Paying oneself dividends

[wingnut]

Hi,

I have found this forum to be a wonderful repository of information, and have some queries which I hope will be answered here.

I am engaged in a line of self-employed work which some would call day trading (although I consider it multi-year trading actually!).

Doing so as an individual as opposed to a company means I am not required to pay tax, nor contribute to CPF. BTW, I'm local, and I'm not looking to cheat the system in any way.

It's all great except that now my wife has ceased employment to look after household affairs, there's no one in my family who's actually 'earning an income.' Or at least one that's easily identified as some sort of formal income.

Now as it turns out, I am looking at a personal venture which requires proof of income, not to mention the possibility of additional property purchases which will require financing.

Can I simply set up a private company for the sole purpose of paying myself annual dividends? The company won't actually be doing anything at all. Is there anything unlawful about this?

If it is viable, will the only way this dividend income show be in the annual tax return?

And does anyone have any idea how banks view this sort of income when assessing lending suitability? I do not expect to be approaching a bank for a loan until I have paid myself annual dividends for at least 2-3 years?

Again assuming it's a viable option.

Many thanks.

[Strong Eagle]

Doing so as an individual as opposed to a company means I am not required to pay tax, nor contribute to CPF. BTW, I'm local, and I'm not looking to cheat the system in any way.

I think you are already in hot water. If you are earning income, you must declare that income on your personal tax return and pay tax on it.

http://iras.gov.sg/irasHome/page.aspx?id=1526

http://iras.gov.sg/irasHome/page01.aspx?id=1262

Second, your day trading is a business, and as such must be registered as a sole proprietorship with ACRA. Only a few select businesses are exempt from registration and yours is not one of them.

http://www.acra.gov.sg/SoleProprietorsh ... ership.htm

While you are not required to pay full CPF you do have Medisave obligations as a self employed.

http://mycpf.cpf.gov.sg/Members/Gen-Inf ... ployed.htm

Bottom line is: You should have had a sole proprietorship, you should have been reporting income, you should have been receiving a notice of assessment, and you should have been paying taxes and into your Medisave account. I'd say you have a mess.

Yes, you can incorporate. And yes, a new company gets attractive tax treatment for the first three years that means profits will not be taxable. So you could pay yourself dividends and avoid tax. I don't know about locals but if a PR were to do this, it shines a bright spotlight on the person.

Your first step should be to get your current situation cleaned up.

[sundaymorningstaple]

I concur with SE as well.

[wingnut]

I used the term day-trader against my own better judgement.

Let's put it this way, the way I live is much more akin to that of a retiree who has some holdings in stocks, and buy them and sell them as part of managing my portfolio, and occasionally receive dividends from them. Except that I'm not quite of retirement age.

From IRAS (all pertaining to the subject of personal income taxation only):

Gains from sale of shares & financial instruments
Generally, profits or losses derived from the buying and selling of shares or other financial instruments on your own account are viewed as personal investments.

Capital gains are not subjected to tax. If you buy and sell shares or other financial instruments at a profit, the profit is not subjected to tax.

When is it taxable

To determine whether an individual is trading, factors such as the frequency and volume of transactions, the interval between the purchase and sale, and the manner of financing the purchase of shares, will be taken into consideration.

The three circumstances factors above alone do not determine whether the gains are taxable.

My trading frequency is very low, my transaction volumes hardly large and I do not use financing of any kind for my investments. So it appears likely that I as an individual am not required to file tax on those.

Dividends exempt from tax

Dividends are not taxable if they are

Foreign dividends received in Singapore on or after 1 Jan 2004. This excludes foreign source income received through partnerships in Singapore.
Income distributions from unit trusts and real estate investment trusts (REIT), that are authorised under Section 286 of the Securities and Futures Act (excludes distributions out of franked dividends) on or after 1 Jan 2004.
One-tier exempt dividends from companies under the one-tier corporate tax system.

And those are the only dividends I receive currently.

I believe that some years back I actually received a letter from IRAS declaring me free of the need to file income tax.

To all intents and purposes, I am an unemployed person to IRAS.

BTW I'm local.

But thanks for your responses. I'm not sure if we're talking at cross purposes here, but I am pretty certain that what I'm doing does not fall foul of IRAS laws.

[/b]

[Strong Eagle]

OK, it wasn't clear from your first email that you did not qualify as a trader.

But now, that raises some interesting questions. If you now start trading inside a pte ltd, you are trading for the company and not for yourself. I would guess that by virtue of the fact that you are trading for the company, you would now qualify as a trader and profits made by the company will be subject to tax. You might also be subject to additional restrictions and reporting requirements above those placed upon a private trader... I dunno.

For the first three years a new private limited has corporate tax waved on the first hundred thousand dollars of profit, so indeed you could pay yourself dividends that don't exceed net profit in a year and not incur a personal tax liability.

Dividends paid show up on the company P&L. For example:

Revenues - 1,000
Expenses - 100
Gross Profit - 900
Dividends Paid - 900
Net Profit - 0

Balance sheet

Assets - Cash $2

Liabilities and Net Worth

Paid Up Capital - $2
Retained earnings prior period - 0
Profit/Loss - 0
Tot Liab and Net Worth $2

Nothing illegal that I know of. Eventually, you will have to pay corporate tax on your profits. Also, since you already have received notice that you are not a trader, it might not matter, but for other companies, they would be looked at closely if directors receive nothing and the shareholders receive it all.

As for the banks: The company receives income and makes a profit. You as a director make nothing. As a shareholder you receive non taxable dividends which I don't think you even need to declare. So, even with audited books, you can show the company made money and paid it all out in dividends, leaving zero profit. You are the one that actually made the money as a shareholder.

My $0.02.

[wingnut]

Thanks for that Strong Eagle.

Hmm, I actually don't intend to switch to using a company of any sort to carry on with what I'm doing since the tax regime is favourable to me.

Put it this way, lol:

I'm unemployed but with means, and for documentation purposes, I'm looking to pay myself so to speak. I have the ability to pay my debts as and when they come due, I just need to show it, which is something that's not quite easy to do with what I'm currently doing.

So what I was thinking was setting up a company, put money in it, take the same money out as dividends to myself, and document it. I don't actually have plans for the company to 'actually' engage in any form of business activity.

I certainly don't expect it to be profitable!

Thank you.

[Strong Eagle]

OK, I get it, finally. However, you still have a problem. You cannot pay dividends except from profits, that is to say, you cannot use paid up capital to pay dividends.

I think you have alternatives. You are trying to demonstrate a "fake" income stream using your own money. Why not simply get a CPA to certify your net worth for use with the banks. This is how it is done in the US. I recently invested in a commercial warehouse. The investment was large enough that I had to prove I can handle the loss, should it occur. A CPA reviews my holdings, verifies assets and income streams and signs that I am solvent and able to do the deal.

Why wouldn't that work for you? I think that the banks would be far more interested to know that you had assets to back a loan as opposed to a somewhat dodgy income stream.

[JR8]

So you set up a company, in order to put money in it, and then take the money out as if it is now earned income.

I'm totally non-expert, but that just sounds 'well dodgy' to me!


p.s. interestingly your status is very similar to being a landlord in the UK. It is not considered a business but passive income (as if the money falls of a magic tree without any work or hassle involved). So you have no Ltd. Co. and no accounts, just your personal tax return.

edit to add comment on SE's post.
In the UK if you're looking for an off the shelf mortgage, it is a box-ticking exercise. Can't tick them, then you have to get a specialist loan which is going to cost more.
Having assets is one thing, but unless a lender has a lien over them they do not help you.

[wingnut]

I think you have alternatives. You are trying to demonstrate a "fake" income stream using your own money. Why not simply get a CPA to certify your net worth for use with the banks. This is how it is done in the US. I recently invested in a commercial warehouse. The investment was large enough that I had to prove I can handle the loss, should it occur. A CPA reviews my holdings, verifies assets and income streams and signs that I am solvent and able to do the deal.

Is that doable here? I never heard of that here actually. The banks do actually know the value of my assets (and it's not really that large such that only a tiny portion of it needs pledging for example for any sort of serious financing, like property for example), but as JR8 pointed out,

''Having assets is one thing, but unless a lender has a lien over them they do not help you.''

And that has been my experience here, and the assets they want lien over is invariably cash, deposited with them, which kinda defeats the entire purpose of financing.

And it's not that dodgy JR8! Some of the stuff that these big name private equity firms, or even listed entities pull, now that's disgusting!

Anyway thanks for the responses guys, it's not the end of the world if I can't work something out, but I'll explore some more options that do not involve paying tax (now that's dodgy!), or more importantly, making CPF contributions.

I believe CPF merely creates the illusion of wealth amongst people here, but actually impedes their wealth enhancement ability. But that's something else for someplace else.

[BillyB]

OP is right. The tax rules governing profit on investments are a little hazy here!

[Strong Eagle]

So... it occurs to me that you could form a private limited, and let's say by example, you issue 200,000 shares at par value $1.

The company has $200K in the bank and you have 200K shares.

Now the directors (you) initiate a share buy back. Each month the company buys back x shares and you get x dollars.

Still weird.

[taxico]

...

I believe that some years back I actually received a letter from IRAS declaring me free of the need to file income tax.

To all intents and purposes, I am an unemployed person to IRAS.

...

that letter you received...

is because you've not been paying taxes (flying under the radar?), IRAS has exempted from filing because it is not necessary (as you've reported an annual income of less than 20k for X number of years).

i'm not very knowledgeable about accounting or structuring companies, but i recommend declaring whatever it is you're earning and let IRAS decide if it is taxable or not. you can amend previous years' declarations.

i assume you don't want to end up being audited and having to go to Novena to explain your case as what IRAS knows about your financial situation may be different from reality.

at the very least, i recommend seeking an accountant to find out what is the safest way you can "beat the system."

[Strong Eagle]

...

I believe that some years back I actually received a letter from IRAS declaring me free of the need to file income tax.

To all intents and purposes, I am an unemployed person to IRAS.

...

that letter you received...

is because you've not been paying taxes (flying under the radar?), IRAS has exempted from filing because it is not necessary (as you've reported an annual income of less than 20k for X number of years).

i'm not very knowledgeable about accounting or structuring companies, but i recommend declaring whatever it is you're earning and let IRAS decide if it is taxable or not. you can amend previous years' declarations.

i assume you don't want to end up being audited and having to go to Novena to explain your case as what IRAS knows about your financial situation may be different from reality.

at the very least, i recommend seeking an accountant to find out what is the safest way you can "beat the system."

Not the case. If you are an investor, dividends are not taxable events because the company has already paid taxes on the profits that led to dividends. I could legitimately not pay myself, instead recording profit in place of salary expense, then pay dividends to myself which would be non taxable.

The question becomes much more cloudy in you are an active trader who makes his/her income on the gains made by trading. But this is not the OP's question. He already has a letter that he is not taxable. Now, he wants an auditable income stream for use in other transactions.

[ericsha]

Talking about dividends:

Is there any legal way to pay dividends before end of the year ?

I'm planning to incorporate next month, already have a contract to generate income, and i'm concerned about to pay me as a foreign director till i get the EP (read somewhere that EP holder can't be director).

[Strong Eagle]

Talking about dividends:

Is there any legal way to pay dividends before end of the year ?

I'm planning to incorporate next month, already have a contract to generate income, and i'm concerned about to pay me as a foreign director till i get the EP (read somewhere that EP holder can't be director).

You really don't make much sense.

a) It is December. If you are "planning to incorporate next month" then you are planning to incorporate in 2012, so you have no company to pay dividends in 2011.

b) You must declare a profit on your corporate tax return and your dividend payouts cannot exceed the amount of profit reported. Never mind the fact that you don't have a company, you don't have any profits, either.

c) If you are in Singapore and already 'generating income' you are doing so illegally, and you will be summarily deported for working illegally and earning money, contract or no contract. Whomever gave you the contract is also in hot water for illegally employing you.

d) You won't get an EP just because you formed a company. Entrepass rules have been tightened up a lot, and you won't be able to get around them by simply forming a company. You should read the MOM and ACRA websites as well as Entrepass stickies on this site.

Overall, you seem woefully under-informed of the requirements you must meet to open and operate a business.