Approved Pension / Provident Funds under Section 5 of the Singapore Income Tax Act
This scheme was introduced back in 1994 as a means to supplement the Central Provident Fund (CPF) system and to provide financial support to employees in the event of a retirement, retrenchment or redundancy.
More than 3 decades have passed since and the take-up rate has been, admittedly low, with a grand total of 59 such schemes / plans approved since the inception of the scheme. There is a plethora of factors that may have attributed to the low take-up rate. One that perhaps sticks out the most is possibly the general perception that such schemes are overtly complex, coupled with strict criteria and detailed compliance obligations. Following closely to that would be that employers and employees may not see significant additional benefits from participating in the scheme, especially if existing retirement savings plans are deemed sufficient.
We are inclined to think that there is limited awareness and understanding of the mechanics and benefits of the scheme that might had led to the underutilisation. Perhaps, it is time to consider making available an additional retirement fund for your employees or marrying the use of an equity-based remuneration scheme with a retirement fund?
At a high-level:-
Conditions for the fund to be qualified as an approved fund under Section 5 of the Singapore Income Tax Act (SITA)
- Contributions to the fund must be alienated to a third party i.e. trustee of the fund. This effectively means that the employer must make cash contribution for his employees to a fund which is set up under a trust;
- Benefits provided under the fund must be made available to all employees, both bargainable and executive;
- The same formula for computing the benefits under the fund must be applied to all employees;
- The level of benefits payable to each employee must not exceed the “benefit limit formula” i.e. (2.25 x last drawn salary x number of years of service) less total employer contributions to the CPF account of the employee);
- Employees cannot contribute to the fund; and
- The trustee of the fund must exercise statutory duty care according to the prevailing Trustees Act with regard to the management and investment of monies in the fund.
Key tax treatments of the approved pension / provident fund:
- Employer contributions are tax deductible for the employer;
- Employer contributions are not taxable benefit-in-kind on employees;
- Employees are only taxed on all benefits paid out of the fund (inclusive of investment returns) at the time of their entitlement to such benefits.
Employers who wish to set up a pension/provident fund may submit an application to the Comptroller of Income Tax (the Comptroller) for the fund to be an approved Section 5 fund. The application must provide full details of the proposed fund, such as the purpose of setting up the proposed fund, draft trust deed and rules of the proposed fund.
Upon obtaining approval as a Section 5 fund, there are certain requirements which the trustee of the Section 5 fund must comply to. This includes (but not limited to) the following:
- Performing valuation once every 3 years to determine the amount of contributions required for a defined benefit fund;
- Seeking tax clearance from the Comptroller before paying any benefits to non-resident employees
- File returns on the investments made by the fund on a semi-annual basis and also a Form P1 by 15 April of each year.
Why Work With Us?
Consider this. If you are keen to explore further on the Approved Pension / Provident fund Scheme, please reach out to us!
At CLA Global TS Tax Services, we acknowledge that global employers must ensure that they and their employees are fully aware of and comply with local filing requirements. A well-organised international assignment arrangement requires employers to strike a balance between competitive compensation and cost control, as well as putting in place effective policies and procedures for regulatory compliance.
Take the First Step Today
The time is nigh to review your current employer / employee reporting obligations in view of these ongoing individual tax changes. Contact us today to learn more about how we can assist you in adhering to the ever-evolving Singapore individual tax landscape.
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CONTACT US
Contact our Tax Advisory Specialists for a Discussion
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Edwin Leow Co-Advisory Leader Head of Tax edwinleow@sg.cla-ts.com |
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Shaun Zheng Director, Tax shaunzheng@sg.cla-ts.com |
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Tan Xin Yi Manager, Tax tanxinyi@sg.cla-ts.com |