BLP v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Choo Han Teck J
• Judgment Date: 01 July 2014
• Neutral Citation: [2014] SGHC 127
• Court: High Court (Singapore)
• Docket Number: Tribunal Appeal No 21 of 2013
• Year: 2014
• Published date: 03 July 2014
• Hearing Date: 20 May 2014,19 May 2014
• Plaintiff Counsel: Tan Kay Kheng, Novella Chan Yandian and Jeremiah Soh Zi Qing (WongPartnership LLP)
• Defendant Counsel: Julia Mohamed and Michelle Chee (Inland Revenue Authority of Singapore)
• Subject Matter: Revenue Law,Income taxation
• Citation: [2014] SGHC 127

Choo Han Teck J:

Were a management corporation to raise money from its members, the subsidiary proprietors, for the purpose of retrofitting and upgrading the common property, should that money be considered “revenue” or “capital”? That was the question before this court. From this, a related legal question followed: should the purpose to which the money was put even be relevant in deeming it revenue or capital?

Sometime in 1997, the appellant sought to retrofit and upgrade its premises (“the Complex”). To finance the project, the appellant obtained a loan of $11,600,000. As the sums in the existing management and sinking funds were inadequate to finance the loan, the appellant resolved, via a special resolution, to collect a “special levy” from each of the subsidiary proprietors. The special levy was collected for the sole purpose of financing that loan. This levy was payable monthly over a period of 13 years, between 1 August 1997 and 31 July 2010. Over the period of the 13 years, an amount of about $16.4m was collected.

When the appellant filed its tax computation pursuant to s 11(1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“ITA”) for the year of assessment 2006, it did not include the special levy contributions. Section 11(1) stipulates how the income of institutions such as management corporations should be ascertained. It reads:

Where a body of persons, whether corporate or unincorporated, carries on a club or similar institution and receives from its members not less than half of its gross receipts on revenue account (including entrance fees and subscriptions), it shall not be deemed to carry on a business; but where less than half of such gross receipts are received from members, the whole of the income from transactions both with members and others (including entrance fees and subscriptions) shall be deemed to be receipts from a business, and the body of persons shall be chargeable in respect of the profits therefrom.

The operative equation in s 11 is: revenue receipts from members divided by total revenue receipts. If the result is half or more (or the equivalent percentage 50% or more), the management corporation will not be considered a business, and will not be tax liable within meaning of s 11(1).

The appellant argued that the special levy was capital, not revenue. This means the relevant portion of the special levy for the year of assessment 2006 ($1,483,197) would not be included in the equation. The appellant argued that the figures in the equation should be $2,548,138 (gross receipts from members) and $5,253,491 (total gross receipts), yielding a proportion of 48.5%. The result is that the whole of its income would be deemed to be receipts from a business, and subjected to income tax. This depicts the appellant as – bizarrely – fighting to pay more tax. That, however, is not the case. The appellant wanted to be deemed a business because, it submitted, it would then be able to claim tax deductions for expenses such as wear and tear pursuant to s 19A of the ITA.

The respondent, on the other hand, argued that the special levy was revenue and should be included in the equation. For completeness, the respondent also pointed out that the sinking fund contributions ($710) should have been included as well. However, the sinking fund contributions were relatively insignificant, and would not have materially changed the resulting percentage. The respondent’s figures were $4,032,045 (gross receipts from members – including sinking fund and special levy) and $6,737,398 (total gross receipts), yielding a proportion of 59.8%. The result is that the appellant would not be deemed to carry on a business, and its income will not be subjected to income tax.

This matter was first raised in a letter by the respondent to the appellant dated 3 July 2007. The figures in [4] and [5] were taken from this letter. The appellant replied, through its solicitors, on 8 October 2007, seeking that the respondent amends the assessment to exclude the special levy. The parties exchanged letters, arguing this point. In the meantime, the respondent had raised an additional assessment in its letter dated 16 June 2011. Nevertheless, the sole point of contention was the inclusion of the special levy. The respondent wrote to the appellant on 21 October 2011 with a notice of refusal to amend (pursuant to s 76(6)(b) of the ITA). The appellant appealed to the Income Tax Board of Review (“the Board”). The Board, in its decision dated 14 October 2013 (BLP v The Comptroller of Income Tax [2013] SGITBR 2), found in favour of the respondent. The appellant appealed to this court, pursuant to s 81(2) of the ITA, seeking that: The whole of the decision of the Board be reversed; and The appellant’s appeal against the Board be allowed, with costs here and below.

Before deciding the question of whether the money paid by the subsidiary proprietors to the appellant was revenue or capital, I will first consider the context, namely, s 11(1). Section 11(1) is found in Part III of the ITA, entitled “Imposition of Income Tax”. Section 11 is entitled “Ascertainment of income of clubs, trade associations, etc.” It is clear that s 11(1) is meant to ascertain if, and when, incomes of bodies of persons such as management corporations should be liable to income tax.

Management corporations are made up of subsidiary proprietors (also called “members”). Management corporations usually collect money from their members for the purpose of maintaining and repairing common areas of their property. This money is generally either put into a “sinking fund” or a “management fund”. On the face of it, it would seem absurd to argue that if there is money leftover in either fund after all expenditures are accounted for, that amount should be considered the management corporation’s profit and hence liable to income tax. This is because that argument contravenes the basic principle of mutuality, which states that a man cannot make a profit by paying himself or trading with himself. However, complexities arise because management corporations may receive money from sources other than their members. Section 11(1) hence assists in the application of the mutuality principle in such instances. In essence, the principle prevails if a specific condition is satisfied. The condition is that 50% or more of its gross revenue receipts must come from its members. If the condition is satisfied, any profits (surplus of contributions over expenditure) will not be taxable. If not satisfied, the whole of the income from transactions both with members and non-members will be deemed to be receipts from a business, and liable to tax. In this case, there was no dispute that the special levy came from the appellant’s members. The point of contention was whether the special levy was revenue or capital.

The Court of Appeal in Comptroller of Income Tax v IA [2006] 4 SLR(R) 161 (“IA”) dealt with the revenue-capital divide. IA concerned ss 14(1) and 15(1)(c) of the Income Tax Act (Cap 134, 2004 Rev Ed). The issue was whether borrowing expenses incurred by the respondent, a property developer, were revenue expenses. The Court of Appeal identified two tests to help distinguish between revenue and capital. The first was the “purpose test” – if the purpose of the expense or transaction was to acquire a new building for rental purposes, for example, it would be capital. The second was the “temporary and fluctuating test” – if the payment was temporary and fluctuating in nature, it would be revenue. Having considered these two tests, the court went on to state as follows (at [79]): First, ascertain the purpose of the transaction. To do so, go through steps (b) to (d). To determine the purpose of the transaction, first, ascertain if there is a sufficient linkage or relationship between the loan and the main transaction or project for which the loan was taken. If there is no linkage, the loan would merely add to the capital structure of the taxpayer and is therefore capital in nature. It may be proved that only parts of the loan do not have a linkage to the main transaction. One main indicator of this absence of a linkage is that those particular parts of the loan are not temporary and fluctuating in nature but are, instead, of a permanent (and therefore capital) nature. On the other hand, if there is a sufficient linkage, proceed to ascertain if the main transaction is of a capital or a revenue nature. If it is of a capital nature, then, given the linkage to the loan, so too is the loan. Likewise, if the main transaction is of a revenue nature.

The Board applied this approach. The transaction was the special levy. The loan was the $11,600,000 that the appellant borrowed. In this case, however, there was also the underlying project of retrofitting and upgrading the Complex, the very purpose of the loan. The Board noted that the appellant itself argued that these three were inextricably linked, and seemed to take a similar view (at [21] and [36]). As such, the Board was of the view that the purpose of the project would be similar to the purpose of the transaction. In ascertaining the purpose of the project, the Board had (further) regard to the “Composite and Integrated Approach” proposed by the High Court in ABD Pte Ltd v Comptroller of Income Tax [2010] 3 SLR 609 (“ABD”) to differentiate...