INCOME TAXATION OF ISOLATED PROPERTY TRANSACTIONS IN SINGAPORE
| Citation | (1994) 6 SAcLJ 96 |
| Published date | 01 December 1994 |
| Date | 01 December 1994 |
| Author | LIU HERN KUAN |
A question often on the mind of property investors when deciding whether to sell their properties is whether the profits arising from the sale would attract income tax. This question is all the more relevant in view of the fact that the prices of housing in Singapore are rising in the booming property market of 1993.
This article attempts to identify factors determining the income taxation of property transactions in the local context by an examination of three recent cases decided by the Income Tax Board of Review. This will be done in two parts. In the first part, the facts and reasoning of the three cases will be critically examined. The factors which the Income Tax Board of Review took into consideration in determining taxability will be identified and commented upon. In the second part, the basis of taxation of the Board of Review in the three cases will be examined. An attempt will be made to suggest, in view of the difficulty the courts have in applying legislation, that some law reform is required. The writer will discuss alternative approaches of taxing real property transactions which it will be submitted, will go some way in addressing the difficulties raised by the three cases. It will be the writer’s thesis that current tax law in Singapore as it now stands can only provide tentative and inadequate answers which do not assist tax practitioners and their clients. As a preliminary, the tax position of an investor in properties will now be examined.
In Singapore, an income gain is taxable while a capital gain is not, as there is no capital gains tax in Singapore. When a taxpayer buys and subsequently sells property, any surplus therefrom may be subject to tax under section 10(1)(a) of the Income Tax Act1 (hereinafter referred to as ‘the Act’.) as income from a trade in properties. This is likely to be the case where the taxpayer has had a history of buying and selling properties. Conversely where a taxpayer purchases property and leases it thereby generating rental income and sells it after a relatively longer period of say 20 years at a profit one can make out a case to the effect that the profits are capital gains and are not subject to tax chargeable from a trade in properties. The problem is one of distinguishing between a capital gain and an trading income gain when an owner sells his property. Singapore law is similar to English law in that there is currently no one single test that the courts apply to determine whether gains from such a situation are trading income or capital gains. However in Singapore, these property
gains may alternatively be taxed as gains or profits of an income nature under S 10(1)(g). This option is also, as the writer will argue later on, unsatisfactory. A main difficulty is that there is no definition of ‘trade’ nor ‘gain or profit of an income nature’ in the Act.
The three cases that will be discussed involved taxpayer companies owned by just two shareholders. Two of the taxpayer companies were family companies with low paid up capitals of HK$20 and S$2 only. All three taxpayers acquired and sold their properties within a relatively short period of their acquisition and made handsome profits from the sales. In the first case, the question was whether the sale of a single block of flats was taxable. The second case involved the assessment to tax of profits from five apartment units, all purchased at the same time and sold separately within seven months of each other. The third case involved the purchase and sale of three shop units (taken together) in a shopping complex, and the purchase and sale of a condominium unit. The shop units were sold within one and a half years from the date of acquisition and in the case of the condominium unit, within three years. The cases proceeded on the basis that tax was chargeable on the ground that the taxpayers were trading in properties.
In SCL v CIT2 two companies, S Ltd and F Ltd, jointly purchased three blocks of flats, Blocks B, C, and F by exercising an option to purchase them on or around 7 July 1979. Some three months later, on 21 October 1979, Block B was sold and S Ltd and F Ltd made a gain of $1,195,500. Then sometime before 8 December 1979, Block C was sold and a gain of $1,680,000 was made. These gains were taxed. As regards Block F, S Ltd and F Ltd decided to incorporate the taxpayer, SCL Pte Ltd to retain Block F for ‘investment purposes’. Subsequently, the taxpayer was approached by an intending purchaser to sell Block F. Block F was then sold to the intending purchaser on 19 November 1980 for a profit of $9,973,193. The question was whether this profit was subject to income tax.
The Income Tax Board of Review (hereinafter referred to as ‘the Board’) held that the issue was whether the profits arising from the sale was a capital realisation or income from a trade or business.3 The Board found that L, who was the chairman of S Ltd and the taxpayer and the governing director of F Ltd, was a person who was very knowledgable about the property market.4 It was also found that L by reason of his ownership of
shares in S Ltd and F Ltd, had a substantial interest in the profit arising from the sale of Block F.5 The Board then stated:
Having regard to the circumstances leading to the formation of the [taxpayer], the fact that the holding companies of the [taxpayer] acquired three blocks of flats and sold two of them at a substantial profit, the financing arrangements made by the holding companies for the acquisition of the property by the [taxpayer], the fact that the [taxpayer] is controlled by L who is very knowledgeable in property dealing and who also controls both S Ltd and F Ltd, we find that the [taxpayer] did not acquire the property as a long-term investment and it was acquired for the purpose of resale at a profit.6
On these bases the taxpayer was held to be liable to pay tax on the surplus arising from the sale of Block F. On the taxpayer’s submission that the sale of Block F was an isolated transaction, the Board held the cases which the taxpayer cited in support of his submission could be distinguished because the taxpayer “was incorporated by S Ltd and F Ltd who themselves were dealing in properties and after they had sold two of the three blocks purchased by them.”
With respect, the reasoning of the Board is difficult to follow. Whatever the circumstances that resulted in the purchase and sale of Block F, at the end of the day, it is imperative that for tax to be chargeable, the taxpayer must be found to be trading or conducting a business. Indeed, the Board acknowledged this to be the issue in the case.7 However, there was no finding to this effect in the judgment, the Board holding that the proceeds from the sale transaction was taxable without indicating the charging provision in the Income Tax Act under which tax was to be assessed. A more careful reading of the case furthur reveals the following issues.
First, the Board held that the transaction was not an isolated one since the parent companies of the taxpayer (which were not parties to the action) had sold two of the three properties purchased by them. In the writer’s view, it is surprising that the activities of the parent companies were considered to determine whether a transaction was isolated or not.8 It is clear that such a finding cannot be made since the question whether a transaction is isolated must be addressed vis-a-vis the taxpayer only and not its parent companies who were separate legal entities. Such a finding
can only be made where the ‘corporate veil is lifted’ so that the court is entitled to disregard the principle that the company is a separate legal entity and consider the history of the parent companies’ trading activities. Even then, there is, to this writer’s knowledge, no principle under statute nor at common law which allows the Courts to lift the corporate veil when deciding whether tax is chargeable.9 Indeed, in principle, if the parent companies have already paid tax at their end there would be no reason why their income generating activities should again be considered when assessing the taxability of their subsidiary. While it was the case that L had a substantial interest in all the Blocks purchased by S Ltd, F Ltd, and the taxpayer, it cannot be disputed that the appeal concerned only the tax assessment of profits received by the taxpayer. The legal basis on which the Board proceeded to consider the activities of the parent companies in arriving at its conclusion that the gains did not arise from an isolated transaction of sale and purchase is unclear. However it may be said that the justification for the Board’s approach would be that it gave attention to substance rather than form, to reality rather than theory as it considered the chronology of events leading to the sale of Block F. Such an approach would discourage taxpayers to incorporate companies to avoid tax. For this reason, it may be preferable to allow the Courts to consider the tax position of the real owners of the taxpayer.
Second, it is clear from the facts that the case involved the taxation of gains from a one-off purchase and sale of property. It is submitted that it is not possible, under the Act, for gains from such isolated transactions to be trading income. The reasons are as follows. First, it is a fundamental principle of tax law that an extraordinary transaction outside the scope of a taxpayer’s ordinary income earning activities is usually not subject to income tax. Income tax is at common law levied on recurring gains earned in the ordinary course of income generating activities but not on casual or extraordinary gains (like gifts received, gambling and lottery winnings) since the concept of income is that of a recurring as opposed to a one-off extraordinary gain.10 Second, the Singapore Court of Appeal in its decision of DEF v CIT11 has held that an isolated transaction of...
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