Comptroller of Income Tax v KE

• Jurisdiction: Singapore
• Judgment Date: 07 August 2006
• Date: 07 August 2006
• Docket Number: District Court Appeal No 29 of 2005
• Court: High Court (Singapore)

Comptroller of Income Tax

Plaintiff

and

KE

Defendant

[2006] SGHC 140

Kan Ting Chiu J

District Court Appeal No 29 of 2005

High Court

Revenue Law–Income taxation–Deduction–Income taxation of licensed housing developer based on Completed Contract Method–Completion of contract under Housing Development (Project Account) Rules–Whether developer can deduct 85% of costs incurred up to temporary occupation permit (TOP) stage against 85% of purchase price accrued and defer deduction of remaining 15% of costs to balance 15% of purchase price receivable in subsequent year of assessment–Housing Developers (Project Account) Rules (Cap 130, R 2, 1997 Rev Ed)

The respondent developed a condominium project (“the project”). The Housing Developers (Control and Licensing) Act (Cap 130, 1985 Rev Ed) and the Housing Developers (Project Account) Rules (Cap 130, R 2, 1997 Rev Ed) required that the proceeds of the sale of the units in the project be paid into a project account from which withdrawals could be made for approved purposes only. However, upon the issuance of Temporary Occupation Permits (“TOPs”) when 85% of the purchase price of the units was due, the surplus money in the project account could be withdrawn.

The respondent had elected to be taxed by the Completed Contract Method (“CCM”). In accordance with the Statement of Accounting Standard 16 (Revised) (“SAS 16”), profit under the CCM was recognised when the TOPs were issued.

The TOPs for the project were issued within the Year of Assessment (“YA”) 1999. The respondent sought to deduct 85% of the costs incurred when the TOPs were issued from 85% of the sale proceeds in computing its tax liability for YA 1999. The balance 15% of the costs was to be deducted from the remaining 15% of the sale proceeds in a subsequent year of assessment.

The Comptroller of Income Tax (“the appellant”) disallowed this and took the position that 100% of the costs in YA 1999 should be deducted in YA 1999 from the sale proceeds accrued in that same year. The respondent appealed to the Income Tax Board of Review (“the Board”) against the appellant's decision. The Board ruled in favour of the respondent, relying on TH Limited v Comptroller of Income Tax (1950-1985) MSTC 457 (“TH v CIT”) as authority for the proposition that applying the CCM uniformly and consistently, 85% of the costs incurred were to be deducted from 85% of the sales proceeds due. The appellant appealed to the High Court against the Board's decision.

Held, allowing the appeal:

(1) The Board had misunderstood the ruling inTH v CIT. TH v CIT was not authority or basis for restricting the deduction of incurred costs to 85% for YA 1999: at [24] and [26].

(2) When the CCM was applied, the profit was recognised at the time of completion. The principle underlying the method was to make it unnecessary to work out profits from year to year or from instalment to instalment, and to quantify the profits only at the time of legal completion when title was delivered: at [40].

(3) When the CCM and SAS 16 were applied together, the project was taken to be completed at the 85% payment or TOP stage, and the sale proceeds of 85% of the purchase price were recognised and the whole incurred costs were deducted. Once the project was taken to be completed at the 85% payment or TOP stage, all the existing income and costs had to be taken into account because there could not be a second completion under the CCM: at [41].

(4) There was no reason or justification for deferring 15% of the accrued costs to a subsequent year of assessment, and then to treat the deferred costs and any further costs incurred in the subsequent year of assessment as one. Such a division and deferral was inconsistent with s 14 of the Income Tax Act (Cap 134, 2004 Rev Ed): at [43].

TH Limited v Comptroller of Income Tax (1950-1985) MSTC 457 (refd)

Thomson Hill Ltd v Comptroller of Income Tax [1983-1984] SLR (R) 297; [1984-1985] SLR 2 (refd)

Housing Developers (Control and Licensing) Act (Cap 130, 1985 Rev Ed)

Housing Developers (Project Account) Rules (Cap 130, R 2, 1997 Rev Ed)r 7

Housing Developers Rules (Cap 130, R 1, 1990 Rev Ed)

Income Tax Act (Cap 134,2004 Rev Ed)ss 10 (1) (a), 14 (1) (consd)

Rules of Court (Cap 322, R 5, 2006 Rev Ed)O 55Dr 7 (5)

David Lim (Inland Revenue Authority) for the appellant

Ong Sim Ho, Ong Ken Loon and Low Wee Siong (Ong Sim Ho) for the respondent.

Judgment reserved.

Kan Ting Chiu J

Facts

1 KE, the respondent, is a licensed housing developer. It developed a condominium project for which Temporary Occupation Permits (“TOPs”) for the units were issued in 1998, by which time all the units had been sold.

2 The development was undertaken under the Housing Developers (Control and Licensing) Act (Cap 130, 1985 Rev Ed) (“the Act”). The agreements of the respondent entered into with the purchasers of the units were in the form prescribed under the Housing Developers Rules (Cap 130, R 1, 1990 Rev Ed). Clause 5 of the agreements stipulated that 85% of the purchase price was to be paid by instalments to the respondent within 14 days from the issue of the TOPs, the remaining 15% being payable on legal completion when legal titles are delivered to the purchasers.

3 The TOPs were issued within the respondent's financial year ended 30 June 1998 and the Year of Assessment (“YA”) 1999.

4 The management of the finances of the development are governed by the Act and the Housing Developers (Project Account) Rules (Cap 130, R 2, 1997 Rev Ed) (“the Project Account Rules”). The Act requires housing developers to set up a project account for each development. Proceeds from the sale of the development have to be paid into the project account, and withdrawals from the project account can only be made for the purposes approved by the Project Account Rules. Rule 7 however provides that after the grant of the TOP, the developer may withdraw any surplus money in the project account after making several mandatory deductions.

5 The combined effect of this rule and cl 5 of the agreement is that the respondent has control of the moneys in the project account when the TOP is issued and 85% of the purchase price is payable.

6 When the TOPs were issued, the respondent had incurred $135.9m in construction and allowable expenses (hereinafter referred to as “the incurred costs”).

7 The respondent which had elected to be taxed by the Completed Contract Method (also known as the Completion Method) sought to deduct 85% of the incurred costs from the 85% of the sale proceeds in computing its tax liability for YA 1999, with the balance 15% of the costs to be deducted from the remaining 15% of the sale proceeds in a subsequent year of assessment.

8 The Comptroller of Income Tax (“CIT”) did not allow that, and took the position that the full amount of incurred costs was to be deducted in YA 1999 from the sale proceeds accrued in that year.

9 The respondent appealed to the Income Tax Board of Review (“the Board”) against the CIT's decision. When the Board ruled in favour of the respondent, the CIT appealed against the Board's decision, and the appeal came before me.

The Completed Contract Method

10 This method allows a taxpayer such as the respondent who receives payment on contracts by instalments to compute his tax liability only at the completion of the contract.

11 The rationale for this method was explained by Lord Templeman in the Privy Council's decision in TH Limited v Comptroller of Income Tax (1950-1985) MSTC 457 (“TH v CIT”) at 459; Thomson Hill Ltd v Comptroller of Income Tax [1983-1984] SLR (R) 297 at [9]:

The principle which inspires the completed contract method is that a project does not yield a profit or an income until the project has been completed and proceeds of sale are or can be realised. Until completion, that is until profit...