We have discussed earlier on the latest IRAS stance on the corporatisation of the medical professional in “IRAS advisory to medical professionals running private practice through companies” November 15, 2019.
We will look into some of the interesting real cases that IRAS has applied s33(1) tax avoidance section on these innovative tax structures that attempted to outsmart the system:
- Different but same same
Mr Neo, provided specialist services through Neo Change medical clinic as a sole proprietor for several years and operated through a shared service arrangement with a medical group and retained bulk of the income to himself for the specialist services that he rendered. He later incorporated and operates the same specialist services through the newly incorporated company, Neo Change Pte Ltd (“NC”). He is the sole director and the only shareholder. There is no change to the business operations and he operates through a same shared service arrangement and retained bulk of the income to himself for the specialist services that he rendered.
The key contentious point in this case is that Mr Neo is essentially operating the same business using his professional skill as a specialist and operating a similar business setup that is the same before and after incorporation. There is no change in the business model, operation or risk taking and the supporting service provided by the shared service agreement is ancillary to the provision of the personal service by Mr Neo. In cases where the company does not employ any staff and own any assets, it is difficult to justify that the setup of the company is nothing more than a mere setup for tax benefit.
2. Pay poor, enrich company
Mr Ted, provides specialist medical services through Ted Benefit Pte Ltd (“TB”) for which he is also the sole director and shareholder. He is supported by a team of clinical medical staff that perform registration, dispensing, pre-consultation checks, as well as some simple medical procedures. Mr Ted pays himself a nominal salary and retains substantial profit in the company. The company then pays a substantial one tier tax exempt dividend to Mr Ted.
The key contentious point in this case is the remuneration for the key professional is not aligned to the economic reality i.e. not an arm’s length transaction and therefore a presumption of shifting the income from a higher personal tax bracket to a lower company tax. The subsequent payment of substantial tax exempt dividend back to Mr Ted further supported the presumption of such a contrived transaction and the intention of flowing the tax benefit back.
3. Pay too good for old boys’ club
Mrs Penny, provides general medical services through Penny Wise Pte Ltd (“PW”) for which she is also the one of the 6 directors and the only shareholder. She is supported by a team of clinical medical staff that perform registration, dispensing, pre-consultation checks, as well as some simple medical procedures. Mrs Penny pays herself a nominal salary and pays the other 5 directors who are also her brothers and sisters substantial directors’ fees . The company has on its employee payroll, her 2 parents as administrative officers and receiving substantial monthly salaries.
The key contentious point in this case is the remuneration for the professional and related parties are not aligned to the economic reality i.e. not an arm’s length transaction and therefore a presumption of shifting the income from a higher personal tax bracket to a lower company tax as well as to related individuals with lower tax liabilities.
4. Musical chair dance
Mr Fun, provides general medical services through Musical Chair Clinic Pte Ltd (“MC”) for which he is also the sole director and shareholder. He is supported by a team of clinical medical staff that perform registration, dispensing, pre-consultation checks, as well as some simple medical procedures. Mr Fun pays himself and his staff market salaries. He strike off MC after 3 years and incorporates a new company – Musical Table Pte Ltd (“MT”) to take over the existing business to take advantage of the 3 year startup tax exemption.
The key contentious point in this case is that MT is clearly an continuation of MC and the setup was done to take advantage of the 3 year startup tax exemption. The startup tax exemption relating to MT would likely be ignored by IRAS.
5. One for all and all for one
Mr Smart, Mr Clever and Mr Brilliant, provides general medical services through 3 companies – Too Smart Clinic Pte Ltd (“TS”), Too Clever Clinic Pte Ltd (“TC”) and Too Brilliant Pte Ltd (“TB”) for which they are the 3 directors and 3 shareholders for each of the companies. TS, TC and TB operate out of the same premise and are supported by the same team of clinical medical staff that perform registration, dispensing, pre-consultation checks, as well as some simple medical procedures for all 3 companies . Mr Smart, Mr Clever and Mr Brilliant and the staff are all paid at competitive market salaries. Depending on the residential address of the visiting patient, the income from patients from district 1 to 9 is recorded in TS, income from patients from district 10 to 19 – TC and income from patients from district 20 to 28 – TB.
The key contentious point in this case is that the setup of the 3 companies TS, TC and TB are all done for the artificial splitting of income and to take advantage of 3 separate startup tax exemption. There is little or no clear commercial substance for the setup as the business is operated through the same premise, same supporting staff, same doctors who owns and controlled the 3 setup.
