Pinetree Resort Pte Ltd v Comptroller of Income Tax

JudgeChao Hick Tin JA
Judgment Date06 September 2000
Neutral Citation[2000] SGCA 48
Date06 September 2000
Subject MatterMutuum,Appeals,Courts and Jurisdiction,Income taxation,Whether initiation deposits are interest-free loans and therefore non-taxable,Refundable initiation deposits paid as part of fee to join club,Whether club "received" money,Whether initiation deposits are mutuum,s 10 and s 14(1) Income Tax Act (Cap 134, 1999 Ed),Whether refunds of initiation deposits deductible against income tax,Revenue Law,Whether judge was aware of principles governing appeal to Income Tax Board of Review,Bailment,Whether arrangement a contractual buy-back scheme,Whether accounting treatment of deposits conclusive,Whether payments subject to legal impediments regarded as income,Gratuitous bailment
Docket NumberCivil Appeal No 199 of 1999
Published date19 September 2003
Defendant CounselFoo Hui Min (Inland Revenue Authority of Singapore)
CourtCourt of Appeal (Singapore)
Plaintiff CounselStanley Lai and Melissa Koh (Lee & Lee)

(delivering the grounds of judgment of the court): Introduction

The appellants are the proprietors of Pinetree Town and Country Club (`the club`), which provides social, recreational and sporting facilities to its members.
In order to join the club, a membership has to be purchased, either directly from the club, or from someone who is presently a member through the open market. Where memberships are purchased from the club directly, the potential member is required to pay a fee of which 15% constitutes a `membership fee` and 85% constitutes an `initiation deposit` which is refundable after 30 years. The appellants` tax liabilities in respect of the initiation deposits became the subject-matter of the appeal before us.

The appeal was brought against the decision of Tan Lee Meng J who dismissed the appellants` appeal against the decision of the Income Tax Board of Review upholding the respondent`s refusal to amend two Notices of Assessment which required the appellants to pay $2,115,234 and $122,056.11.
These sums were the tax assessed in respect of the initiation deposits for the years 1986 and 1989 respectively. [See [2000] 2 SLR 43.]


The club decided to start the initiation deposit scheme at a Special General Meeting of the members sometime in late 1985. At this meeting, the members of the club decided to increase the maximum number of members from 3,600 to 4,000. The initiation deposit scheme was suggested as a means of marketing the membership. Pursuant to this, the Constitution of the club was amended to require potential members to pay a membership fee, of which 85% constitutes the initiation deposit and 15% constitutes the entrance fee.

Changes were also made to the Constitution to cater for the requirements under which the initiation deposits would be refunded.
Under rr 20A and B, the initiation deposit is refundable when an individual or corporate life member (at any time within six months of his having been a member of the club for 30 years) gives written notice to the appellants of his intention to terminate his membership. The appellants would then be required to make the refund, without any interest, of the amount paid as an initiation deposit to the member within 30 days of the receipt of the written notice to terminate membership, provided that all moneys, debts and other liabilities owing to the appellants have been discharged by the member in question. If the appellants do not receive a member`s requisite written notice, then the member will lose his right to the refund of the amount paid as an initiation deposit, but will continue to be a member of the club.

According to the Constitution, the initiation deposit would be forfeited by the appellants in certain circumstances.
Rule 19 states that if a member`s payments to the club are in arrears, the initiation deposit may be forfeited at the appellants` discretion and the member`s name removed from the Register of members. When membership is reinstated, the initiation deposit would then be written back as a deferred liability of the appellants. Rule 20 provides that a member will lose his initiation deposit if he resigns from the club. Under r 21, a member who dies, becomes of unsound mind, is adjudicated bankrupt, is the subject of winding up proceedings or is convicted of any offence (other than a traffic accident) would lose his membership and would not be entitled to a refund of the initiation deposit. The initiation deposit would also be forfeited if the club is dissolved under r 26.

The initiation deposits were classified in the appellants` accounts as deferred liabilities.
However, the appellants were free to use the initiation deposits and did in fact use them. If the membership was transferred, the initiation deposit would remain as a deferred liability in the appellants` accounts and the appellants` contractual obligation to refund the initiation deposit to the transferee under r 20A was preserved, provided that the other requirements pertaining to a refund were met.

The dispute between the appellants and respondent arose from the respondent`s view that the initiation deposits were taxable as they formed part of the consideration paid by a potential member to join the club.
The appellants however felt that, while the entrance fees were taxable income, the initiation deposits were not, as they were interest-free loans from the members of the club and entered as a deferred liability into the club`s accounts. The appellants emphasised that, if and when the initiation deposits were not refunded to the relevant members under the provisions of the Constitution, they would then be subject to tax as they would then accrue to the club as income.

The respondent however assessed tax in the sums of $2,115,234.00 and $122,056.11 for the years of assessment 1986 and 1989 respectively.
The appellants appealed against the assessment to the Income Tax Board of Review (`the Board`) who rejected their claims.

The decision below

The main contention in the appeal before Tan Lee Meng J was that the initiation deposits did not accrue to the appellants at the time of payment because they were interest-free loans from the members of the club. This was further evidenced by the possibility that the initiation deposits would have to be refunded to the members under the conditions laid down by the Constitution after 30 years of membership.

The learned judge did not agree with the appellants.
He took the view that, due to the numerous conditions that had to be complied with before a member was entitled to the refund of the initiation deposit, as well as the varied circumstances under which the initiation deposit could be forfeited by the club, the initiation deposits were income accruing to the club at the time of payment.

The learned judge added that, in determining the nature of the payments to the club, the issue was the real character of the payments, and not what the parties called them: CIR v Wesleyan and General Assurance Society [1946] 30 TC 11.
In so holding, he dismissed the appellants` argument that the Board erred in classifying the initiation deposits as taxable income merely because the appellants had not described the initiation deposits as `loans` in the constitution or in the membership forms. The Board had made it clear that this, viewed in combination with other factors, meant that the clear inference to be drawn was that there had been no intention by either party to the transaction to create a debt. In particular, the learned judge endorsed the Board`s view that the club`s rules, for example, the rule that a member would have to resign his membership in order to get his initiation deposit back, militated against the notion that the initiation deposit was an interest-free loan. Moreover, he noted that the appellants were entitled to a tax deduction for any deposit refunded to a member who made a claim within the prescribed period after the 30th year of membership.

He considered, in contrast, the cases of Raffles Marina Club and Laguna Golf and Country Club, which made similar arrangements with their members, but expressly structured their arrangements and stated from the start that they were taking loans from their members.
Due to the fact that these clubs were located on land which is leased to them only for short periods, unlike the appellants, whose club sits on freehold land, the loans made by the members of those clubs were repayable on a fixed date. A trust deed was also made between the two clubs and a trustee corporation which was to act for the benefit of the holders of unsecured notes issued in respect of the loans. The trust deed contained safeguards to ensure that the members would be repaid their loans. As such, the revenue authorities were persuaded that the moneys were not taxable income. These features were not present in the scheme of initiation deposits arranged by the appellants.

Finally, the learned judge rejected the appellants` submission that the initiation deposit should be classified as a mutuum (a quasi-bailment) as there was a real likelihood that the initiation deposit would not be refunded at all.
The question of a mutuum thus did not arise and he dismissed the appellants` appeal against the decision of the Board.

The appeal

The appellants raised three main issues in the appeal. Their first contention, that the initiation deposits amounted to loans from the members of the club, encompassed several sub-issues. These included the refund of the initiation deposits, the accounting treatment of the deposits, the nature of the appellants` holding of the deposits, whether the scheme amounted to a contractual buy-back of the membership by the appellants and whether this case was analogous to the scheme of members` loans in Raffles Marina Club and Laguna Golf and Country Club. The second main contention concerned the tax deductability of the deposits which would actually be refunded to members, and the third related to whether the payment of the initiation deposits amount to a mutuum or quasi-bailment.

Preliminary issue: Discretion of the High Court to overturn an appeal from the decision of the Income Tax Board of Review

The appellants submitted as a preliminary issue that the learned judge had erred in suggesting that it is often not easy for a taxpayer to persuade the court to overrule a decision of the Board based on the decision in Mount Elizabeth (Pte) Ltd v Comptroller of Income Tax [1986] SLR 421 . They contended that this was only the case where the appeal involved a factual evaluation of evidence. However, as this appeal raised a point of law, viz whether for the purposes of income tax assessment, the initiation deposits constituted loans or mutuums at the point when they were paid by potential members to the club, the interpretation to be given to the applicable rules of the club, and the inferences made by the learned judge and the Board, an appellate court was in as...

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