Revenue and Tax Law
| Published date | 01 December 2005 |
| Citation | (2005) 6 SAL Ann Rev 464 |
| Author | TAN Kay Kheng LLB (Hons)(National University of Singapore), CDipAF (Association of Chartered Certified Accountants), MAcc (Charles Sturt University); FCPA (Australia), Advocate and Solicitor (Singapore). Leonard GOH MA (Cambridge); Advocate and Solicitor (Singapore); State Counsel/Deputy Public Prosecutor, The Attorney-General’s Chambers. |
| Date | 01 December 2005 |
20.1 In contrast with previous years, 2005 was a bumper year for revenue law cases decided by the Supreme Court. In 2004, there was no reported decision. In 2003, there was only one (viz, Kuok (Singapore) Pte Ltd v Commissioner of Stamp Duties[2003] 4 SLR 43). Tax practitioners will no doubt welcome this development.
20.2 A total of 11 cases which had relevance to revenue law were decided in 2005:
| Tax Type | High Court | Court of Appeal |
| Income tax | 6 | 2 (arising from those High Court cases which went on appeal) (Note: A third case was dismissed in February 2006. A fourth case was allowed by a 2:1 majority in March 2006. A fifth case was dismissed in August 2006.) |
| Goods and services tax | 3 | Nil |
| Property tax | 1 | Nil |
| Estate duty | 1 | Nil |
20.3 The decisions discussed the following sections of the Income Tax Act (Cap 134, 1994 Rev Ed) (‘ITA 1994’), (Cap 134, 1996 Rev Ed) (‘ITA 1996’), (Cap 134, 2001 Rev Ed) (‘ITA 2001’) and (Cap 134, 2004 Rev Ed) (‘ITA 2004’):
(a) s 10(1)(g) of ITA 1996 and ITA 2001 — income accruing in or derived from Singapore (catch-all category);
(b) s 10(5) of ITA 1996 — gains from exercise of employment share options deemed to be income;
(c) s 10E of ITA 2004 — ascertaining the income of an investment holding company;
(d) s 14(1) of ITA 1994, ITA 1996 and ITA 2004 — allowable deductions of expenses incurred in producing the income (three cases);
(e) s 15(1)(c) of ITA 1994 and ITA 1996 — deductions not allowed for sums used as capital (two cases);
(f) s 83 (read with s 81(5)) of ITA 2004 — hearings in camera; and
(g) s 97 of ITA 2004 — meaning of ‘shall be liable’.
20.4 The decisions also cited the following provisions of the Income Tax Act but did not discuss them: s 10(1)(a) of ITA 1994, s 10(1)(d) of ITA 2004, s 10(5) of ITA 2001 and s 37(2)(a) of ITA 1996 (now s 37(3)(a) of ITA 2004 with modifications).
20.5 JD Ltd v Comptroller of Income Tax [2006] 1 SLR 484 (‘JD Ltd’) was a decision of the Court of Appeal. (The High Court decision is reported at [2005] 4 SLR 705.) The taxpayer was an investment holding company. It held share investments in several related companies. The taxpayer borrowed funds to purchase these share investments. It paid interest on these borrowed funds.
20.6 Between 1985 and 1996, the taxpayer received dividends from some (but not all) of these related companies. Some related companies never
declared any dividends for the entire period. Others declared dividends only for certain years. The issue was what interest expenses the taxpayer could claim a deduction for under s 14(1) of ITA 2004 (the relevant provisions of the various versions of the Income Tax Act were the same as ITA 2004 at all material times). Was it (a) the entire interest expenses the taxpayer had incurred; or (b) only interest expenses attributable to share investment counters which had declared dividends?
20.7 Section 14(1) provides:
For the purpose of ascertaining the income of any person for any period from any source chargeable with tax under this Act (referred to in this Part as the income), there shall be deducted all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of the income, including … [emphasis added]
20.8 The Court of Appeal held that only interest expenses attributable to those companies which had declared dividends were deductible (ie, category (b)). Firstly, it held that ‘source’ in s 14(1) meant the dividend income from the ‘particular share counter that yielded the revenue’ [emphasis added] and that there could be as many sources of income as there were shareholdings (at [26]).
20.9 In this regard, the Court of Appeal distinguished its earlier decision of Andermatt Investments Pte Ltd v Comptroller of Income Tax[1995] 3 SLR 451 (‘Andermatt’). In Andermatt, the dividends had arisen from only one homogeneous block of shares of a single company. There was therefore only one source of dividend income in that case. The Court of Appeal clarified (at [23]) that Andermatt did not decide that ‘dividend income, no matter how it is derived, invariably forms a single source of income’.
20.10 Secondly, the Court of Appeal ruled (at [47]) that the words ‘expenses … incurred … in the production of the income’ in s 14(1) meant interest expenses specific to ‘the income’, and not ‘any income’ [emphasis added by the Court of Appeal].
20.11 The Court of Appeal also noted (at [51]) the Comptroller”s measured approach in this case. The Comptroller only disallowed interest-expense deductions for share counters which had never declared dividends. For counters which had declared dividends, the Comptroller had allowed the taxpayer interest-expense deductions even in years where no dividends were declared.
20.12 In addition, the Court of Appeal considered s 10E of ITA 2004. This provision deals with the ascertainment of the income of an investment holding company. It was enacted in 1996. Section 10E provides:
(1) Notwithstanding any other provisions of this Act, in determining the income of a company or trustee of a property trust derived from any business of the making of investments the following provisions shall apply:
(a) any outgoings and expenses incurred by the company or trustee of a property trust in respect of investments of that business which do not produce any income shall not be allowed as a deduction under section 14 for that business or other income of the company or trustee of a property trust;
[emphasis added]
20.13 The question was whether s 10E changed the law from 1996 onwards, or merely declared the law as it had previously been. The taxpayer argued that it changed the law. Hence, prior to 1996, the Income Tax Act did not allow the Comptroller to discriminate between income-producing and non-income-producing share counters.
20.14 The Court of Appeal disagreed with the taxpayer. The court held (at [54]) that this section merely declared the law as it had been. Section 10E was enacted for ‘the avoidance of doubt’. In this regard, the court (ibid) relied on what Dr Richard Hu Tsu Tau, the then Minister for Finance had said in Parliament (Singapore Parliamentary Debates, Official Report (27 September 1995) vol 64 at col 1548):
[C]lause 6 inserts a new section 10E to the Act to clarify the circumstances under which expenses incurred by a company carrying on the business of holding investment are deductible under the Act. [emphasis added by the Court of Appeal]
20.15 The Court of Appeal made two other observations. First, it cautioned against reliance on foreign authorities in tax matters (at [32]):
It is desirable, therefore, in interpreting tax legislation, to rely on foreign authorities only if the corresponding tax statutes are identical or very similar to local legislation, and if the schemes of deduction and taxation systems are alike. [emphasis added]
20.16 Next, it held (at [64]—[66]) that tax appeals before the Court of Appeal could similarly be heard in camera. This was notwithstanding that s 83 only specified that hearings before the Board of Income Tax Review and the High Court were to be in camera.
20.17 In T Ltd v Comptroller of Income Tax[2005] 4 SLR 285 (‘T Ltd’), the High Court examined ss 14(1)(a) and 15(1)(c) of ITA 1996. It pre-dates JD Ltd (supra para 20.5). The Court of Appeal heard the taxpayer”s appeal on 22 February 2006 and dismissed it. Grounds were delivered on 30 March 2006 by the Court of Appeal (see [2006] 2 SLR 618) and will be discussed more fully in the 2006 issue of this Annual Review.
20.18 In this case, the taxpayer purchased land to develop a retail complex. Its aim was long-term investment by letting the completed complex to tenants.
20.19 The taxpayer was awarded the building contract in October 1993. It got the Temporary Occupation Permit (‘TOP’) in November 1995. The taxpayer claimed deductions under s 14 on expenses (eg, interest, marketing and advertising expenses) incurred before the TOP (ie, between October 1993 and November 1995). The Comptroller disallowed the taxpayer”s claim.
20.20 The issues before the High Court were:
(a) whether the taxpayer”s business only commenced when the TOP was issued (‘Pre-commencement Issue’); and
(b) whether the interest on the loan prior to the TOP was capital expenditure (‘Capital Expenditure Issue’).
20.21 On the Pre-commencement Issue, the parties agreed that expenditure was not deductible under s 14 if there was no ‘business’ in existence at the time the expenditure was incurred. The dispute was whether the taxpayer”s business commenced only when the TOP was issued (the position of the Inland Revenue Authority of Singapore (‘IRAS’)), or even before the TOP when the taxpayer laid out its capital expenditure (the taxpayer”s position).
20.22 Andrew Ang J held that the taxpayer only commenced its business when the TOP had been issued. The reason for the taxpayer”s existence was to own and let the completed property; not to acquire or develop the land. Acquiring and developing the land were merely preparatory steps: they would have earned the taxpayer no profit without the property being let (at [21]). Ang J added (at [37]) that:
Ultimately, the outcome of each case depends on its own facts and, in particular, on the degree of connection between the activity which the taxpayer claims to be the commencement of the business and the core business of the taxpayer. [emphasis added]
In this case, Ang J decided that developing the property was not essential to its letting (at [39]).
20.23 The Capital Expenditure Issue concerned the interplay between ss 14(1)(a) and 15(1)(c). Section 14(1)(a) provides:
(1) For the purpose of ascertaining the income of any person for any...
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