On 1 January 2018, FRS 109 Financial Instruments, which replaces FRS 39 Financial Instruments: Recognition & Measurement, came into effect. Previously, we addressed the accounting treatment of the new standard and how it changes the way companies account for financial instruments. In this blog post, we discuss the tax treatment of financial instruments.
The tax framework for FRS 109 is found in Section 34AA of the Income Tax Act (ITA).
Transitioning from FRS 39 to FRS 109
Upon transition from FRS 39 to FRS 109, taxpayers are required to reclassify and remeasure their
financial assets and liabilities. If any difference exists between the remeasured carrying amount
at the date of initial application (DIA) and the previous carrying amount, it will effectively be
recognised in the opening retained earnings or other appropriate categories in the equity section
of the balance sheet at DIA.
These differences may be subjected to tax or allowed as a deduction within the period of the first
application of FRS 109. As for impairment losses relating to financial assets on revenue account,
these will be allowed as deductions.
Furthermore, upon transitioning from FRS 39 to FRS 109:
- The tax treatment provision for available-for-sale (AFS) financial assets in FRS 39 will no
longer be relevant.
- Gains and losses on transactions undertaken to hedge capital risk will be disregarded.
- Held-to-maturity, loans and receivables, and AFS categories which were present in FRS 39, will no longer exist. Instead, FRS 109 adopts a measurement category – and tax treatment – for FVOCI financial assets.
A compulsory tax treatment applies to those who adopt FRS 109. The reason, according to the Ministry of Finance (MOF), is to keep the tax system simple and reduce compliance cost. However, it is important to note that this also results in the taxation of accumulated unrealised revenue gains as there is no option of adopting the realisation basis of taxation.
FRS 109 tax treatment: Capital items
Similar to the FRS 39 tax treatment, the FRS 109 tax treatment of the taxpayer’s financial assets
and financial liabilities is generally aligned with the accounting treatment. Taxpayers who apply
FRS 109 for accounting purpose, must apply the tax treatment from the year of assessment (YA) of
the basis period in which FRS 109 is first applied for accounting purpose.
Exceptions to this default FRS 109 tax treatment would be items that are capital in nature. Under
the FRS 39 tax treatment, taxpayers were required to submit a list of financial assets on capital
account to the Comptroller of Income Tax (CIT) for assessment. As was the requirement under FRS 39,
they still have to submit an annual list of all debt and equity instruments on capital account with
their income tax returns.
In addition, under FRS 109, taxpayers must submit an itemised listing of all equity instruments measured at FVOCI on revenue and capital account with their income tax returns, in the YA in which any asset is derecognised.
Taxes on unrealised revenue gains
Taxpayers under the Pre-FRS 39 tax treatment need to pay extra attention in their transition to FRS
109, especially if they have accumulated significant amounts of unrealised revenue gains. As the
FRS 109 tax treatment is compulsory, they will be required to pay taxes on these gains upon transition. As such, it is important to identify and consider the tax impact of transitional tax adjustments early to assess their cash flow in preparation for a one- time transitional tax bill.
It is also a good idea to get familiarised with the FRS 109 tax treatment early to ensure compliance with the Section 34AA requirements. Taxpayers should consider preparing the necessary documents that would support their claim on whether their financial instruments are held on revenue or capital account, as well as the itemised listing of financial instruments on revenue and capital account, to the CIT.
For more information and help in ensuring a smooth transition to the FRS 109 tax treatment, contact
our tax professionals at +65 6336 2828.