Revenue and Tax Law

• Publication year: 2018
• Citation: (2018) 19 SAL Ann Rev 721
• Published date: 01 December 2018
• Author: TAN Kay Kheng LLB (Hons) (National University of Singapore); CDipAF (Association of Chartered Certified Accountants); MAcc (Charles Sturt University); MTax (University of New South Wales); CTA, FCPA (Australia), ATA (Income Tax), FSIArb; Advocate and Solicitor (Singapore). Leonard GOH MA (Cambridge); Advocate and Solicitor (Singapore); Deputy Senior State Counsel, Legislation Division, Attorney-General's Chambers.
• Date: 01 December 2018

Introduction

24.1 The Supreme Court delivered six decisions in 2018. Of the five cases concerning income tax, three dealt with substantive issues of revenue law. The remaining case dealt with stamp duties.

24.2 There are therefore, in the authors' view, six cases for the year 2018 which had some relevance to revenue law:

Tax Type	High Court	Court of Appeal
Income tax	2	3
Stamp duty	1	0

Income tax

Gains from sale of properties

24.3 In BQY v Comptroller of Income Tax,1 the issue was whether the taxpayers were liable to pay tax on profits made on selling three bungalows. The High Court dismissed the taxpayers' appeal. In so ruling, Choo Han Teck J disagreed with the taxpayers' submission that the gains arising from their sale were capital gains and were therefore not subjected to income tax under s 10(1)(g) of the Income Tax Act2 (“ITA 2014”). Choo J did not see any error in the finding of facts by the

Income Tax Board of Review (“Board”) and hence held that their findings ought not to be disturbed.3

24.4 Further, Choo J observed that out of the five properties purchased by the taxpayers in the years 1997 to 2012, in terms of chronology, the first was occupied as a residential home until June 2012 when they moved into the fifth property. The gains in issue arose from the sale of the second, third and fourth properties which were not occupied by the taxpayers at any time after their acquisition. These three properties were sold after being owned for only a short period (that is, between three and ten months). Their move into the fifth property occurred after the Comptroller had started asking questions in February 2012 concerning the three properties that were sold.4 With “the whole picture” and seeing “the forest”, the court did not think that the Board had erred when it found that the taxpayers' intention was to purchase the properties for resale with a view to making a profit.5

24.5 On the facts as reported, this is an uncontroversial decision which serves to illustrate how a purchaser's intention may be construed within the given factual matrix of the case, in order to determine whether a profit from a resale should be taxable.

Gains from employment

24.6 In BRE v Comptroller of Income Tax,6 the High Court rejected the taxpayer's argument that tax should not be imposed on himself but on a company (“Subjunctive”) that he had created and owned. Subjunctive had received payments from another company (“TGS”) for his role as “Project Development Manager” of TGS. The taxpayer argued that the notices to pay tax should not have been served by the Comptroller on him. On the documents tendered in evidence, the court found that they “show[ed] plainly and unequivocally that TGS was employing [the taxpayer] as its project manager in Singapore”.7

24.7 The taxpayer's counsel also raised the issue of illegality in obtaining the income, since the taxpayer's employment pass was issued to him as employee of Subjunctive and not TGS. The submission was that no tax should be payable for illegally obtained income. Choo Han Teck J dismissed the contention:8

It is not disputed that BRE [the taxpayer] did not have an employment pass with TGS. It is therefore clear that he had been working illegally in that sense, but illegality is a garden of mixed fruit, and not all are forbidden to the tax authority. Unless BRE can show some ground that offends public policy, income earned by a resident is taxable even if that resident did not have the requisite licence for his work. This appeal is dismissed with costs to be taxed if not agreed.

Deductibility of interest expenses

24.8 In BML v Comptroller of Income Tax,9 the taxpayer appealed against the decision of the High Court affirming the decision of the Board to dismiss the taxpayer's appeal.10 The Court of Appeal dismissed the appeal.

24.9 At all material times, the appellant (a company) owned a mall and all its shares were held by two shareholder companies equally. The appellant carried out a securitisation exercise which raised $520m through a bond issue carried out by a special purpose vehicle, WM Limited. The bond issue was secured by, inter alia, an assignment to WM Limited of the appellant's rights over the tenancy agreements and rental income from the mall. The proceeds of $520m were used to refinance pre-existing borrowings, as working capital, and $333m in equal division was lent to the shareholders (“Shareholder Advances”). The Shareholder Advances enabled the appellant's shareholders to subscribe for subordinated junior bonds as part of the bond issue by WM Limited and for use as general working capital. Hence, the appellant derived two sources of income: rental income from the mall and interest income from the Shareholder Advances.11

24.10 The appellant also carried out a capital restructuring exercise. By capitalising a substantial sum of $325.3m and returning a sum of $333m to the shareholders, its share capital was reduced to $2.5m. However, in place of the debt of $333m, shareholder bonds (“Shareholder Bonds”) were issued by the appellant in favour of its shareholders. Interest was paid by the appellant at 7.1% per annum (“Interest Expense”). The Shareholder Bonds would mature in 2011. In effect, the issuance of the Shareholder Bonds resulted in an equity-to-debt

restructuring of the appellant's capital by replacing the shareholder companies' equity with debt (via the Shareholder Bonds).12

24.11 The deductibility of the Interest Expense for the years of assessment 2005 to 2009, which amounted to some $95.7m, was the subject of contention in the appeal to the Board, the High Court and finally the Court of Appeal.13

24.12 The relevant provision was s 14(1)(a) of the ITA 2014 and the issue was whether the interest expense on the bonds was a:14

… sum payable by way of interest … upon any money borrowed by that person [that is, the appellant] where the Comptroller is satisfied that such sum is payable on capital employed in acquiring the income.

In construing s 14(1)(a), the Court of Appeal applied the direct link test which it observed has found support in at least three Court of Appeal decisions,15 viz Andermatt Investments Pte Ltd v Comptroller of Income Tax,16 JD Ltd v Comptroller of Income Tax17 (“JD”) and BFC v Comptroller of Income Tax18 (“BFC”). Simply put, the direct link test requires a direct link between the money borrowed and the income produced. On the facts of the appeal, this would require a direct link between the Shareholder Bonds and the rental income/interest from Shareholder Advances, before the Interest Expense is deductible.

24.13 The Court of Appeal disagreed with the appellant that the direct link test was not the exclusive test for s 14(1)(a). It held that:19

… although the direct link test may apply in different ways to different sets of facts, it is a test of general application under s 14(1)(a) of the ITA 2014 and it applies also to the present case.

24.14 Before applying the direct link test to the taxpayer's case, the Court of Appeal considered the taxpayer's primary submission that “capital would be ‘employed in acquiring the income’ within the meaning of s 14(1)(a) if income-producing assets are retained and

represented by the said capital” [emphasis added].20 The taxpayer submitted that as long as capital is “represented” by income-producing assets, evidenced by the taxpayer's balance sheet, the requirements of s 14(1)(a) were satisfied. The Court of Appeal rejected this “test of representation” as:21

… it appears to us that the test of representation is premised on the accounting equation that the total assets of a company are equal to the company's total liabilities and equity.

There was no justification for this test to take the place of the direct link test, or stand as an instance of satisfying the direct link test.22 The court also noted that the test of representation does not seem compatible with the term “the income” in s 14(1)(a), and gives rise to a further concern:23

The test of representation gives rise to a further concern that there would be undue reliance on the balance sheet of the taxpayer. While accounting practices and rules are relevant in tax law, they do not necessarily dictate tax consequences. As Andrew Phang JA observed in ABD ([31] supra), ‘[w]here ordinary accounting principles run counter to the principles of tax law, they must yield to the latter for the purposes of computing gains and profits for tax’ (at [111]). The test of representation holds paramount the manner in which information is presented on the corporate balance sheet and does not appear to leave room for the tax authority to consider whether the requirements of s 14(1)(a) are satisfied. This could not have been the statutory intention when s 14(1)(a) expressly contemplates that the CIT must be ‘satisfied that’ the interest is payable on capital employed in acquiring the income.

24.15 The observation by the Court of Appeal on the interaction of tax law and accounting principles is important and worth remembering whenever the tax statute is being interpreted. This interaction of principles, including the dictum in ABD Pte Ltd v Comptroller of Income Tax,24 has been previously discussed in a chapter in The Law and Practice of Singapore Income Tax.25

24.16 The foreign cases cited by the taxpayer were also closely analysed and then rejected by the Court of Appeal.26 The court emphasised once again that:27

… in the area of tax law, foreign jurisprudence has to be considered carefully before it is adopted as part of local law. This is because tax law is primarily a creature of statute and must respond to local regulatory concerns.

24.17 The other premise of the taxpayer's primary submission was the “test of retention” which “posits that capital is ‘employed in acquiring the income’ within the scope of s 14(1)(a) if the taxpayer's income-producing...