TAX AVOIDANCE GONE SOUR

• Author: LIU HERN KUAN
• Date: 01 December 1996
• Citation: (1996) 8 SAcLJ 259
• Published date: 01 December 1996

Andermatt Investments Pte Ltd v CIT

INTRODUCTION & FACTS

Under the Income Tax Act,1 an expense could be deductible if, subject to section 15, it fell within sections 14(1)(a)—(g). The issue in the recent Court of Appeal decision of Andermatt Investments Pte Ltd v CIT2 was whether an interest expense fell to be deducted under section 14(1)(a). The decision was an important one as it was the first occasion that section 14(1)(a) was considered by the local courts. Section 14(1) and 14(1)(a) reads:

14(1) For the purpose of ascertaining the income of any person for any period from any source chargeable with tax under this Act (referred to in this Part as the income), there shall be deducted all outgoings and expenses wholly and exclusively incurred in the production of the income, including —

1. (a) except as hereinafter provided, any sum payable by way of interest upon any money borrowed by that person where the Comptroller is satisfied that the interest was payable on capital employed in acquiring the income.

The facts of the case were as follows. A company, Wan Holdings Pte Ltd (hereafter, ‘Wan Holdings’), developed and owned a property known as No. 1 Jalan Remaja, Singapore 1027 (hereafter, “the Hillview Property”). Wan Holdings was owned by members of the Wan family. On 28 November 1987, the taxpayer company, Andermatt Investments Pte Ltd, (hereafter, “Andermatt”) was incorporated for the purpose of investment holding including, inter alia, owning and leasing out the Hillview Property. The Wan family also owned Andermatt.

The method under which the Hillview Property was acquired by Andermatt was, to say the least, rather unusual. The Hillview Property was not acquired by way of sale by a vendor to a purchaser. Instead of buying the Hillview Property, Andermatt bought the entire share capital of the owners of the property, Wan Holdings; instituted voluntary winding up proceedings of Wan Holdings; and caused the Hillview Property to be distributed as a return of capital in specie. The reason for the rather odd way in which the Hillview Property was transferred was because Andermatt wanted to effect a saving of stamp duties payable. It was not mentioned in the judgments why the Wan family, who owned Wan Holdings, incorporated Andermatt to buy the shares of Wan Holdings. But it was clear that a sale of the Hillview Property by way of direct transfer from Wan Holdings to

Andermatt would attract stamp duty payable at ad valorium rate.3 On the other hand, the purchase of the shares of Wan Holdings, the vendor of the Hillview Property, would only attract 0.2% of the market value of the shares on transfer4 and $5 on the distribution of the Hillview Property in specie to Andermatt.5 Based on the Hillview Property being valued at $20m, the stamp duty savings would be slightly less than $560,000, an amount not at all insubstantial.

The full amount of this savings would probably have been made via the taxpayer’s method of transfer of the Hillview Property if not for the fact that Andermatt did not have sufficient capital to effect the transfer. The purchase price of the Wan Holdings shares was $20,000,030, and the taxpayer was able to meet this expense by paying $ 1m from its paid up share capital. The outstanding $19,000,030 stood as a debt owing to the vendors of the Wan Holdings shares. It was only in May and June of 1988, some six months after the taxpayer purchased the Wan Holdings shares, that it repaid $5.8m of the principal sum of $19,000,030 outstanding to the vendors of the Wan Holdings shares. This partial payment of $5.8m was raised by way of an overdraft facility, secured on the Hillview Property. The interest cost on the overdraft was $201,172 in the relevant financial period. In that same financial period, Andermatt derived income from its business of investment holding which comprised dividend income of $4;620,007 from its holding of the Wan Holdings shares and rental income of $599,845.54 from its ownership of the Hillview Property. It was conceded that the sum total (referred to in this note as ‘trading income’) was taxable as income from a trade under section 10(1)(a). The sole issue in the case was whether the interest expense of $201,172 was allowable as a deduction from this trading income. Andermatt argued that it was allowable under section 14(1)(a). The respondent, the Inland Revenue Authority of Singapore (‘IRAS’), took the view that it did not, and assessed the taxpayer to additional tax of $62,173.35 based on the interest expense being disallowed.

Andermatt lost all the way from the Income Tax Board of Review, to the High Court, to the Court of Appeal. The arguments raised were rather conceptual. This note attempts to put in focus the main issue which the Court of Appeal had to decide and examine why the taxpayer was unsuccessful.

ANALYSIS

The decision raised a rather interesting question on the meaning of the term, “interest … payable on capital employed in acquiring the income” in

section 14(1)(a). Arguably, in order to satisfy section 14(1)(a), four issues had to be addressed; viz, (1) whether the expenditure was in the nature of interest; (2) whether the interest was payable on capital; (3) whether the capital was employed to earn income and (4) whether the relevant income was earned. If all these issues were resolved in the affirmative, then the expense would be allowable under section 14(1)(a). Issues (1) and (2) were not raised in argument and presumably were not disputed. It was issues (3) and (4) which formed the bulk of discussion in the Court of Appeal.

Andermatt’s main argument was based on issue (3): that the capital was employed to earn the income since, on the facts, the overdraft was taken out to complete the acquisition of the Hillview Property. The connection between the purchase of the shares and the interest expense was, in essence, as follows. Andermatt’s liquidation of Wan Holdings resulted in the vesting of the Hillview...