ABB v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 08 February 2010
• Neutral Citation: [2010] SGHC 46
• Citation: [2010] SGHC 46
• Docket Number: Income Tax Appeal No 1 of 2009
• Date: 08 February 2010
• Hearing Date: 27 October 2009
• Plaintiff Counsel: Tan Kay Kheng and Tan Shao Tong (WongPartnership LLP)
• Published date: 24 February 2010
• Defendant Counsel: Joanna Yap and Joyce Chee (Inland Revenue Authority of Singapore)
• Court: High Court (Singapore)
• Year: 2010

Chao Hick Tin JA: Introduction

This is an appeal from the decision of the Income Tax Board of Review (“the Board”) in Income Tax Board of Review Appeal No 32 of 2007, where the Board held that gains obtained from the exercise of share options by the estate of a deceased employee were subject to income tax. It raises two questions, namely: (a) whether such a benefit can be considered to arise from employment; and (b) whether the relevant provisions of the Income Tax Act (Cap 134, 2004 Rev Ed) (“the Act”), which provisions deem gains derived from share options to be taxable income, apply to gains derived from share options permitted to be retained, and subsequently duly exercised, by the estate of a deceased employee.

The facts

The appellant is the widow of an employee taxpayer (“the Taxpayer”) and brings this appeal in her capacity as the executrix of his estate (“the Estate”). The respondent is the Comptroller of Income Tax. Prior to his death, the Taxpayer was a senior executive in a group of related companies (hereafter referred to collectively as “the Companies” and individually as a “Company”). As part of his remuneration, he was granted share options in each Company pursuant to that Company’s share option plan. The terms of the share option plans of the Companies (collectively, “the Share Option Plans”) are substantially similar, and the most relevant provisions are the following:¹ 7.1 Subject as provided in Rules 7 and 8, an Option shall be exercisable, in whole or in part, during the Exercise Period applicable to that Option and in accordance with the Vesting Schedule and the conditions (if any) applicable to that Option.

…

7.3 In any of the following events, namely:–

…

(d) the death of a Participant [ie, a holder of share options granted pursuant to the Share Option Plans];

…

an Option then held by that Participant shall, to the extent unexercised, lapse without any claim whatsoever against the Company, unless otherwise determined by the Committee in its absolute discretion. …

[emphasis added]

The Executive Resource Compensation Committee of each Company is the “Committee” referred to in the above provisions, and it is responsible for administering that particular Company’s share option plan I will refer to the Executive Resource Compensation Committees of the Companies collectively as “the Committees”.

It may be noted that the other events covered by Rule 7.3 of the Share Option Plans include the bankruptcy of a holder of share options granted pursuant to these plans (a “Participant”), a Participant leaving the Companies due to ill-health, injury or retirement upon reaching the legal retirement age, etc. This rule further provides that the Committees, in exercising their discretion to allow a Participant to retain share options which would otherwise have lapsed, can vary the number of shares comprised in the share option and the period during which they have to be exercised.

After the death of the Taxpayer in 2005, the Committees exercised their discretion to allow the Estate to retain and exercise the share options that had been granted to the Taxpayer prior to his death (“the Share Options”), which would prima facie have lapsed upon his death. In addition, the exercise periods for certain of the Share Options which were not exercisable yet were brought forward such that those share options could be exercised immediately by the Estate. The Committees’ decision only restored the Share Options, which (as just mentioned) would otherwise have lapsed due to the death of the Taxpayer, and did not confer any new share options on the Estate.

The Share Options were subsequently exercised by the Estate in 2006, and the gains derived from the exercise of the options were computed by the respondent as amounting to over $8m for the Year of Assessment 2007. The tax liability on the Estate from such gains was about $1.7m.

The appellant disputed that the gains derived from the exercise of the Share Options were subject to income tax and appealed to the Board. The Board found that the retention of the Share Options by the Estate was a benefit accruing to the Estate by reason of the Taxpayer’s employment, and concluded that the gains derived from the exercise of these share options were subject to income tax. Dissatisfied, the appellant now appeals to this court against the Board’s decision.

Relevant provisions of the Income Tax Act

The respondent subjected the gains derived by the Estate from the exercise of the Share Options to income tax under s 10(1)(b) of the Act, which reads as follows:

Charge of income tax

10.— (1) Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of — … (b) gains or profits from any employment; …

In addition to s 10(1)(b), two other provisions are also pertinent. The first is s 10(6) of the Act, which reads as follows:

Any gains or profits, directly or indirectly, derived by any person from a right or benefit granted on or after 1st January 2003, whether granted in his name or in the name of his nominee or agent, to acquire shares in any 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 chargeable to tax under subsection (1)(b) [ie, s 10(1)(b)] … [emphasis added]

The second provision is s 10(5) of the Income Tax Act (Cap 134, 2001 Rev Ed) as it stood prior to the amendments effected by the Income Tax (Amendment) Act 2002 (Act 37 of 2002) (“the former s 10(5)”). The former s 10(5) is the predecessor of s 10(6) of the Act and reads as follows:

Any gains or profits directly or indirectly derived by any person by the exercise, assignment or release of a right or benefit whether granted in his name or in the name of his nominee or agent 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]

The Court of Appeal held in Comptroller of Income Tax v HY [2006] 2 SLR(R) 405 that s 10(5) of the Income Tax Act (Cap 134, 1996 Rev Ed), which was in pari materia with both the former s 10(5) and s 10(6) of the Act, was merely a deeming or definitional provision which sought to include, as taxable income, gains derived from the exercise of share options that had been granted to a taxpayer by reason of his office or employment. By extension, the former s 10(5) and s 10(6) of the Act would operate similarly. Both of these provisions are relevant in this appeal because s 10(6) of the Act applies to share options granted on or after 1 January 2003, while the former s 10(5) applies to share options granted before 1 January 2003 (see s 10(6A) of the Act). Since the Share Options were granted to the Taxpayer over a period from 1999 to 2004, both s 10(6) of the Act and the former s 10(5) are applicable.

Both the appellant and the respondent have accepted that, for the purposes of this appeal, there is no material difference between s 10(6) of the Act and the former s 10(5). What is more important is that both of these provisions only operate in respect of share options that are obtained by reason of any office or employment held by the taxpayer. Counsel for the appellant, Mr Tan Kay Kheng (“Mr Tan”), has also pointed out that neither s 10(6) of the Act nor the former s 10(5) makes any express reference to gains derived from share options that are allowed to be retained by the estate of a deceased employee.

Issues arising in this appeal

In order to subject the gains obtained by the Estate from the exercise of the Share Options to income tax under s 10(1)(b) of the Act, the respondent must show that: the retention of the Share Options by the Estate was a benefit extended by the Companies by reason of the Taxpayer’s employment; and s 10(6) of the Act and the former s 10(5) apply to share options retained by a deceased taxpayer’s estate. These are the two determinant issues in this appeal.

The first issue: Whether the retention of the Share Options by the Estate constituted a benefit arising from the Taxpayer’s employment The law

Before I examine the relevant authorities, I need to refer to the Court of Appeal’s decision in JD Ltd v Comptroller of Income Tax [2006] 1 SLR(R) 484, where the court cautioned against the blind use of foreign case law in elucidating tax principles, especially where the wording of the foreign tax legislation was not in pari materia with the local equivalent. I acknowledge that foreign tax statutes may be (and are often) worded differently from our local tax legislation. However, for the purposes of the present appeal, I find Commonwealth cases to be relevant, and even persuasive, sources of authority in determining the issue of whether a particular gain or benefit is one that was obtained by reason of the taxpayer’s employment. This is because, as I will go on to show, the question of whether a gain or benefit arose from employment is a very broad inquiry that depends very much on the circumstances of each individual case. In determining this question, the precise wording of the relevant tax statute would be less crucial. What matters more are the factors which the courts in other Commonwealth jurisdictions have considered to be germane in characterising whether a gain falls within or outside employment.

General principles

I will begin my analysis of the first issue (viz, whether the retention of the Share Options by the Estate was a benefit obtained by reason of the Taxpayer’s employment) by referring to the applicable general principles enunciated by Upjohn J in Hochstrasser (Inspector of Taxes) v Mayes [1959] Ch 22 (“...