Easing the financial burden on individuals – What can we hope for from the budget?

This article was contributed and first published in The Business Times on 7 January 2009.

The perennial dilemma is with us again – what would you like to see included in the Finance Minister’s budget speech this year? This is not quite as simple a question as it may have been in the previous years. The current economic conditions present the Finance Minister with a difficult dilemma – whether to give away generously to individuals via the personal tax system as a means to stimulating the stuttering economy; or to play things more cautiously keeping the purse strings tight on the tax system and use the money on more targeted economic stimulation projects such as infrastructure.

Whether you are in favour of a giveaway budget or a more prudent approach, most would agree that it would be helpful to ensure at least two goals are achieved with any reforms that are made to the personal tax regime:

1. The working population should be recognised for the contribution they make to the successful and diverse economy of Singapore. Any measures introduced should continue to encourage more of the same commitment to push on through this difficult period; and

2. The working population of Singapore needs jobs. Therefore existing employers need to be encouraged to maximise employment opportunities and new employers, whether foreign or local, need to be encouraged to set up or relocate their businesses here.

If both goals are simultaneously achieved in the budget reforms, Singapore should be well-placed to emerge stronger from the crisis than other less agile competitors. The budget therefore represents an excellent opportunity to do this.

Personal tax rates and reliefs
If we start with the basics, there are some obvious measures that may be universally popular and may meet both of the goals set out above.

1. Top marginal personal tax rate – Bringing down the top rate of income tax (currently 20 percent) to at least match the corporate rate (18 percent) would put more money in the hands of the higher earners to enable them to invest more money back into the economy. It would also help to make Singapore more competitive than other regional locations, in terms of headline tax rates.

2. Starting rates of taxation – At present, annual income of S$20,000 or below attracts zero percent taxation with the next S$10,000 of income attracting tax at only 3.5 percent. By increasing the zero rate tax band from $20,000 to $30,000, a sizeable proportion of employees would be removed from the tax net completely. The administrative cost for employers to comply with tax filing requirements for these employees would be removed as would the cost of the tax authority collecting the tax of less than $350. It would also put a bit of extra money in the hands of all taxpayers.

3. Income tax rebate – This was used last year (albeit for very different reasons) and is an excellent way to inject good news and extra cash into the system without being committed in the longer term to repeat the measures year after year. Whilst this is not a ‘means tested’ or focused measure, it is a welcome ‘windfall’ that may boost morale in addition to short-term spending power.

4. Family-friendly policies – Earlier in the year a number of family-friendly measures were announced which helped new and existing parents by reducing their income tax bill. Is there scope to further enhance this by increasing the ‘spousal’ relief for married couples?

There are pros and cons to each of the above proposals, but at least they have one thing in common – they are simple to understand and to administer. It is important to keep this in mind, especially when we are all suffering from overload of financial news – sometimes ‘simple is best’.

Pensions
The idea that we should save enough for the future and be encouraged to ‘look after ourselves’ during retirement is also a ‘sensible’ message. This has been a recurrent theme in recent budgets – last year saw the reform of the Supplementary Retirement Scheme (SRS), for example.

This idea has been brought into even sharper focus in recent months as those nearing retirement are finding that their net worth is considerably lower than they had expected due to the volatile markets. So can any more be done which may help the dual policy objectives of encouraging hard work and attracting foreign talent? Yes, maybe.

Singapore employers are increasingly using a ‘pension’ as a means of attracting and retaining staff. Section 5 of the Singapore Income Tax Act allows for tax-free contributions to be made to an approved scheme and in turn employers have the freedom to set their own terms around minimum service periods before contributions vest and contribution rates. The only catch is that these contributions must be ‘employer’ contributions and so employees are not permitted to vary the contribution rate or to make additional contributions.

A simple tweak to the existing law here, to allow employee contributions with a corresponding tax deduction over and above the current CPF cap, may allow ‘thrifty’ employees to save in a tax-efficient manner as well as to remove some of the perceived ‘barriers’ for foreign employees who may compare the Singapore system with that from their home country. For example, Employment Pass holders cannot make CPF contributions and so a Section 5 scheme may help to bridge the gap.

In addition, to further enhance the attractiveness of a Section 5 scheme, the 50 percent tax exemption of distributions from an SRS could also be mirrored in the rules that apply to Section 5 plans. This may also be an opportunity to improve flows of capital within Singapore and to stimulate investment in Singapore-listed companies as a new home is sought for the new flows of cash.

Retrenchment & retraining
In the recently released ‘Tripartite Guidelines on Managing Excess Manpower’, employers are strongly encouraged to consider retrenchment only as a ‘last resort’ and instead to consider sending their employees for skills training and upgrading under the Skills Programme for Upgrading and Resilience (SPUR). However, there will inevitably be some retrenchments in the sharp downturn and so what more could be done to help?

Firstly, there is already a tax concession called ‘course fees relief’ and, with a similar intention as SPUR, the aim here is to encourage retraining and help with employability. The current limit to the relief is S$3,500 which was set under ‘normal’ economic conditions. Perhaps there may be room to increase this in the budget speech?

At the more ‘radical’ end of the scale, perhaps a scheme to defer income tax payments for those who have been retrenched and who are actively seeking work would help alleviate some more short-term financial worries? For example, monthly GIRO payment plans could be spread over a longer period until new employment is secured.

Focus on Costs
Cost control is the ‘order of the day’ among many businesses. A package of measures at the personal tax level which helps, in a sustainable and targeted way, to remove any remaining cost barriers for employers whilst also stimulating ‘sensible’ behaviours (e.g. saving for one’s retirement) may reward past hard work and, at the corporate level, to encourage new lines of business to relocate to Singapore.

Conclusion
Whatever the outcome of this year’s budget, the Finance Minister is going to be hard pushed to please all of the people with all of the measures introduced. As always, there will be winners and losers.

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