Pinetree Resort Pte Ltd v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judgment Date: 17 February 2000
• Date: 17 February 2000
• Docket Number: District Court Appeal No 25 of 1999 (Income Tax Board of Review No 2 of 1996)
• Court: High Court (Singapore)

Pinetree Resort Pte Ltd

Plaintiff

and

Comptroller of Income Tax

Defendant

[2000] SGHC 24

Tan Lee Meng J

District Court Appeal No 25 of 1999 (Income Tax Board of Review No 2 of 1996)

High Court

Contract–Contractual terms–Membership of proprietary club–Payment of initiation deposits–Whether initiation deposits interest-free loans from members–Whether classification of deposits as deferred liabilities relevant–Whether deposits a mutuum–Revenue Law–Income taxation–Membership of proprietary club–Payment of initiation deposits–Whether deposits taxable as income

The appellants were the sole proprietors of a club. Membership of the club required the payment of an entrance fee. Subsequently, the constitution of the club was changed; membership fees were such that members joining the club were required to pay a fee of which 15% consisted of the entrance fee and the remaining 85% consisted of an “initiation deposit” (“the deposit”).

The respondent contended that the deposits were taxable as they were part of the consideration paid by members upon joining. The appellants argued that they were refundable, interest-free loans from the members and were not subject to tax as long as they were accounted for as a deferred liability.

On appeal, the main issue was whether or not the appellants were correct in contending that the deposits did not accrue to them in the year of payment because they were interest-free loans.

Held, dismissing the appeal:

(1) As it was elementary that a loan was repayable to the lender in due course, the conditions which had to be complied with before members were entitled to a refund of the deposits, and the varied circumstances under which they might be forfeited by the club, militated against their classification as interest-free loans: at [20] and [24].

(2) The court found that the following factors militated against the finding that the deposits were loans: (a) the lack of documentation evidencing that the deposits were loans to the club; (b) the club's stringent limitation on the right of members to claim a refund of their deposits; (c) the club's rules on forfeiture of the deposits; and (d) the fact that a member had to resign in order to get his deposit back, which indicated that the arrangement was not a loan but a contractual buy-back of the membership in the club: at [21], [24], [26] and [27].

(3) The court acknowledged that the name given to a transaction by the parties concerned did not necessarily decide the nature of the transaction, and that the true question was the real character of the payment. In this regard, the fact that the appellants' accountants had classified the deposits as “deferred liabilities” was not conclusive of the matter: at [21] to [22].

(4) The deposits could not be classified as a mutuum. A mutuum was a loan of something which was not to be returned in specie, but with something similar and equivalent. In the present case, there was a real likelihood that the deposits might not be refunded at all: at [32].

(5) On the totality of the circumstances, the court was satisfied that the Income Tax Board of Review's findings were not erroneous in law or based on insufficient evidence and left its findings undisturbed: at [33].

Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 14 ATD 98 (distd)

Heather v P-E Consulting Group Ltd [1973] Ch 189; [1973] 1 All ER 8 (folld)

Inland Revenue Commissioners v Wesleyan and General Assurance Society [1948] 1 All ER 555; 30 TC 11 (folld)

Mount Elizabeth (Pte) Ltd v Comptroller of Income Tax [1985-1986] SLR (R) 950; [1986] SLR 421 (refd)

Income Tax Act (Cap 134,1996 Rev Ed)s 10

Stanley Lai (Lee & Lee) for the appellant

Foo Hui Min (Inland Revenue Authority of Singapore) for the respondent.

Tan Lee Meng J

1 In this case, the appellants appealed against the decision of the Income Tax Board of Review, which dismissed their appeal against the refusal of the respondent, the Comptroller of Income Tax, to amend two notices of assessment dated 18 November 1994 requiring the appellants to pay the sums of $2,115,234 and $122,056.11 for the 1986 and 1989 years of assessment. I dismissed the appellants' appeal and now give my reasons for doing so.

Background

2 The appellants are the sole proprietors of the Pinetree Town & Country Club (hereinafter referred to as “the club”), which is situated at 30 Stevens Road, Singapore. The club provides social, recreational and sporting facilities to its members. Since its inception, members of the club have had to pay an entrance fee to join it. In December 1985, the maximum number of club members was increased from 3,600 to 4,000. At the same time, the constitution of the club was amended so that potential members were required, when joining the club, to pay a fee, of which 15% constituted the entrance fee and 85% constituted what was termed as an “initiation deposit”.

3 The dispute between the respondent and the appellants concerns the initiation deposits. The respondent took the view that the initiation deposits are taxable as they are part of the consideration paid by members to join the club. On the other hand, the appellants asserted that while the entrance fees ought to be regarded as taxable income, the initiation deposits are interest-free loans from members of the club and are not subject to tax so long as they remain in the accounts as a deferred liability. The appellants appealed to the Income Tax Board of Review against the decision of the respondent but their appeal was unsuccessful. The appellants then appealed against the decision of the Board.

4 It would be fruitful at this juncture to look at the arrangements concerning the payment and refund of the initiation deposits. If this is done, one can fully understand why the respondent and the Income Tax Board of Review took the view that the initiation deposits are not interest-free loans from members of the club.

5 To begin with, an initiation deposit is refundable to a member of the club only if he has remained a member for 30 years. This, by itself, raises no eyebrows. What is worth noting is that no claim for a refund of the initiation deposit can be made by any person who wishes to remain a member of the club. This is because a member who seeks a refund of the initiation deposit after he has been a member of the club for 30 years is required to terminate his membership. The appellants are thus requiring the member concerned to choose between continued membership of the club or a refund of what the appellants themselves contend is an interest-free loan from the member to the club.

6 Stringent conditions are applicable to any claim for a refund of initiation deposits. For a start, an initiation deposit is only refundable if a claim is made within six months after the 30th year of membership. If such a claim is not made within the said six months, the right to a refund of the initiation deposit is lost. Note must also be taken of the club's rules relating to forfeiture of initiation deposits. These rules, which are, without more, clearly out of place in the...