The Singapore Exit Tax That No One Talks About – Singapore is terrific hub for Australian expats with estimates of 20,000 to 25,000 residing over in Singapore.
We’d expect this number to increase over the coming years, once COVID-19 is well behind us.
Singapore is well known for its low tax rate environment and traditionally higher cost of living with some terrific tax advantages such as no Capital Gains Tax(CGT) on liquid investments like shares, exchange traded funds, managed funds, etc.
Low tax and limited CGT exposure for Australian expats make this location a lucrative place to live and work.
It is common for Australian expats to receive stock/share incentive schemes from their employers in the form of direct shares or Employee Share Option Plans or ESOPs.
You sometimes might here these referred to as the ‘Golden Handcuffs’ as they typical vest to the employee over certain periods with big cliffs allowing that employee to exercise large tranches.
These types of incentives are often taxed under the normal personal income tax category. This is regardless of where the ESOP is exercised or where the shares vest.
Generally, the amount of taxable gains or profits is the difference between the open market price of shares at the time of exercise and the amount paid by the individual for the shares (exercise price).
Employees are only able to sell or exercise such share grants upon them vesting and their employer restrictions being lifted.
Most Australian expats who receive these will have a login to a platform and are able to see their total value, vesting dates, what is exercisable, etc.
The nasty Singapore exit tax – Deemed Exercise Rule
When an Australian expat ceases employment in Singapore with unexercised ESOPs and share awards, the gains from these unexercised tranches are taxed on a ‘deemed exercise’ basis, which is typically a month prior to cessation of leaving Singapore.
Under this rule, the employee is deemed to have received a final gain from the following:
- Unexercised ESOPs
- ESOPs with selling restrictions yet to be lifted
- Unvested ESOPs
The final gains are deemed as income received by the employee one month before the foreign employee ceases employment in Singapore or the date of grant, whichever the later.
Thus, the taxable gains are:
- Open Market Price of shares at (one month before employment ceases or date of grant, whichever the later) – exercise price
The concern around this deemed exercise rule is that you could be paying tax on shares which haven’t been vested to you. An example would be paying tax on shares that are still vesting to you well past 2025.
Australian expats are coughing up large tax amounts even though they have not received the actual remuneration amount which is a concern, given that some expats might not have the liquid assets to pay the final tax bill.
The IRAS does have the ability to access personal bank accounts in Singapore to be able to pay the final tax, so tread carefully if you know this event may arise in the coming years.
There is one silver lining with regard to a future tax refund, which I’ll discuss in our next article but there is a further concern that Australian expats are paying tax to another taxation body like the ATO when the shares actually vest, should the Expat moved back to Australia.
Look out for my next article on this where I deep dive into the retrospective opportunity you have.