Chief Assessor v HSBC Institutional Trust Services (Singapore) Ltd

• Jurisdiction: Singapore
• Judge: Belinda Ang Saw Ean J
• Judgment Date: 04 June 2012
• Neutral Citation: [2012] SGHC 120
• Published date: 09 April 2013
• Date: 04 June 2012
• Year: 2012
• Hearing Date: 10 February 2012
• Plaintiff Counsel: Joanna Yap and Alvin Chia (Inland Revenue Authority of Singapore)
• Citation: [2012] SGHC 120
• Defendant Counsel: Leung Yew Kwong, Novelle Chan and Tan Shao Tong (Wong Partnership LLP)
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 422 of 2011

Belinda Ang Saw Ean J:

This Originating Summons No 422 of 2011 (“OS 422/2011”) is the Chief Assessor’s appeal against the decision of the Valuation Review Board (“the Board”) made on 24 May 2011 (“the Decision”).

The relevant facts

There is no dispute as to the relevant facts underlying the valuations in dispute. The Respondent, HSBC Institutional Trust Services (“the Landlord”), is the trustee of CapitalMall Trust which owns the shopping centre known as Bugis Junction.

Bugis Junction has 180 units which are normally leased to tenants carrying on various types of businesses at the shopping centre.

In the computation of the annual value of the various tenanted units (collectively “the Premises”) for the valuation years of 2004 and 2005, the Chief Assessor did not exclude a portion in the gross rent for depreciation arising from wear and tear of escalators, lifts, air-conditioning and fire safety systems installed in Bugis Junction (hereinafter referred to collectively as “the asset items” or individually as “the asset item”).

The Board’s Decision

Dissatisfied with the assessment made by the Chief Assessor, the Landlord appealed to the Board. The Board accepted the Landlord’s contention and ruled that the claim for depreciation was a constituent part of the total cost of the services provided by the Landlord, and that it should be excluded from gross rent in the determination of annual value for the relevant tax years (see [8] & [10] below).

Ms Tan Gee Hong (“Ms Tan”), the property manager, testified before the Board. She explained in her affidavit that the tenants paid the Landlord a monthly gross rent that included a sum of $0.20 per square foot calculated on the basis of a 7.5% annual depreciation for air-conditioning plant, lifts and escalators, and 20% for the fire safety system. It was Ms Tan’s evidence that the Landlord had contracted to let out the Premises located in a building with central air conditioning, escalators, lifts, and a fire safety system, and that the asset items were required to provide the services agreed to by the Landlord, and for that reason the claim for depreciation was an expense that related to services rather than rent or letting. She confirmed that this monthly sum of $0.20 per square foot was an integral part of gross rent but its purpose was not itemised in the tenancy agreements; that it was for depreciation in relation to the asset items; that the monthly service charge of $1.50 per square foot was to cover operating expenses¹ and not depreciation of the asset items. It was argued on behalf of the Landlord that the Premises would yield higher rental as compared to a shopping mall without similar installations like central air-conditioning, lifts, escalators and fire safety systems.

Ms Tan’s evidence was not seriously challenged by the Chief Assessor who did not call any witness.

The Board referred to BCH Retail Investment Pte Ltd v Chief Assessor [2007] 2 SLR(R) 580 (“BCH( No 2)”) for the principle that any component of gross rent that was for services and not related to rent must be excluded from the gross rent for purposes of calculating annual value. With that principle in mind, the Board accepted the Landlord’s reasoning and stated (at [14]):

In the first place the items in question were required to provide the services to the tenants. The [Landlord] would have to incur actual and notional expenditure, which refers to the depreciation of the equipment. Undoubtedly, these items cannot last forever and not only require maintenance but need replacement due to wear and tear. ... [T]he underlying premise remain (sic) that the [Landlord] would require these items to provide services to the tenants which they are contractually bound to.

In coming to its decision, the Board followed Chartered Bank v The City Council of Singapore [1959] SPTC 1 (“Chartered Bank”), a decision of Wee Chong Jin J (as he then was). In that case, Wee J excluded the cost of services and the landlord’s profit for providing those services from the gross rent to determine annual value. In addition, the learned judge allowed for the exclusion of depreciation of equipment (lifts, air conditioners and fire extinguishers) from gross rent as well. The Board observed: ²

A plain reading of the Chartered Bank case would be an implicit awareness of the learned judge that depreciation was a concept which he recognised and which ought to be excluded from the gross rent, if it had been so included, for the purposes of calculating annual value.

Applying Chartered Bank to the factual matrix of this particular case, the Board agreed (at [18]):

... that the depreciation of the [asset] items constituted part of the total cost of services and since the gross rents were formulated taking into consideration the depreciation, this ought to be excluded in the computation of the annual value.

Having concluded in favour of the Landlord that the amount claimed for depreciation of the asset items (ie, the notional expense) was part of the total cost of services and that it related to services rather than rent, the Board considered it irrelevant and saw no merit and legal implication in the Chief Assessor’s contention that the asset items were permanent features and as an integral part of the building in Bugis Junction were assessable to property tax together with the building.

OS 422/2011

OS 422/2011 is brought pursuant to s 35 of the Property Tax Act (Cap 254, 2005 Rev Ed) (“the PTA”). It was agreed between the parties that the question of law for this appeal is whether, as a matter of principle, a component in the gross rent for depreciation of the asset items (ie, escalators and lifts, air conditioning and fire safety systems) should be excluded from gross rent in the computation of annual value. This question requires a determination of what the annual value of the Premises is according to the definition of “annual value” in s 2(1) of the PTA, which focuses on the element of rent or letting. Some additional questions will necessarily flow from this definition read with s 2(2), as well as the charging provision in s 6(1) of the PTA, and they will be identified and discussed later in this Judgment.

The relevant statutory provisions

It is appropriate at this juncture to set out the relevant statutory provisions. The charging provision of the PTA is s 6(1) which provides: Charge of property tax 6.-(1) As from 1st January 1961, a property tax shall, subject to the provisions of this Act, be payable at the rate or rates specified in this Act for each year upon the annual value of all houses, buildings, lands and tenements whatsoever included in the Valuation List and amended from time to time in accordance with the provisions of this Act.

[emphasis added]

Section 2(1) defines “annual value” as follows:

“annual value” —

(a) in relation to a house or building or land or tenement, not being a wharf pier, jetty or landing-stage, means the gross amount at which the same can reasonably be expected to be let from year to year, the landlord paying the expenses of repair, insurance, maintenance or upkeep and all taxes (other than goods and services tax);

...

[emphasis added]

Section 2(2) reads as follows:

In assessing the annual value of any premises in or upon which there is any machinery used for any of the following purposes:

(a) the making of any article or part thereof; (b) the altering, repairing, ornamenting or finishing of any article; or (c) the adapting for sale of any article,

the enhanced value given to the premises by the presence of such machinery shall not be taken into consideration, and for this purpose “machinery” includes the steam engines, boilers and other motive power belonging to that machinery.

The competing arguments Chief Assessor’s Case

The Chief Assessor submits that the Board erred in allowing the exclusion of a portion of the gross rent for depreciation in the computation of annual value. First, the Chief Assessor argues that the Board had focussed on the wrong question, viz, whether the Landlord required the asset items to provide services to the tenants. It was an error that distracted it from what the Chief Assessor considers to be the correct approach pronounced by the Court of Appeal in BCH (No 2), viz, whether the portion of the gross rent for depreciation is related to rent or letting.³ Second, the Board was wrong to have ruled as irrelevant its own findings that the asset items were permanent features and, hence, an integral part of the building. Third, Chartered Bank provides little guidance on whether, as a matter of principle, the depreciation of the asset items ought to be excluded from gross rent in arriving at the annual value of the Premises for the valuation years 2004 and 2005. There was no ratio decidendi in that case to give it binding authority to resolve the problem in the present case.

The Landlord’s Case

The Landlord submits that the Board was correct in holding that the claim for depreciation ought to be excluded from the gross rent in order to arrive at the annual value of the Premises. The Landlord’s argument is that as depreciation constituted part of the total cost of the services provided and the gross rent was formulated with the depreciation in mind, it ought to be excluded from the gross rent in order to arrive at the annual value of the property. Chartered Bank and BCH (No 2) were cited in support.⁴

Finally, the Landlord accepts that the asset items are in the nature of plant and machinery, but disagrees that they formed “integral parts of the building”.⁵ According to the Landlord, the Board rightly decided (at [17]):

On the point made by [the Chief Assessor] that all the items are permanent features of the building and hence an integral part of the building, we are of the view that this is irrelevant. Just because an escalator...