ABD Pte Ltd v Comptroller of Income Tax

Judgment Date08 April 2010
Date08 April 2010
Docket NumberIncome Tax Appeal No 2 of 2009
CourtHigh Court (Singapore)
ABD Pte Ltd
Comptroller of Income Tax

Andrew Phang Boon Leong JA

Income Tax Appeal No 2 of 2009

High Court

Revenue Law—Income taxation—Whether entrance fees received for membership to proprietary club taxable in years of assessment in which they were levied or whether such profit should be taxed over period of club membership—

Revenue Law—Income taxation—Whether costs of acquiring premises and constructing building of proprietary club thereon, as well as geomancy fees, deductible from gross entrance fees received—

Revenue Law—Income taxation—Whether damages payable to members of proprietary club following civil action for breach of obligation to deliver premier club deductible in year of assessment following year in which club was opened

The appellant was the taxpayer and the respondent was the Comptroller of Income Tax. The taxpayer was incorporated to build and operate a proprietary club (‘the Club’). It acquired a 30-year lease of land from the State, commencing on 18 October 1996, on which it built the Club building. Membership of the Club entailed a licence, for a period commencing from the date the member joined the Club until October 2026, to use and enjoy the facilities of the Club. Between 30 November 1996 and 30 November 2000, the taxpayer received entrance fees from members of the Club. The Club began its operations on 22 March 2000. The taxpayer admitted too many members to the Club and the facilities of the Club were overcrowded. This led a class of members to institute a civil action against the taxpayer. In 2005, the Court of Appeal ordered the taxpayer to pay damages of $3,000 to each of the members who had participated in the civil action, being diminution in the value of their memberships in the Club. Subsequently, the taxpayer entered into a Scheme of Compromise and Arrangement, sanctioned by the High Court, with the rest of the members of the Club to pay $3,000 (partly in kind) to each member. This was an appeal against the decision of the Income Tax Board of Review on 16 June 2009, which dismissed the taxpayer's appeal against the Comptroller of Income Tax's assessment of the taxpayer's tax liability for the Years of Assessment 1998-2003. The issues to be decided in the appeal were: (a) whether the profit from the entrance fees should be taxed in the year that the fees were levied on each member or whether such profit should be taxed equally over the period of club membership (ie, 30 years); (b) whether the costs of acquiring the land and constructing the Club building thereon, as well as the geomancy fees, were deductible from the gross entrance fees received; and (c) whether the sum of $53,283,000, which the taxpayer was obliged to pay to the Club's members following the civil action against it, was deductible in the Year of Assessment 2001.

Held, dismissing the appeal:

(1) Tax law centred on, inter alia,the raising of revenue for the financing of public infrastructure and redistribution and the legal regime was statutory in nature. The Income Tax Act (Cap 134, 2008 Rev Ed) (‘the Act’) embodied a coherent system that sought to balance the contrasting views and expectations of the tax regime. Where the situation concerned was not provided for by the Act, just as no tax could be levied, by the same token, no tax concession operated in favour of the taxpayer: at [3] and [4].

(2) In order for a particular decision to be legally justified, legal rules and principles (which contain normative force) must be both formulated as well as applied. A court could not - and must not - justify a particular decision based solely on the facts. Whilst the facts of any given case were of fundamental importance (particularly in the context of the law relating to income tax), they did not operate alone. A decision by the court was the product of an integrated process in which the relevant legal rules and principles were applied to the relevant factual matrix: at [7], [38], [64] and [75].

(3) It was a well-established principle of tax law that neither profit nor loss may be anticipated. Income accrued when a taxpayer became entitled to it. The stage at which a taxpayer would be deemed to have done all that was required of it to earn the income depended on the particular trade it was engaged in: at [16] and [28].

(4) It could not be said that the taxpayer earned the entrance fees over a period of 30 years. The present case involved the taxation of entrance fees received for the grant of membership to the Club. The obligation of the taxpayer upon receipt of entrance fees was merely to admit the payer of the entrance fees to membership. The taxpayer fulfilled this obligation, and was legally entitled to the whole of the entrance fees, once the application for membership was approved and liability of the member to pay the entrance fees accrued: at [21], [23] and [29].

(5) In order for the taxpayer to be able to deduct the costs of acquiring the lease and constructing the Club for tax purposes, such expenditure could not be of a capital nature: at [41].

(6) The courts had, over many years, mooted several tests (including the ‘once and for all’ test, the ‘enduring benefit of the trade’ test, the ‘fixed and circulating capital’ test and the ‘identifiable asset’ test) which were supposed to aid the court in ascertaining whether or not a specific item (or items) of expenditure were either capital or revenue in nature. However, there was no clear guidance as to which test ought to prevail and some tests appeared to overlap with each other. Moreover, the tests did not - except in the clearest fact situations - yield close to determinate results. The ‘once and for all’ test had been subsumed within the ‘enduring benefit of the trade’ test; there was an overlap between the ‘enduring benefit of the trade’ test and the ‘fixed and circulating capital’ test; and there was a possible overlap between the ‘enduring benefit of the trade’ test and the ‘identifiable asset’ test. It appeared that the‘enduring benefit of the trade’ test was, despite its weaknesses, probably still the main test: at [38], [43] to [61] and [66] to [69].

(7) A balanced approach towards the use of commonsense was required. A related series of two propositions, proceeding from the first (which was general) to the second (which comprised particular guidelines) was suggested in order to consolidate the various tests into a composite and integrated whole. The more particular or specific guidelines in the latter were intended to elaborate upon the general proposition (which comprised the former). The guidelines assisted the courts in focusing on the precise facts in the case at hand. They possessed normative force although they were more specific than the general proposition embodied in the first proposition: at [63] to [65].

(8) First, the court had to, as a matter of general principle, look closely at the purpose of the expenditure and ascertain whether or not such expenditure either created a new asset or opened new fields of trading not hitherto available to the taxpayer - in which case the expenditure concerned would be capital (and not revenue) in nature. An expenditure which strengthened an existing asset would also be capital in nature. Secondly, whether or not an expenditure had created (or strengthened an existing asset), or created a new field of trading not hitherto available to the taxpayer, would lead back to the various tests. The purpose of the expenditure had to be ascertained and the court should have regard, in particular, to the manner of the expenditure and the consequence or result of the expenditure. In applying the various guidelines, although the specific facts were of the first importance, the underlying principle was that for the expenditure to be of a capital nature, the expenditure had to have either created a new asset or opened new fields of trading not hitherto available to the taxpayer. The guidelines were useful factors to be considered in the analysis of whether the expenditure in each case complied with this underlying principle although the weight of each factor depended upon the nature of the expenditure. Moreover, previous decisions of the courts provided guidance as to the factors which might point towards an income or capital expenditure in each unique set of circumstances: at [71], [73] and [75].

(9) The cost of acquiring the land and constructing the Club building were capital in nature and, for tax purposes, no deduction was legally permissible in respect of such expenditure. The land and building of the Club represented assets as well as basic and permanent infrastructure which belonged to the taxpayer and did not comprise stock-in-trade which the taxpayer dealt with in the course of its business. The purchase of the land and construction of the building by the taxpayer was a one-time expenditure, the result of which was the acquisition of an asset which simultaneously constituted the permanent structure of the taxpayer's business of furnishing facilities to its members. That the asset was not perpetual since the lease of the land was for 30 years was not a critical factor since permanence was not to be equated with perpetuity. Moreover, the asset lasted throughout the duration of the trade and was not extinguished or diminished by each trading transaction. It was clear from the Rules and Regulations of the Club that every member of the Club was only furnished with a licence to use its facilities and that all the assets of the Club belonged to the taxpayer. The fact situation of the present case was completely different from that inBritish South Africa Company v Commissioner of Income Tax [1946] AC 62. Rather, the case in point was In re A B Ltd [1957] MLJ 143 - whilst the taxpayer in the present case may have acquired the Club premises in order to operate its business, the taxpayer had not realised these assets. The fact that the...

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