top up in Jan each year rather than
Dec, and you could earn around 20% more interest on your CPF savings in
just 10 years.
There are many schools of thought. Some says
it’s better to build your own retirement funds. Some says you can depend on
CPF. In any case, you need to evaluate your own needs and work out the math. I am confident you can make the best
decision for yourself!
✓ Grow your
CPF savings faster,
✓ Avoid the
year-end rush, and
✓ Avoid
missing out on the year-end tax relief deadline.
Do you think topping up cash in CPF account is a good tax-reducing method? Feel free to share your views :)
It can be easy to pay less tax. Huat ah!
Cheers,
EzHuat
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