Revenue and Tax Law

• Published date: 01 December 2013
• Date: 01 December 2013
• Author: TAN Kay Kheng LLB (Hons) (National University of Singapore); CDipAF (Association of Chartered Certified Accountants); MAcc (Charles Sturt University); MTax (University of New South Wales); CTA, FCPA (Australia), ATA (Income Tax), FSIArb; Advocate and Solicitor (Singapore). Leonard GOH MA (Cambridge); Advocate and Solicitor (Singapore); Legal Officer, Accounting and Corporate Regulatory Authority.
• Citation: (2013) 14 SAL Ann Rev 490

Introduction

23.1 The Supreme Court delivered ten decisions in 2013 relating to tax law: eight decisions dealing with income tax and the remaining two dealing with property tax. There were no cases dealing with stamp duty or goods and services tax.

23.2 Four of the income tax cases dealt with the relatively new regime concerning the exchange of information with foreign tax authorities under applicable double tax agreements. The other four cases involved varied scenarios concerning chargeable income and deductions. In last year's SAL Ann Rev, we discussed the High Court case of AQQ v Comptroller of Income Tax[2013] 1 SLR 1361 (see (2012) 13 SAL Ann Rev 420 at 421–424, paras 23.5–23.12) and mentioned that the decision was being appealed to the Court of Appeal. The Court of Appeal has since released its judgment on 26 February 2014 (see Comptroller of Income Tax v AQQ[2014] 2 SLR 847), allowing the Comptroller's appeal in part and dismissing AQQ's cross-appeal; this decision will be discussed in next year's SAL Ann Rev.

23.3 The two property tax cases in 2013 were decisions of the Court of Appeal.

23.4 There are therefore, in our view, ten cases for the year 2013 which had relevance to revenue law:

Tax Type	High Court	Court of Appeal
Income tax	7	1
Property tax	-	2

Income tax

Deductibility of losses due to defalcation

23.5 The only Court of Appeal decision involving income tax in 2013 was delivered in AQP v Comptroller of Income Tax[2013] 2 SLR 155 (‘AQP (CA)’). The High Court decision (AQP v Comptroller of Income Tax[2012] 1 SLR 185 (‘AQP (HC)’) was reviewed two years ago and the brief facts set out there need not be repeated: see (2011) 12 SAL Ann Rev 422 at 423–426, paras 22.5–22.17.

23.6 To recapitulate, the key issue in AQP relates to the deductibility of losses arising from misappropriations by the taxpayer company's former managing director (‘ex-MD’). The High Court had to consider whether the losses were wholly and exclusively incurred by the plaintiff in its production of income within the meaning of s 14(1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (‘ITA’). (There was also a further issue involving the ‘error or mistake’ provision under s 93A of the ITA, but this issue was rendered academic and the Court of Appeal refrained from commenting on s 93A: at [5].)

23.7 The High Court had held that the so-called Curtis test laid down in the seminal English case of Curtis (HM Inspector of Taxes) v J & G Oldfield Ltd(1925) 9 TC 319 (‘Curtis’) applied in Singapore. Tay Yong Kwang J opined as follows (AQP (HC) at [54]):

Did the defalcator possess an “overriding power or control” in the company (ie, in a position to do exactly what he likes) and was the defalcation committed in the exercise of such “power or control”? If so, the losses which result from such defalcations are not deductible for income tax purposes.

23.8 Applying the Curtis test to the facts, the High Court had no difficulty finding that the ex-MD had overriding power or control in the taxpayer company and the losses were therefore not deductible.

23.9 On appeal, it was argued by the taxpayer that the test of ‘overriding power or control’ did not apply; rather, the applicable test was ‘in the course of normal income-earning activities’. The Court of Appeal remarked (at [20]) that:

… what is of pivotal importance is not the mere ritualistic recitation of any given test as such but, rather, ascertaining which test is undergirded (and hence justified) by logic, principle and commonsense. [emphasis in original]

23.10 The court noted that for employees who have overriding power or control in their respective organisations, ‘checks and balances can –and ought to be – in place to prevent such overriding power or control from being abused by the employee concerned’. However, ‘the law does not demand a perfect system of checks and balances for this would place an unfair – indeed, intolerable – burden upon the taxpayer’; what is required is ‘a sufficient system of checks and balances’ [emphasis in original in both instances] and this can mean that defalcations can nevertheless occur: AQP (CA) at [24].

23.11 If there was no sufficient set of checks and balances, then that omission would break the nexus to the production of income, which is an inherent requirement in s 14 of the ITA itself. Applied in this way, the ‘overriding power or control’ test is a logical and principled test that is also consistent with commercial reality and practice: AQP (CA) at [25].

23.12 As the taxpayer company in AQP had not been given an opportunity to proffer evidence as to whether it had instituted a proper system of checks and balances, the case was remitted back to the Income Tax Board of Review (‘the Board’) so that the necessary evidence could be adduced: AQP (CA) at [31]–[32]. The Board would then apply the test as laid out by the Court of Appeal in deciding whether the deduction ought to be allowed.

23.13 For completeness, readers may wish to note that the Court of Appeal also commented on the importance of substance over form in evaluating whether an employee has overriding power or control (eg, there could be de facto authority scenarios) (AQP (CA) at [28]), the consideration of policy elements in evaluating the applicable test (AQP (CA) at [30]) and the impact of findings in the prior criminal proceedings involving the ex-MD on the tax appeal before the Board: AQP (CA) at [31].

Taxation of insurance companies

23.14 One of the three cases decided by the High Court in 2013 has been affirmed by the Court of Appeal at the time of writing. Of the two remaining cases, one did not proceed to the Court of Appeal as the appeal was withdrawn, while the other was still pending before the Court of Appeal.

23.15 In the first reported decision of Comptroller of Income Tax v BBO[2013] 3 SLR 36, the taxpayer company carried on the business of a general insurer in Singapore and was regulated by the Insurance Act (Cap 142, 2002 Rev Ed). Under the regulatory regime, the taxpayer had to maintain separate insurance funds for each class of insurance business. To this end, there were the Singapore Insurance Fund (‘SIF’) and the Offshore Insurance Fund (‘OIF’). Some funds from the SIF and OIF were invested in the shares of three companies, C, D and E, in the group of companies to which the taxpayer belonged. These shares were regarded as ‘Core Shares’ by the taxpayer. Pursuant to a takeover offer made in 2001, the taxpayer sold all the Core Shares to F, a listed company. Consideration was paid to the taxpayer partly in cash and partly in shares in F. The resultant gains from selling these shares totalled more than $89m, which the Comptroller sought to assess to tax. In some previous years of assessment in the period 1973–1995, there were some sales of shares for which the taxpayer reported the gains as taxable income. For a summary of the facts, see the judgment at [2]–[4].

23.16 The Comptroller relied on ss 10 and 26 of the ITA to assess the gains to tax, ie, that the gains were from the taxpayer's trade or business under s 10(1)(a), and secondly, it was implied in ss 26(3) and 26(4) that gains from the sale of investments by insurance companies other than life insurance companies should be subject to tax.

23.17 The Comptroller's position was rejected at first instance by the Board (see BBO v Comptroller of Income Tax[2012] SGITBR 2). On the Comptroller's appeal, the High Court dismissed the appeal.

23.18 At the outset, the High Court made some preliminary observations which were not disputed: that s 10 of the ITA (and indeed the entire ITA) imposes tax only on gains or profits of an income nature, and not on capital gains; that the income versus capital dichotomy is the cornerstone of the income tax regime in Singapore; and that the concept of income is not defined by the ITA and its meaning has to be determined with reference to decided cases where the circumstances of the taxpayer were similar: at [15]–[19].

23.19 As regards insurance companies, Lai Siu Chiu J accepted that the general position is that gains derived from the disposal of investments in the course of its investment activities would constitute the insurer's income. However, gains may in some instances be capital in nature and not subject to income tax. Lai J noted (at [20]–[24]) that this position was not disputed by the Comptroller even though the Comptroller argued that none of the exceptions to the general position applied to the taxpayer in relation to the disposal of the Core Shares.

23.20 Lai J reviewed the cases cited by the parties and noted the following (with reference to Commissioner of Inland Revenue v National Insurance Co of New Zealand Ltd(1999) 19 NZTC 15,135) (at [26]):

… there was no absolute or precise rule which stated that all gains from the sale of share investments by insurance companies must necessarily be income in nature … each case was to be construed on its own facts. [emphasis in original]

In making a judgment on the facts, this must be based on the totality of the evidence, including whether there were features that distinguish the transaction from the general run of investments inherent in the nature of insurance business, whether claims could easily...