Comptroller of Income Tax v BBO

• Jurisdiction: Singapore
• Judgment Date: 04 February 2014
• Date: 04 February 2014
• Docket Number: Civil Appeal No 58 of 2013
• Court: Court of Appeal (Singapore)

Comptroller of Income Tax

Plaintiff

and

BBO

Defendant

[2014] SGCA 10

Sundaresh Menon CJ

,

Andrew Phang Boon Leong JA

and

Andrew Ang J

Civil Appeal No 58 of 2013

Court of Appeal

Revenue Law—Income taxation—Taxation of gains realised in disposal of shares held by insurance company in related companies—Whether gains of a capital or revenue nature

This was an appeal under s 81 (5) of the Income Tax Act (Cap 134, 2008 Rev Ed) (‘the ITA’) against the decision of the High Court judge (‘the Judge’) dismissing the appeal of the appellant comptroller (‘the Appellant’) against the decision of the Income Tax Board of Review (‘the Board’) in Income Tax Appeal Nos 3 and 4 of 2010. The Board had allowed the appeal of the respondent insurance company (‘the Respondent’) against revised assessments raised on it by the Appellant seeking to tax the gains made by the Respondent on the disposal of certain shares (‘the Shares’) that had been held by the Respondent in its related companies [C], [D] and [E].

The appeal revolved around the single issue of whether the gains arising from the Respondent's disposal of the Shares were revenue or capital in nature (and hence whether they were liable to be taxed as income). The Appellant's primary argument on appeal was that the Shares were attributable to the Respondent's insurance business as the Shares were acquired, by applying the proceeds of premiums received, in the course of the insurance business and were at all times in its insurance funds. As such, the Appellant argued that the gains realised in the disposal of the Shares were taxable as income. The Respondent argued that insurance companies are not precluded from holding shares as capital assets, the disposal of which would give rise to capital gains. In particular, the Respondent argued that the Shares were held by it as part of a corporate preservation strategy in order to minimise the possibility of a hostile takeover, rather than for the purposes of trade.

Held, dismissing the appeal:

(1) In determining the scope of income tax, it was necessary to draw a distinction between taxable income and non-taxable capital gains. The relevant question to be asked in the present case was whether the gain in question was a mere enhancement of value by realising a security or whether it was made in an operation of business in carrying out a scheme for profit-making. The distinction was between the profit that arose when property had been committed to a business as part of its stock in trade and was then realised in the course of trading operations and the gain that arose from a realisation of property not so committed. The former was taxable income, the latter not: at [18] and [19] .

(2) An integral part of the insurance business was to channel its premium receipts and capital into productive activities such as investments which would generate income to meet its liabilities arising from claims by policyholders. As the investment of an insurer's funds was generally part of the business of the insurer, any investment income derived from within or without Singapore constituted its taxable business income. Likewise, the gains or profits derived from the disposal of investments by the insurer in the course of its business activities were generally subject to income tax: at [20] .

(3) However, this general principle is not an absolute or immutable principle of law.On the contrary, the question whether certain investment gains were properly attributable to the revenue or capital account was ultimately a question of fact. The proposition that gains or profits derived from the disposal of investments by insurers were generally taxable as income was more in the way of a general rule or presumption of fact drawn from circumstantial evidence. The relevant tribunal was not discharged from its role as fact-finder solely by virtue of the fact that the taxpayer was engaged in the business of insurance or something similar. However, the particular features of the insurance business would generally give rise to the factual inference that the gains concerned arose in an ‘operation of business in carrying out a scheme for profit-making’ unless there was cogent evidence to the contrary: at [25] and [26] .

(4) The regulatory requirement for the establishment and maintenance of insurance funds could not without more restrict an insurance company from holding capital assets in its insurance funds. Insurance companies (whether holding assets in the insurance fund or shareholders' fund) should only be taxed according to the ordinary principles of revenue law, albeit the holding of an asset in a particular fund might be a relevant factor in ascertaining whether the investment was intended to be held as a capital asset. Capital assets do not become revenue assets just because they could potentially be applied to meet the company's liabilities, in a situation of liquidation or otherwise: at [44] , [46] and [47] .

(5) The Appellant's argument that the Shares formed part of the Respondent's insurance business because they were used to meet the solvency requirements in the Insurance Act was unpersuasive. These solvency requirements were merely regulatory measures introduced to ensure that the interests of policyholders were adequately protected. The taxation of financially regulated companies such as insurance companies could not be determined solely by regulatory measures which were prescribed for a whole gamut of policy reasons which might have little or nothing at all to do with taxation: at [48] .

(6) Taking into account the totality of the evidence before the Board and the Judge, which was largely undisputed by the Appellant, the Shares were capital assets and the gains attributable to them were therefore not liable to tax (at [50] , [52] and [57] to [59] ):

1. (a) Motive of the taxpayer: The Respondent did not acquire the Shares with an intention to trade in them, but acquired and held the Shares as part of a group corporate preservation strategy.

2. (b) Duration of ownership: The Shares were held for a long period of time (of up to 30 years), which was in line with the Respondent's stated intention of holding the Shares for an indefinite period.

3. (c) Multiplicity of similar transactions: Consistent with the stated corporate preservation strategy, there were few disposals of the Shares by the Respondent throughout its relatively long period of holding.

4. (d) Finances:Evidence was adduced by the Respondent to show that the Respondent did not need to and did not in fact liquidate the Shares to meet its liabilities in the insurance business.

(7) All factors indicated that the Shares were acquired and held to safeguard the long-term strategic interests of the Respondent's corporate group and, indeed the Shares were eventually realised pursuant to a takeover of the Respondent. At that point, there was no longer any reason for the Respondent to retain the Shares. On the totality of the evidence, the Board was well entitled to find that the Shares were in fact capital assets, the gains attributable to which were not taxable under the ITA. It followed that the Judge did not err in affirming the determination of the Board: at [63] .

Californian Copper Syndicate (Limited and Reduced) v Harris (1904) 5 TC 159 (refd)

CIR v National Insurance Co of New Zealand Ltd (1999) 19 NZTC 15,135 (refd)

CIR v Sincere Insurance and Investment Co Ltd [1973] HKCU 47 (refd)

Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation (1946) 73 CLR 604 (refd)

Employers' Mutual Indemnity Association Ltd v Federal Commissioner of Taxation (1991) 91 ATC 4850 (refd)

GRE Insurance Ltd v Federal Commissioner of Taxation (1992) 92 ATC 4089 (refd)

London Australia Investment Co Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1977) 138 CLR 106 (refd)

Northern Assurance Co v Russell (1889) 2 TC 551 (refd)

Punjab Co-operative Bank Ltd, Amritsar v Commissioner of Income-Tax, Lahore [1940] AC 1055 (refd)

Scott v Commissioner of Taxation (New South Wales) (1935) 35 SR (NSW) 215 (refd)

State Insurance Office v CIR [1990] 2 NZLR 444 (refd)

Liverpool and London and Globe Insurance Co, The v Bennett [1913] AC 610; 6 TC 327 (refd)

Waylee Investment Ltd v The CIR [1991] 1 HKLR 237 (refd)

Income Tax Act (Cap 134, 2008 Rev Ed) s 10 (1) (a) (consd) ;ss 10 (1) , 10 (1) (b) , 10 (1) (g) , 26 (3) , 26 (4) , 81 (2) , 81 (5)

Insurance Act (Cap 142, 2002 Rev Ed) ss 17, 17 (1) , 17 (4)

Income Tax Act 1976 (NZ) ss 65 (2) (a) , 65 (2) (e)

Income Tax Act 1842 (c 35) (UK) s 100, Schedule D

Foo Hui Min, David Lim and Vikna Rajah (Inland Revenue Authority of Singapore) for the appellant

Tan Kay Kheng, Tan Shao Tong, Novella Chan and Jeremiah Soh (Wong Partnership LLP) for the respondent.

Judgment reserved.

Andrew Ang J

(delivering the judgment of the court):

1 This is an appeal under s 81 (5) of the Income Tax Act (Cap 134, 2008 Rev Ed) (‘the ITA’) against the decision of the High Court judge (‘the Judge’) dismissing the appeal of the appellant Comptroller (‘the Appellant’) against the decision of the Income Tax Board of Review (‘the Board’) in Income Tax Appeal Nos 3 and 4 of 2010. The Board had allowed the appeal of the respondent insurance company (‘the Respondent’) against revised assessments raised on it by the Appellant seeking to tax the gains made by the Respondent on the disposal of certain shares (‘the Shares’) that had been held by the Respondent in its related companies [C], [D] and [E].

2 The significance of this case lies to some degree in the fact that it is the first local case dealing with the income tax treatment of investment gains accruing to insurance companies. At its core it revolves around the single issue of whether the gains arising from the Respondent's disposal of the Shares were revenue or capital in nature (and hence whether they were liable to be taxed as...