Revenue and Tax Law
| Citation | (2014) 15 SAL Ann Rev 482 |
| Published date | 01 December 2014 |
| Date | 01 December 2014 |
| 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. |
24.1 The Supreme Court delivered eight decisions in 2014 relating to tax law: four decisions dealing with income tax, two dealing with property tax, one dealing with goods and services tax/custom duty, and the last case dealing with stamp duty.
24.2 The income tax cases dealt with a broad range of important issues: the taxation of insurance companies and management corporations, the general anti-avoidance provision (s 33) in the Income Tax Act (Cap 134, 2008 Rev Ed) (ITA) and the impact of the income/capital dichotomy on the deductibility of certain common expenses arising from the issuance of bonds under s 14 of the ITA. Save for the case involving a management corporation, the other three cases were decisions of the Court of Appeal.
24.3 Of the two property tax cases, both Court of Appeal decisions, one dealt with s 8 of the Property Tax Act (Cap 254, 2005 Rev Ed) (PTA) concerning the refund of property tax where various units in two commercial buildings were vacant for certain periods of time. The other discussed briefly property tax exemption in the context of charitable trusts.
24.4 There are therefore, in our view, eight cases for the year 2014which had relevance to revenue law:
| Tax Type | High Court | Court of Appeal |
| Income tax | 1 | 3 |
| Property tax | 0 | 2 |
| Goods and services tax | 1 | 0 |
| Stamp duty | 1 | 0 |
24.5 In Comptroller of Income Tax v BBO[2014] 2 SLR 609 (BBO),the Court of Appeal upheld the decisions of the High Court and Income Tax Board of Review (Board of Review) and dismissed the appeal of the Comptroller of Income Tax (the Comptroller) in an important decision affecting the insurance industry. The decision of the High Court has been reviewed in last year's SAL Ann Rev: see (2013) 14 SAL Ann Rev 490 at 492495, paras 23.1423.28.
24.6 For ease of reading, the facts as previously summarised are setout again as follows: 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 sharestotalled more than $89m, which the Comptroller sought to assess to tax. In some previous years of assessment in the period 19731995, there were some sales of shares for which the taxpayer reported the gains as taxable income. For a summary of the facts by the Court of Appeal, see [4][7].
24.7 The significance of this case lies to some degree in the fact that it is the first local case dealing with the income tax treatment of investment gains accruing to insurance companies, and it raises interesting questions as to the singular nature of insurance companies as enterprises to which investment activities are central (if not crucial),the impact of this on their consequent tax treatment and the relevance of the overarching regulatory regime to the entire enquiry, as noted at the outset by the Court of Appeal: at [2][3].
24.8 The sole issue was whether the resultant gains from selling the shares in question were revenue or capital in nature, and hence whether they were liable to be taxed as income (at [2]) under s 10(1)(a) of the ITA as income in respect of gains or profits from any trade [or] business. Before the High Court, the Comptroller had also argued the additional ground of what it contended was a mini-regime under ss 26(3) and 26(4) of the ITA: see (2013) 14 SAL Ann Rev 490 at 493 and 495, paras 23.16 and 23.27. This additional ground was not pursued before the Court of Appeal: at [10].
24.9 The Comptroller's core argument was based largely on s 17 of the Insurance Act which requires an insurance company to maintain an insurance fund or funds relevant to its particular liabilities; absent any transfer of surplus to the statutory requirements, any realisation of assets purchased through the utilisation of an insurance fund would give rise to a profit or loss which is part of the taxable insurance business:at [13]. Hence, the Comptroller argued that the gains from the CoreShares were taxable.
24.10 The Court of Appeal noted that (at [15]):
while the approaches taken in other jurisdictions are of considerable assistance, the question must ultimately be resolved on the basis of first principles and the established rules of revenue law as applied to the specific facts of the instant appeal.
24.11 The approach on determining the distinction between taxable income and non-taxable capital gains can be found in the seminal case of Californian Copper Syndicate (Limited and Reduced) v Harris(1904)5 TC 159 at 166, where the Lord Justice Clerk articulated the timehonoured test:
What is the line which separates the two classes of cases may be difficult to define, and each case must be considered according to the facts; the question to be determined being Is the sum of gain that has been made a mere enhancement of value by realising a security, or is ita gain made in an operation of business in carrying out a scheme for profit-making?
24.12 The Court of Appeal noted that it is not enough that the gainarose in the operation of business; it must also have arisen pursuant to the carrying out of a scheme for profit-making: BBO at [19].
24.13 Hence, while it is an integral part of insurance business to channel premium receipts and capital into various investments to generate income to meet its liabilities from claims by policyholders, as discussed in various decided cases, there is no absolute or immutable principle of law and the question of whether a receipt is income is ultimately a question of fact to be determined in accordance with the ordinary concepts and usages of mankind: BBO at [20][25].
24.14 The Court of Appeal held that the two New Zealand cases extensively relied on by the High Court were directly relevant to the appeal, viz Commissioner of Inland Revenue v National Insurance Company of New Zealand Ltd(1999) 19 NZTC 15, 135 and State Insurance Office v Commissioner of Inland Revenue[1990] 2 NZLR 444, where the courts found that insurance companies may in some instances be deriving capital gains or losses from the disposal of investments: BBO at [33][34].
24.15 The Court of Appeal laid down the relevant enquiry to be undertaken as follows (BBO at [40]):
(a) The crucial question is whether the gain in question is a mere enhancement of value by realising a security or whether it was made in an operation of business in carrying out a scheme for profitmaking.
(b) This is ultimately a question of fact to be determined according to ordinary concepts having regard particularly to the circumstances under which, and the purposes for which, the investments were acquired and held by the taxpayer.
(c) However, as a matter of practicality, the nature of insurance(or similar) businesses would ordinarily give rise to an inference that the gains concerned arose in the course of trade or in the operation of business in carrying out a scheme for profit-making (unless, of course, there is cogent evidence that the investments were acquired and held as capital assets).
[emphasis in original]
24.16 In applying this approach, the Court of Appeal first held that the Comptroller's argument based on s 17 of the Insurance Act was clearly flawed. The court reasoned as follows (BBO at [44]):
The regulatory requirement for the establishment and maintenance of insurance funds cannot without more restrict an insurance company from holding capital assets in its insurance funds. Assets which are acquired with the receipts of income would not invariably be of arevenue nature, and the relevant enquiry (set out above at [40]) must be applied at each stage.
24.17 In so holding, the Court of Appeal agreed with the respondent taxpayer (BBO at [45]) that:
the purpose of the Insurance Act is for the regulation and not the taxation of the insurance industry. The imposition of tax is solely within the purview of Parliament through the enactment of clear tax legislation which is to be interpreted by the court or relevant tribunalusing principles developed incrementally by case law.
It bears noting, as observed by the court, that regulatory frameworks are often shaped by intricate policy considerations which may have little or nothing to do with tax: BBO at [45]. Such regulatory frameworks also included solvency requirements under the Insurance Act: BBO at [48].
24.18 Undertaking the relevant enquiry (as detailed earlier), and taking into account the totality of the evidence before the Board of Review and the High Court, which was largely undisputed by the Comptroller, the Court of Appeal held the view that the Core Shares were capital assets and the gains attributable to them were not liable to tax: BBO at [50]. In reaching its conclusion, the Court of Appeal also made their observations regarding the factors that were relevant (that is, the badges of trade), viz the motive of the taxpayer, the duration of ownership, the multiplicity of similar transactions, finances and others: BBO at [52][61]. The Comptroller's appeal was therefore dismissed with costs.
24.19 Comptroller of Income Tax v AQQ[2014] 2 SLR 847 (AQQ) is the first case reaching the Court of Appeal on the interpretation and application of the general...
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