BLP v Comptroller of Income Tax
|Choo Han Teck J
|01 July 2014
| SGHC 127
| SGHC 127
|High Court (Singapore)
|03 July 2014
|Tribunal Appeal No 21 of 2013
|Tan Kay Kheng, Novella Chan Yandian and Jeremiah Soh Zi Qing (WongPartnership LLP)
|Julia Mohamed and Michelle Chee (Inland Revenue Authority of Singapore)
|Revenue Law,Income taxation
|20 May 2014,19 May 2014
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 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  and  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)(
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
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  and ). 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
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Revenue and Tax Law
...were therefore held not to be deductible. Taxation of management corporations 24.47 In the case of BLP v Comptroller of Income Tax SGHC 127 (BLP), the High Court had the opportunity to consider the application of s 11 of the ITA to a management corporation for the first time. Previous......