HSBC Institutional Trust Services (Singapore) Ltd v Chief Assessor

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 17 January 2013
• Neutral Citation: [2013] SGCA 4
• Plaintiff Counsel: Tan Kay Kheng, Tan Shao Tong and Novella Chan (WongPartnership LLP)
• Docket Number: Civil Appeal No 80 of 2012
• Date: 17 January 2013
• Hearing Date: 27 November 2012
• Subject Matter: Revenue Law,Annual value,Property tax
• Published date: 25 January 2013
• Citation: [2013] SGCA 4
• Defendant Counsel: Foo Hui Min, Joanna Yap and Alvin Chia (Inland Revenue Authority of Singapore)
• Court: Court of Appeal (Singapore)
• Year: 2013

Chao Hick Tin JA (delivering the judgment of the court): Introduction

This is an appeal against the decision of a High Court judge (“the Judge”) who held that a portion of the rent of a unit within a shopping centre representing the depreciation of certain asset items in the common area of the shopping centre (“the Asset Items”) should be included in the gross rent for the purposes of computing the “annual value” of the unit in assessing property tax. The decision of the Judge was reported in Chief Assessor v HSBC Institutional Trust Services (Singapore) Ltd [2012] 3 SLR 933 (“the Judgment”). The sole issue to be determined in the present appeal is whether the Judge was correct to have refused to exclude the depreciation component in the rent paid by a tenant in determining the “annual value” for the purposes of property tax assessment. The answer is, in turn, dependent upon the proper construction of the expression “annual value” as defined in s 2(1) of the Property Tax Act (Cap 254, 2005 Rev Ed) (“the PTA”).

Facts

The facts are straightforward and undisputed. The appellant, HSBC Institutional Trust Services (Singapore) Limited (“the Appellant”), is the trustee of CapitaMall Trust which owns, inter alia, a property known as Bugis Junction (“the Property”). The respondent is the Chief Assessor (“the Respondent”).

The Property is a shopping centre comprising 180 units which are normally leased to tenants carrying on various types of businesses. The Asset Items consist of escalators, lifts, air-conditioning and fire safety systems installed within the Property. It is common ground that the Asset Items are fixtures.¹

The Appellant’s evidence is that a sum calculated at the rate of $0.20 per square foot per month (“the $0.20 psf”) was included in each tenant’s monthly gross rent. This sum was to represent the annual depreciation of the plant and machinery of the Property including, inter alia, the Asset Items (“depreciation component”), although the $0.20 psf was not separately itemised in each tenancy agreement. This evidence adduced by the Appellant was not challenged by the Respondent (see the Judgment at [19]). The expression “gross rent” refers to the actual sum paid by each tenant, which may include components which are not “rent” per se (see below at [15]).

The Appellant had sought to exclude the depreciation component in the computation of the annual value of the units in the Property for the purposes of assessment of property tax. However, the Respondent ruled that the depreciation component should not be excluded in the computation of the annual value of the units in the Property for the valuation years of 2004 and 2005 (see the Judgment at [4]). This dispute thus gave rise to the present proceedings.

The proceedings below

The Appellant appealed to the Valuation Review Board (“the Board”) against this ruling of the Respondent. On 24 May 2011, the Board found for the Appellant and held that the depreciation component of the rent should be regarded as part of the total cost of services. As the depreciation component pertained to services rather than rent, the Board considered it irrelevant that the Asset Items (to which the depreciation component related) were permanent features and an integral part of the Property. The Board thus held that the depreciation component ought to be excluded from the gross rent in the computation of the annual value of each unit of the Property.

The Respondent then appealed to the High Court. The Judge reversed the decision of the Board and held that the depreciation component in the gross rent paid by the tenant of each unit had to be included in the computation of annual value (see the Judgment at [43]). She reasoned as follows: In assessing annual value, the touchstone was whether each component in the gross rent was related to rent or letting (“the touchstone question”) (see the Judgment at [20]). The Board, in focusing on whether the depreciation component was part of the total cost of services, was asking the wrong question. Rather, it should have asked the touchstone question (see the Judgment at [22]). The touchstone question was in turn determined by whether the machinery or equipment to which the depreciation component in the gross rent related was a part of the property that was assessable to tax (“the threshold question”) (see the Judgment at [20]). Given that property tax was a tax on immovable property, to determine the threshold question, the court would examine if the plant or machinery was so affixed as to become part of the immovable property such that it was assessable to tax under s 6(1) of the PTA (see the Judgment at [30]). Whether a chattel was so annexed as to become a fixture assessable to tax was governed by either the fixture test or the enhancement test. In the instant case, the application of either test would lead to the same conclusion that the Asset Items were affixed to land so as to become part of the land (see the Judgment at [41]–[42]). As fixtures, the Asset Items enhanced the value of the building and should be included in the assessment of the annual value. It thus followed that the depreciation component of the gross rent had to do with the letting of the Property, which, in turn, meant that the depreciation component was related to the rent or letting of each unit in the Property (see the Judgment at [43]).

Issues before this Court

The following are the issues before this Court: what is the proper test for excluding an expense amount which has been included in the gross rent when determining the annual value of a property, and in particular the relevance of the fixture test and/or the enhancement test in that regard (“Issue 1”); and on the application of the test for exclusion elucidated in Issue 1, whether the depreciation component should be excluded from the annual value of each unit in the Property (“Issue 2”).

These issues will be considered seriatim.

The relevant principles

As previously stated by this Court in BCH Retail Investment Pte Ltd v Chief Assessor [2007] 2 SLR(R) 580 (“BCH No 2”) (at [18]), “any meaningful analysis of the factual matrix in the present proceedings must commence with conceptual and definitional clarity”. We thus begin our discussion with a consideration of the statutory framework for the assessment of property tax and how it has been interpreted in the cases.

The charging provision is found in s 6(1) of the PTA, which provides as follows:

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.

Pursuant to s 6(1) of the PTA, property tax is payable upon the “annual value” as defined in s 2(1) of the PTA, the material part of which reads 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 in italics and bold italics]

Related to rent or letting

Two phrases in s 2(1) of the PTA in particular require further analysis here. The first is the phrase “reasonably be expected to be let from year to year”, ie, the rent that a hypothetical tenant can reasonably be expected to pay. In BCH No 2 (at [19]), this Court analysed s 2(1) of the PTA and found that the key focus of “annual value” was on rent or letting: 19 It will be immediately seen that the definition of “annual value” focuses on the element of rent or letting. Indeed, it is undisputed by either party that the annual value of any given property must include only elements of rent or letting. To this end, any expenses that are not related to elements of rent or letting ought not to be taken into account in the computation of annual value. This is not only logical and fair; it is also an elementary, albeit fundamental, starting-point. Indeed, in our view, this concept is so vital that it constitutes the main compass guiding all our subsequent legal navigation. [emphasis in original]

Pursuant to BCH No 2, if the expense in the present case (ie, the depreciation component of the Asset Items) is not related to rent or letting, it will not be taken into account in the computation of annual value. On the other hand, if the depreciation component could be regarded as relating to rent or letting, it will be included in the computation of annual value. This principle was affirmed in Tan Hee Liang v Chief Assessor and another [2009] 1 SLR(R) 335 (“Tan Hee Liang”) (at [40] and [64]). The question whether the expense sought to be excluded related to rent or letting was correctly identified as the touchstone question by the Judge (see the Judgment at [20]).

Although the gross rent of a property gives some indication of annual value, and is often “an important factor and/or starting-point” in the assessment of annual value, it is by no means conclusive as the gross rent might contain elements which have nothing to do with rent or letting (see BCH No 2 at [24]). In fact, the argument for exclusion only arises if an item, extraneous to rent or letting, has been included in the gross rent, for it would be illogical and unprincipled to argue for the exclusion of something from the gross rent which was never included in the gross rent in the first place (see BCH No 2 at [28]). Where an expense is excludable, however, it can only be excluded if it has been found to be a genuine component of the gross rent, ie, when its inclusion in the gross rent is not a sham for the...