What is the Start-Up Tax Exemption (SUTE)?
For newly-incorporated companies in Singapore that meet certain criteria, they are entitled to receive up to 3 years of assessment (YA) and 75% of tax exemption.
For the first 3 YA from incorporation, the company is allowed 75% of tax exemption on their first $100,000, and 50% of tax exemption on their next $100,000.
What this means is that if I start a company and I earn $300,000 in the year, normally I will need to pay 17% in taxes here in Singapore, which works out to $51,000.
However, due to the SUTE, I will only be considered taxable for $25,000 of my first $100,000, $50,000 of my next $100,000, and only then all $100,000 of my final $100,000.
Thus, instead of being taxed on $300,000, I am instead taxed based on $175,000, which at 17%, works out to $29,750 (a tax savings of $21,250)!
Why Your First Year End Date Matters
So coming back to the question of why your financial year-end date matters
You only have 3 YA to use this. Since you are able to set your first financial year end up to 18 months away, it might be tempting to do so. (However, do note that your year of assessment is different from your financial year.)
If your financial year exceeds 12 months, it will be treated as 2 YA. Which means, if I incorporate my company in November 2020, and I choose my financial year end as December 2021 (14 months), I will be given the tax exemptions for November 2020 to December 2020 (first YA), and then January 2021 to December 2021 (second YA), and lastly January 2022 to December 2022 (third YA).
As you can see, the first YA November 2020 to December 2020 only lasts for 2 months, so you only get 2 months of tax exemption instead of the full potential of 12 months tax exemption. This means that unless your business is highly profitable and turning in $200,000 within 2 months, you are probably better off stretching out the full period of tax exemption instead.
Instead, see if you can set your first financial year end 12 months away, in order to maximize your years of tax exemption. Subsequently, after your 3 years are over, you can consider changing your financial year end to another more convenient year end.
How To Decide Your Ideal Financial Year End Date
Glad you asked! We’ve covered this very topic in another article. Click on this title to read it: HAVE YOU CHOSEN A POOR FINANCIAL YEAR END DATE?