GLOBAL wealth is at one of its highest levels today. Asia-Pacific accounts for 42 per cent (or S$289 trillion) of total global wealth as at August 2023. Within the next decade, baby boomers are expected to impart S$25 trillion of collective wealth to the next generation.
This has fueled the growth of family offices established by affluent families to manage their family assets.
Singapore is emerging as an attractive location for family offices in Asia. The nation’s robust regulatory framework, stable economy, favourable tax and regulatory conditions, talented workforce, and strategic geographical location are key draw factors. Additionally, Singapore is among the world’s least corrupt countries, and its advanced healthcare infrastructure and safe environment appeals to affluent families.
The growth of Singapore’s family office industry augments the city-state’s position as a leading financial centre. Where wealth is brought onshore, positive spin-offs to the wider economy are bound to follow, such as greater venture capital for local startups, more employment opportunities for residents, and increased industry collaboration.
Singapore’s attractiveness has not been left to chance. The country has been actively positioning itself as a global family office hub, implementing numerous initiatives to attract family offices.
For example, domestically-based single family offices (SFOs) are exempt from licensing in Singapore if they manage proprietary wealth. Other incentives include the Enhanced-Tier Fund Tax Incentive (Section 13U), the Singapore Resident Fund Scheme (Section 13O) and the Philanthropy Tax Incentive Scheme (PTIS) for family offices.
These efforts have gained traction. According to the Economic Development Board, the number of family offices in Singapore grew from about 400 in late 2020 to around 1,100 towards the end of 2022. Yet, this is a mere fraction of the estimated 20,000 family offices globally today.
What can Singapore do to elevate its position as a family office hub?
Reduce compliance requirements and extend incentive scheme
Singapore has introduced Section 10L of its Income Tax Act, which pertains to the taxation of gains from the sale or disposal of foreign assets occurring on or after Jan 1, 2024, that are received here by businesses without adequate economic substance domestically. This is in line with Singapore’s focus on anchoring substantive economic activities in the country.
Section 10L does not apply to business entities that are part of certain tax incentive schemes. However, it does not explicitly exclude companies that are tax-exempt under Sections 13O and 13U of Singapore’s Income Tax Act. These sections cover tax incentive schemes for funds managed by domestically-based fund managers, including SFOs.
As the conditions for the tax incentive schemes for investment vehicles managed by SFOs have been tightened to instil economic substance, we suggest that investment vehicles that are eligible for tax incentives under Section 13O and Section 13U be automatically excluded from Section 10L.
This will reduce the duplicative administrative and compliance burden for family offices to self-assess for Section 10L as well as comply with Sections 13O or 13U. It also simplifies regulatory considerations for families that wish to set up their family office vehicles here.
Additionally, to provide a conducive operating environment for Singapore-based fund managers, including SFOs, the government may wish to extend the Sections 13D, 13O, and 13U tax incentive schemes for funds for another five years. They are currently due to expire on Dec 31, 2024.
Enhance regulations and incentives for ESG investments
There is growing interest among ultra-wealthy families to look beyond conventional performance metrics in investing. According to the 2022 EY Single Family Office Study, 44 per cent of respondents plan to exclude investments that do not align with the family’s ethics and values.
Affluent families are also considering environmental, social and governance (ESG) factors, as well as customer and stakeholder influence, when investing their wealth. The next generation is notably behind this shift, as it is keen to explore positive impact alongside financial gains.
While current tax incentives are broad enough to cater to companies that prioritize ESG, more can be done. Enhanced government support, through clearer ESG regulations and incentives, will boost the growth of the ESG ecosystem. In turn, this will attract more ESG-compliant businesses and startups, as well as increase ESG investments.
As affluent families increasingly consider ESG factors in their investment strategies, having more defined ESG regulations and incentives becomes crucial for Singapore to stay relevant and competitive as a hub for SFOs.
Refine the list of designated investments under Sections 13O and 13U
The use of carbon credits is expected to increase with the growing global demand for voluntary carbon credits, and they could form a meaningful component for investment portfolios. The current list of designated investments includes only emission derivatives and emission allowances, and does not include carbon credits.
To facilitate Singapore’s growth as a carbon trading hub, high-quality carbon credits that are available for offset against carbon tax should be included in the list of designated investments for investment funds and SFO investment vehicles.
The next generation is also keen to explore burgeoning areas such as digitalisation, artificial intelligence, fintech and the green economy. In particular, digital assets such as tokens and cryptocurrencies are becoming a significant asset class for global investors.
Amid these changing attitudes, the government can consider expanding the list of designated investments to include alternative assets, such as certain digital assets.
Provide flexibility in wealth structures
The Variable Capital Company (VCC) framework is a corporate structure for investment funds in Singapore. Since its introduction in 2020, it has seen encouraging uptake among fund managers.
The use of the VCC framework can be extended to investment vehicles managed by SFOs. This affords SFOs greater flexibility in deciding how to organise their asset-holding structures to reap the benefits of using VCC, such as access to double-tax treaties and the ability to segregate assets and liabilities to avoid co-mingling of assets. This would be especially useful for multi-generational families.
Singapore has established a firm foundation as a destination for family offices. To be a leading global family office hub, the Republic needs to continuously refine its policies to align with international standards and evolving needs and interests of affluent families.
The writer is EY Asia-Pacific family enterprise and private tax leader. The views in this piece are the writer’s and do not necessarily reflect the views of the global EY organisation or its member firms.
Credit : THE BUSINESS TIMES