Revenue and Tax Law
| 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, Attorney-General’s Chambers. |
| Date | 01 December 2006 |
| Published date | 01 December 2006 |
21.1 2006 was another bumper year for revenue law cases. The cases related to only income tax and property tax. Under income tax, two Court of Appeal cases laid down some important rulings on the capital/income distinction in the context of allowable deductions under s 14 of the Income Tax Act (Cap 134, 2004 Rev Ed) (‘ITA 2004’) generally. This includes the deduction of interest expense under s 14(1)(a) of the ITA 2004 specifically. In the realm of property tax, the cases are important in understanding how commercial properties, particularly shopping centres, may be subject to assessment of their annual values. There were no court cases dealing with estate duty, stamp duty or goods and services tax.
21.2 The Supreme Court decided nine cases in 2006 which had relevance to revenue law:
| Tax Type | High Court | Court of Appeal |
| Income Tax | 3 (two of the cases went up to the Court of Appeal. Both were heard in 2007.) | 3 |
| Property Tax | 2 (Both cases went up to the Court of Appeal. The Court of Appeal decided one case in 2006 and the other in 2007.) | 2 (One appeal related to a High Court decision mentioned in the previous column.) |
21.3 The cases discussed the following provisions of the Income Tax Act (Cap 134, 1994 Rev Ed) (‘ITA 1994’), (Cap 134, 1996 Rev Ed) (‘ITA 1996’), (Cap 134, 1999 Rev Ed) (‘ITA 1999’), (Cap 134, 2001 Rev Ed) (‘ITA 2001’) and ITA 2004:
(a) s 10(1) of the ITA 1996 — income accruing in or derived from Singapore;
(b) s 10(1)(a) of the ITA 2004 — gains or profits from a trade, business, profession or vocation;
(c) s 10(5) of the ITA 1996 — gains from exercise of employment share options deemed to be income;
(d) s 13A of the ITA 2001 and the ITA 2004 — taxation of shipping profits and the meaning of ‘Singapore ship’ under the original provision in the ITA 2001, and as amended and shown in the ITA 2004;
(e) s 14(1) of the ITA 2004 — allowable deduction of expenses incurred in producing income (two cases);
(f) ss 14(1) and 14(1)(a) of the ITA 1999 — allowable deduction of expenses (including interest) incurred in producing income (two cases);
(g) s 15(1)(b) of the ITA 1994 and the ITA 1999 — deduction disallowed for expenses not wholly used for purposes of acquiring the income;
(h) s 15(1)(c) of the ITA 1999 and the ITA 2004 (the provision is exactly the same in the respective revised editions of the ITA) — deduction not allowed for sums used as capital (three cases);
(i) s 37(2)(a) of the ITA 1999 — deduction of losses in preceding year of assessment in any trade, business, profession or vocation;
(j) ss 81(1) and 81(2) of the ITA 1994 and the ITA 1999 — appeals to the High Court on questions of law or mixed law and fact.
21.4 The cases also cited the following provisions of the ITA but did not discuss them: s 10(1)(a) of the ITA 1999, s 14(1)(h) of the ITA 1999, s 15(1)(a) of the ITA 1994 and s 37(1) of the ITA 1999.
21.5 In Comptroller of Income Tax v HY[2006] 2 SLR 405, the Court of Appeal considered whether the gains the taxpayer had made from exercising certain employee stock options were liable to be taxed in Singapore.
21.6 The taxpayer was employed by Standard Chartered PLC (‘Stanchart’) in UK. Between August 1990 and March 1994, Stanchart granted him seven options to acquire Stanchart shares.
21.7 In October 1994, the taxpayer was posted to Stanchart”s Singapore branch. The first two of these seven options had crystallised by then: the taxpayer could have exercised these two options (but not the other five) before he was posted to Singapore, but he did not do so.
21.8 In 1997, the taxpayer decided to exercise all seven options. He made the decision whilst in Phuket. On returning to Singapore, he signed the notices exercising the options, obtained an overdraft in pound sterling to pay for the shares and sent the requisite documents plus full payment to Stanchart”s registered London office.
21.9 The taxpayer subsequently sold his shares on the London Stock Exchange. He made a profit. He never remitted any of the profit to Singapore. The issue was whether he nevertheless still had to pay tax on this profit arising from exercising these options.
21.10 The majority of the Court of Appeal (Yong Pung How CJ and Tay Yong Kwang J) held that gains from all seven options were liable to be taxed. Chao Hick Tin JA (as he then was) agreed that profits from the last five options were taxable but gains from the first two (which had crystallised before the taxpayer”s posting to Singapore) were not.
21.11 The Court of Appeal was unanimous that s 10(1) was the only charging provision under the ITA 1996. Section 10(5) of ITA 1996 was merely a deeming provision that treated gains from the exercise of stock options as income (at [19]). The then relevant portion read:
Any gains or profits directly or indirectly derived by any person by the exercise … of a right … to acquire shares in a company shall, where the
right or benefit is obtained by that person by reason of any office or employment held by him, be deemed to be income… [emphasis added]
21.12 The court held that s 10(5) did not say whether such income was liable to tax in Singapore. Hence, the words ‘by reason of employment’ in s 10(5) did not only refer to employment in Singapore or any particular country (at [19] and [47]). The upshot was that the taxpayer”s gains (from exercising these options) were ‘income’ within s 10(5).
21.13 Was this ‘income’ taxable under s 10(1)? To be taxable, the income must be ‘accruing in or derived from Singapore’. The majority judges held that what mattered was the taxpayer”s activities which had earned him the right to exercise these options. The location of these activities was the true source of the income: at [27].
21.14 The majority judges said that it was the taxpayer”s work in Singapore from 1994 to 1997 which had enabled him to exercise the stock options. To exercise the options, he had to be employed by Stanchart at the time of exercise. Accordingly, gains from all seven options (including the two which had crystallised before 1994) were subject to tax (see [31]).
21.15 On his part, Chao JA found that the last five options only crystallised after the taxpayer had come to Singapore. He therefore accepted that gains from these five options were taxable: at [61]. However, the first two options had crystallised before the taxpayer”s posting to Singapore. He could therefore have exercised them when he was still in London. His posting to Singapore was totally fortuitous. This fortuitous act did not change a right derived in London to one derived in Singapore. Consequently, he held (at [62]) that gains from the first two options were not taxable.
21.16 The Court of Appeal examined ss 14(1)(a) and 15(1)(c) of the ITA 1999 in T Ltd v Comptroller of Income Tax[2006] 2 SLR 618 (‘T Ltd’). The High Court”s decision in this case was discussed in last year”s review: (2005) SAL Ann Rev 464 at paras 20.17—20.25.
21.17 The taxpayer had purchased land to build and develop a retail complex. Its aim was long-term investment by letting the finished complex to tenants.
21.18 The taxpayer was awarded the building contract in October 1993. It obtained a loan to purchase the land. It paid interest on the loan. It obtained
the temporary occupation permit (‘TOP’) for the building in November 1995.
21.19 The taxpayer claimed deductions under s 14 on expenses incurred before the issuance of TOP for the building (ie, between October 1993 and November 1995). These expenses included interest, agency fees and marketing expenses. The Comptroller disallowed the taxpayer”s claim.
21.20 The Court of Appeal dismissed the taxpayer”s appeal. The issues before the Court of Appeal were:
(a) Whether the taxpayer”s business only commenced when TOP was issued (‘pre-commencement issue’); and
(b) Whether the interest on the loan prior to TOP was capital expenditure (‘capital expenditure issue’).
21.21 On the pre-commencement issue, the Court of Appeal held that the taxpayer”s business consisted of letting out the shopping mall. Hence, the taxpayer”s business only commenced when TOP was granted. The purchases of the land and construction works were only preparatory steps toward this business: at [13]. There was a difference between (a) business that achieved no profits, and (b) business that produced no income because they were not yet in a position to generate any: at [15].
21.22 The Court of Appeal also clarified what it had said in Pinetree Resort Pte Ltd v Comptroller of Income Tax[2000] 4 SLR 1 (‘Pinetree Resort’): ‘the business has to be...
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