Comptroller of Income Tax v BBO

• Judgment Date: 08 April 2013
• Date: 08 April 2013
• Docket Number: Originating Summons No 681 of 2012
• Court: High Court (Singapore)

Comptroller of Income Tax

Plaintiff

and

BBO

Defendant

[2013] SGHC 74

Lai Siu Chiu J

Originating Summons No 681 of 2012

High Court

Revenue Law—Income taxation—Accounting—Taxpayer insurance company disposing shares pursuant to takeover—Taxpayer intending to hold shares indefinitely to preserve corporate structure of group—Taxpayer holding shares for long period of time with few disposals—Whether gains made by taxpayer from sale of shares were income in respect of gains or profits from taxpayer's trade or business and, hence, taxable—Section 10 (1) (a) Income Tax Act (Cap 134, 2008 Rev Ed)—Statutory Interpretation—Revenue statutes—Whether implied in ss 26 (3) and 26 (4) Income Tax Act (Cap 134, 2008 Rev Ed) that gains or profits from sale of investments by insurance companies other than life insurance companies should be subject to tax—Sections 26 (3) and 26 (4) Income Tax Act (Cap 134, 2008 Rev Ed)

This was an appeal brought by the Comptroller of Income Tax (‘the Comptroller’) under s 81 (2) of the Income Tax Act (Cap 134, 2008 Rev Ed) (‘the Act’) against the decision of the Income Tax Board of Review (‘the Board’) in Income Tax Appeals Nos 3 and 4 of 2010 (‘ITA 3 & 4 of 2010’). In ITA 3 & 4 of 2010, the Board held that the gains arising from the taxpayer's disposal of shares in [C] , [D] and [E] (collectively referred to as the ‘Core Shares’) were not assessable to tax under the Act.

The taxpayer was a company registered in Singapore and was part of the [C] group of companies (‘the [C] Group’). It carried on the business of a general insurer in Singapore and was registered under the Insurance Act (Cap 142, 2002 Rev Ed) (‘the Insurance Act’). The taxpayer used insurance funds to invest in the Core Shares. Previously, the taxpayer sold some of its [C] and [D] shares and reported those gains as taxable income.

In June 2001, [F] , a listed company, offered to acquire [C] for a consideration comprised of partly cash and partly shares in [F] (‘the Takeover’). The taxpayer accepted the Takeover offer and sold its entire holding of [C] shares in exchange for cash and shares in [F] . The taxpayer also sold its portfolio of [D] and [E] shares. The Comptroller took the view that the gains made by the taxpayer were taxable as ‘gains’ or ‘profits’ under s 10 of the Act and in that regard it issued revised assessments to the taxpayer for years of assessment 2002 and 2003.

The Board allowed the taxpayer's appeals against the Comptroller's revised assessments and the Comptroller appealed to the High Court against the Board's rulings.

Held, dismissing the appeal:

(1) The prerequisite for ‘gains or profits’ from various activities to be subject to income tax under s 10 of the Act was that the ‘gains or profits’ had to be gains or profits that were income in nature: at [15] .

(2) Income tax was a tax on income or revenue gains, not capital gains: at [17] .

(3) In general, the gains derived from the disposal of investments by an insurer in the course of its investment activities constituted the insurer's income: at [21] .

(4) Nonetheless, the gains arising from the disposal of investments by an insurer might in some instances be capital in nature, and, hence, not subject to income tax: at [24] .

(5) The issue was whether the gains made by the taxpayer from the sale of the Core Shares were income in respect of gains or profits from the taxpayer's trade or business. Although the ‘badges of trade’ were not directly relevant because it was not disputed that the taxpayer was in the business of general insurance, some of the factors were relevant to the analysis of whether the Core Shares were capital assets: at [32] .

(6) The taxpayer did not acquire the Core Shares with an intention to trade in them. The Core Shares were acquired with the intention of holding them indefinitely so as to preserve the corporate structure of the [C] Group and afford a defence mechanism against any potential hostile takeover of any company in the [C] Group. The taxpayer's intention in holding the Core Shares was therefore to promote the long-term strategic interests of itself and the [C] Group. This intention was manifested in six ways.

1. (a) First, there were cross-holdings of shares and cross-directorships between the companies within the [C] Group: at [34] .

2. (b) Second, shares of companies in the group were held by a company controlled by the founder of [C] and his family: at [35] .

3. (c) Third, regular reports on the status of cross-holdings of various companies in the [C] Group were generated to the senior management of [C] to ensure that effective control was maintained to minimise the possibility of any hostile takeover: at [36] .

4. (d) Fourth, any decision to sell any shares or rights in the companies within the [C] Group was closely scrutinised and had to be approved so as to ensure that the appropriate level of shareholding and effective control was maintained: at [37] .

5. (e) Fifth, the Core Shares were passively held by the taxpayer and were not managed by the taxpayer's fund manager. In contrast, those of the taxpayer's shares that were meant for trading were managed and actively monitored by the taxpayer's fund manager: at [39] .

6. (f) Sixth, the shares of [E] , a non-listed company, were not readily realisable: at [40] .

(7) Consistent with the [C] Group's corporate preservation strategy, the taxpayer acquired the Core Shares and held onto them for a very long time. The [C] and [D] shares were accumulated over a period of 30 years and 20 years respectively. The [E] shares were held for 27 years: at [41] .

(8) Consistent with the corporate preservation strategy of the [C] Group, there were few disposals of the Core Shares by the taxpayer throughout the long periods of holding. There were only nine disposals of [C] shares, while the [D] and [E] shares were not disposed of until the Takeover. Even when the taxpayer sold some of its [C] shares or rights, those shares or rights were almost always sold to other companies within the [C] Group: at [44] and [45] .

(9) The fact that the taxpayer did not use any borrowings in acquiring the Core Shares was indicative of the taxpayer's ability to hold the Core Shares on a long-term basis. Moreover, there was no necessity for the taxpayer to liquidate the Core Shares to meet claims and liabilities of its insurance business as the taxpayer had sufficient cash reserves: at [47] .

(10) Consequently, the Core Shares were capital assets and not revenue assets, and hence, the gains from the sale of the Core Shares were not taxable as income: at [51] .

(11) The fact that the taxpayer had voluntarily paid income tax on previous occasions was in no way conclusive and determinative of the issue of whether the Core Shares were capital or revenue assets, and hence whether the gains were taxable: at [54] .

(12) Although the aim of ss 17 (1) and 17 (4) of the Insurance Act was to separate the assets, receipts, liabilities and expenses of each insurance fund in order to benefit the policyholders of the particular insurance fund concerned in the event of insolvency, the regulatory requirement for insurance funds did not restrict an insurance company from holding capital assets: at [58] .

(13) Even though the Core Shares were taken into consideration when calculating the solvency margin of the taxpayer's Insurance Fund as required under s 18 (1) (a) of the Insurance Act, this was not determinative of the issue of whether the Core Shares were revenue assets for income tax purposes. Ultimately, the inquiry into whether the Core Shares were revenue assets or capital assets was based on an assessment of the totality of the evidence: at [63] .

(14) Sections 26 (3) and 26 (4) of the Act were only concerned with the apportionment of revenue gains which insurance companies derived in Singapore and overseas from their businesses and, in particular, the computation of the amount of income on which Singapore income tax was payable. The provisions did not tax capital gains arising from the sale of investments by insurance companies: at [65] .

(15) Section 26 (3) of the Act contemplated a situation where an insurance company might have derived income from both Singapore and overseas. Since the Act was based on a territorial concept, ie, overseas income would not be subject to Singapore income tax unless such overseas income was received in Singapore, s 26 (3) therefore provided the mechanism for ‘ascertaining’ that portion of the total income which fell within the ambit of the Act and which should be subject to income tax in Singapore. Section 26 (3) was not concerned with capital gains: at [67] and [68] .

(16) Section 26 (4) of the Act dealt with the computation of the income of insurance companies (other than life insurance companies) carrying on, inter alia,the specific business of insuring and reinsuring offshore risks, as these companies enjoyed a concessionary tax rate under s 43 C of the Act. Section 26 (4) was only concerned with ascertaining what portion of an insurance company's total income was subject to income tax in Singapore. Gains or profits realised from the sale of investments had to be income in nature before such gains or profits might fall within the scope of s 26 (4): at [69] and [70] .

(17) The fact that Parliament extended the concessionary rate of tax to gains or profits realised by an insurance company from the sale of investments in the course of its offshore business did not go to show that gains or profits realised by an insurance company from the sale of investments were taxable in the first place because the extension of the concessionary rate of tax was directed at specified income derived by insurance companies. It had to first be determined if the gains or profits from the sale of investments constitute income, as opposed to capital gains: at [75] .

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