Direct tracing comes before the proxy
The third edition, dated 30 January 2026, covers interest and qualifying borrowing costs under section 14(1)(a). A loan directly traceable to an income-producing asset has its interest deducted against that income; if the asset produces no income, deduction fails. A S$2 million loan funding an office rented for S$60,000 annually is traceable to rent; a S$50 million factory loan is traceable to manufacturing income. Where tracing is unavailable and assets include non-income producers, Total Asset Method (TAM) is the default administrative proxy. It must not be elected merely to move a traceable loan’s interest to other assets. Methodology should align with the guide from 16 December 2016.
Interest, asset classes and lease exclusions
Interest-bearing financing includes overdrafts, loans, bonds and notes. Specific interest funds identified assets, including tax-sale-agreement ROU assets and hire purchase; common interest is the remainder. Exclude already non-deductible interest such as dividend-payment borrowing, and ROU interest for operating leases or finance leases not treated as tax sales where contractual payments are deducted. Income-producing assets include business plant, property, shares and interest-bearing loans. A qualifying block of shares that once paid dividends may remain income-producing in subsequent years without dividends under the concessionary group treatment. Vacant long-term investment property, shares never yielding dividends and interest-free loans are non-income-producing.
The two formulas and adjusted year-end asset base
Disallowed common interest equals year-end cost of non-income-producing assets divided by adjusted total asset cost, multiplied by common interest. For an identified income stream, replace the numerator with costs of that stream’s assets; the allocated interest may be deducted only against that stream, including exempt or passive investment income. Total assets comprise current and non-current assets but exclude amounts financed by specific interest-bearing loans and the relevant ROU costs. For partially specifically financed assets, only the financed portion is removed, leaving the balance subject to common-interest allocation. Repaying the specific loan brings that asset cost back into subsequent years’ denominator. TAM uses financial year-end figures without intra-year acquisition/disposal adjustments.
Example 1: a common-loan-only asset pool
The year-end S$10 million pool consists of S$1 million interest-free related-party loan, S$3 million rental investment property and S$6 million trade assets. Two bank loans of S$2 million/S$4 million incur S$40,000/S$80,000 interest, giving S$120,000 common interest. The interest-free loan absorbs 1/10 × S$120,000 = S$12,000, disallowed. The property absorbs 3/10 × S$120,000 = S$36,000, deductible against rent. The remaining S$72,000 is deductible against trade income. These categories must stay separate; the rental portion is not a general business deduction.
Example 2: partial specific financing
Company Y has S$4 million property, S$1 million interest-free related-party loan, S$2 million income-producing shares and S$3 million trade assets. The property’s S$3 million specific loan costs S$60,000 interest; a S$1.5 million common loan costs S$30,000. Remove the S$3 million financed portion from the S$10 million pool, leaving a S$7 million denominator. The property’s residual S$1 million gets S$4,286 common interest, added to S$60,000 direct interest: S$64,286 against rent if rented. The interest-free loan also gets S$4,286, disallowed. Shares get S$8,571 against dividends. The illustration’s amounts are rounded; underlying fractions are 1/7 and 2/7 of S$30,000.
Valuation and irrevocable return to FRS 109 values
Non-financial assets use historical cost, including investment property, associates/subsidiaries/joint ventures, plant/equipment and goodwill/intangibles. Financial assets under FRS 109 normally use balance-sheet values. An election in writing with the income tax return may choose historical cost if all costs are separately tracked and proper records kept; apply consistently. A later switch back to FRS 109 balance-sheet valuation is irrevocable. Those continuing historical-cost treatment from pre-FRS 39 or an FRS 39 election may retain it on transition to FRS 109 if tracking continues, but an eventual switch to FRS 109 value is likewise irrevocable. FRS 109 replaced FRS 39 for periods beginning from January 2018, with early application allowed.
Remaining FAQ restrictions and borrowing costs
An earlier Comptroller-agreed TAM variation can continue until relevant assets are disposed of or relevant loans repaid; either event returns the default method. Do not exclude assets merely because they existed before borrowing or were funded with non-interest-bearing money. Attribute interest and qualifying borrowing costs to one-tier or foreign-dividend investments and deduct only against dividends. Dividend-payment loan interest is wholly non-deductible and is not common interest. Exchange differences on interest are included: S$10,000 interest plus S$500 exchange loss gives S$10,500 for allocation. TAM also determines disallowed qualifying borrowing costs and may apply to loans to Singapore related parties, with transfer-pricing guidance relevant.
Computation evidence and edition history
Include the interest-restriction calculation in the tax computation. Supporting records need not accompany the return but must be sufficient for an audit request. Missing documentation or misuse may cause interest disallowance and incorrect-claim penalties. The update table details February 2023 clarification of default status, lease classifications, denominator costs, FRS 109 and exchange differences, while the January 2026 third-edition publication has no separate change entry. Enquiries use 1800 356 8622 for corporate or 1800 356 8300 for individual matters.
Official source
This article independently explains the substantive contents of the official PDF, including the relevant conditions, procedures and annexes. The linked document remains the authoritative source for its original wording, and later changes should be checked separately.
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