How Do You Decide on the Financial Year End of Your Company?

When starting a business in Singapore, one of the most important decisions you will have to make is deciding on your first Financial Year End (FYE). This date determines when you will have to submit your corporate filings and taxes as well as how you’ll need to report taxable income in the following Year of Assessment (YA).

 

This article will discuss some of the things you need to think about before making your decision and how the FYE affects your business.

But First, What is a Financial Year End in Singapore?

Representing the accounting period of your company, your FYE marks the last day of your financial year. When the time comes, the company secretary will have to file your Annual Returns (AR) with the Accounting and Corporate Regulatory Authority (ACRA) whereas the tax agent will file your corporate tax returns with the Inland Revenue Authority of Singapore (IRAS).

 

Additionally, did you know the FYE does not necessarily have to follow the end of the calendar year? In fact, companies usually choose 31 March, 30 June, 30 September or 31 December when setting the date of their Financial Year End. It can start and end on a day you choose but you will have to decide if your accounting period covers 12 months or over 52 weeks.

How Long Should the First Financial Year of My Company be?

Note that ACRA allows the financial year to be longer than 12 months but not more than 18 months in the year of incorporation. However, when it comes to tax, IRAS uses the basis period for tax assessment purposes and the basis period cannot exceed 12 months. Should the first financial year be longer than 12 months, for example 16 months, the profits or losses would be split into two YA for tax purposes (first YA for 4 months and second YA for 12 months) and the company will end up not reaping the full benefits from the tax exemption applicable for new companies. This will be covered more below.

Key considerations when determining your FYE:

1. Tax exemption for start-up companies

As a start-up company, take note that you may be eligible for tax exemptions on your normal chargeable income, which refers to income to be taxed at the prevailing corporate tax rate. Now, qualifying companies can enjoy special tax exemption for the first three consecutive YAs as long as the YA falls in: 

 

YA 2020 onwards

  • 75% exemption on the first $100,000 of normal chargeable income; and
  • A further 50% exemption on the next $100,000 of normal chargeable income.

Tax Exemption on First $200,000 of Chargeable Income (where any YA of the first 3 YAs falls in or after YA 2020):

Chargeable Income

% Exempted from Tax

Amount Exempted from Tax

First $100,000

75%

$75,000

Next $100,000

50%

$50,000

 

As such, the maximum exemption for each YA will amount to $125,000.

 

YA 2019 and before

  • Full exemption on the first $100,000 of normal chargeable income; and
  • A further 50% exemption on the next $200,000 of normal chargeable income.

Tax Exemption on First $300,000 of Chargeable Income (where any YA of the first 3 YAs falls in YA 2010 to YA 2019):

Chargeable Income

% Exempted from Tax

Amount Exempted from Tax

First $100,000

100%

$100,000

Next $200,000

50%

$100,000

 

In total, the maximum exemption for each YA is $200,000. 

 

The table below summarises how a new company can optimise the tax exemption by setting the first financial year to be as close as possible to 12 months, but not more than 12 months. For example:

 

Date of incorporation: 10 July 2020

 

 

Option 1

Option 2

Option 3 

(Recommended)

First FYE

31 Dec 2020

31 Dec 2021

30 Jun 2020

Number of months in the first Financial Year

6 months

18 months

12 months

1st YA

2021

2022

2021

Basis Period for 1st YA

10 Jul 2020 –

31 Dec 2020

10 Jul 2020 –

31 Dec 2020

10 Jul 2020 –

30 Jun 2021

2nd YA

2022

2023

2022

Basis Period for 2nd YA

1 Jan 2021 –

31 Dec 2021

1 Jan 2021 –

31 Dec 2021

1 Jul 2021 –

30 Jun 2022

 

Based on the above, here are the implications to qualifying companies for having a 1st FYE that is too short (Option 1: 6 months and below) or too long (Option 2: more than 12 months):

 

  1. Short basis period of 6 months in the 1st YA instead of the usual 12 months. As a result, the tax exemption for start-ups is only applies to normal chargeable income generated in the first 2 years and 6 months from the date of incorporation, rather than 3 full years; and
  2. Potential loss on tax savings up to $3,825, being the difference in tax exemption on first $100,000 of chargeable income between a qualifying start-up company and a non-startup company, multiplied by 75% exempted from tax and the tax rate of 17%. [($100,000-$10,000)*75%*17%].

 

To conclude, for entrepreneurs starting your business, avoid setting your company’s FYE on 31 December. Instead, depending on your company incorporation date, it’s best to set the 1st FYE to be as close as possible to 12 months but not more than 12 months in order to maximise tax exemptions for your start-up.

2. Subsidiary company

It is highly recommended to align your subsidiary company’s FYE with that of the holding company, to streamline the process of preparing the consolidated financial statements for group reporting purposes.

Can I Change My FYE Subsequently?

Yes, companies must notify ACRA of the change. Note that you may only change your FYE for the current or immediate prior financial year. 

 

In the event the deadline for holding Annual General Meeting (AGM) has passed, companies will not be able to change the FYE of the year. For example, a company with a FYE on 30 June cannot change the FYE for 30 June 2021 past the AGM deadline of 31 Dec 2021, but it can still change the FYE for the current year ending 30 June 2022. Once the FYE is lodged with ACRA, the next course of action will be to inform IRAS.

Review Your Financial Year End with Us

Can’t figure out a suitable date of choice for your business’ FYE? You can always seek assistance from one-stop corporate service providers in Singapore like Chartsworth. Starting from your new company incorporation, make a more informed decision with us today.