Wee Teng Yau v Comptroller of Income Tax and another appeal

• Jurisdiction: Singapore
• Judge: Choo Han Teck J
• Judgment Date: 04 November 2020
• Neutral Citation: [2020] SGHC 236
• Plaintiff Counsel: Zheng Sicong and Lau Sze Leng Serene (Inland Revenue Authority of Singapore),Lau Kah Hee and Muhammad Fikri Yeong Bin Iskandar Shah (BC Lim & Lau LLC)
• Docket Number: Tax Appeals Nos 10 and 11 of 2020
• Hearing Date: 26 October 2020,28 September 2020
• Subject Matter: Income taxation,Revenue Law,Avoidance
• Published date: 19 January 2021
• Court: High Court (Singapore)
• Citation: [2020] SGHC 236
• Year: 2020

Choo Han Teck J:

The Appellant, Dr Wee, is a dentist who was employed by a dental clinic known as Alfred Cheng Orthodontic Clinic Pte Ltd (“ACOC”) from January 2011 to May 2012. On 1 May 2012, Dr Wee incorporated a company known as Straighten Pte Ltd (“SPL”), of which he was the sole director and shareholder.

From 1 May 2012, Dr Wee continued to provide the same dental services to ACOC’s patients as he had done before. The only difference is that from 1 May 2012, ACOC paid for Dr Wee’s services to SPL instead of to Dr Wee. SPL, in turn, paid Dr Wee a salary and also a director’s fee. Tax-exempt dividends were also declared and paid to Dr Wee from the profits remaining in SPL.

The fees paid by ACOC to Dr Wee for the year of assessment (“YA”) 2012 were $279,194.60. The fees paid by ACOC to SPL and reported as SPL’s income for YAs 2013 to 2016 were $1,470,764 in total.

For YAs 2013 to 2016, SPL paid a total of $336,000 by way of director’s remuneration to Dr Wee. Dr Wee also received $765,205 by way of tax-exempt dividends as shareholder. During this period, the annual remuneration to Dr Wee from SPL (which ranged between $40,000 to $110,000) was significantly lower than the $279,194.60 which Dr Wee had earned directly from ACOC in 2011.

The Comptroller thus treated the fees received by SPL from ACOC as Dr Wee’s income and levied tax accordingly. Dr Wee objected on the ground that he should only be taxed on his personal income which was the remuneration that SPL had paid him. The balance from ACOC to SPL should be paid by SPL as corporate tax. By this arrangement, the Comptroller submits, Dr Wee would be paying less tax than if the entire ACOC payment to SPL was treated as income to Dr Wee. The matter was reviewed by the Income Tax Board of Review (“ITBR”) which agreed with the position of the Comptroller. Dr Wee appealed against that decision before me. The Comptroller, although successful below, cross-appealed against Dr Wee on some of the findings and conclusions of the ITBR.

The Comptroller relies on s 33(1) of the Income Tax Act (Cap 134, 2008 Rev Ed; Cap 134, 2014 Rev Ed) (“The Act”) as the basis for the levy of the assessed tax on Dr Wee. Counsel for Dr Wee, Mr Lau Kah Hee, submitted that the Comptroller had failed to satisfy the requirements of s 33(1), and further, that even if it did, Dr Wee would be exempted under s 33(3)(b) of the Act. For convenience, s 33(1) and s 33(3)(b) are set out below: 33.––(1) Where the Comptroller is satisfied that the purpose or effect of any arrangement is directly or indirectly – (a) to alter the incidence of any tax which is payable by or which would otherwise have been payable by any person; (b) to relieve any person from any liability to pay tax or to make a return under this Act; or (c) to reduce or avoid any liability imposed or which would otherwise have been imposed on any person by this Act,

the Comptroller may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the arrangement and make such adjustments as he considers appropriate, including the computation or recomputation of gains or profits, or the imposition of liability to tax, so as to counteract any tax advantage obtained or obtainable by that person from or under that arrangement.

…

(3) This section shall not apply to ––

…

(b) any arrangement carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax.

Section 33(1) refers to an arrangement, and that can be broad or narrow, simple or complex, but to refer to two arrangements (as the ITBR did) may lead to confusion. I believe what the ITBR meant was that the arrangement in this case can be seen as having two parts in some other arrangements.

The arrangement was for ACOC to pay to SPL, a private limited company wholly owned by Dr Wee, what it had previously paid Dr Wee directly. SPL could then pay a lower salary to Dr Wee that enables Dr Wee to pay less personal income tax while SPL itself pays a lower rate corporate tax. The net result of this simple arrangement is that Dr Wee gets the same amount of pay from ACOC but avoids paying the tax he used to pay, because he could use SPL to extract tax benefits that he could not himself obtain. For the period in question, this was the sole purpose of SPL. The facts fit directly under s 33(1)(a) as well as s 33(1)(c).

The question remains whether Dr Wee’s arrangement with ACOC is exempted from s 33(1) by virtue of s 33(3)(b), a provision that is straightforward and clear. But because it is expressed in wide terms, intending to be applicable in varied circumstances, applicants can latch on to those terms as their escape route.

In this case, for example, Dr Wee argues that SPL was a...