Jurisdiction - Singapore
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Singapore – First Supreme Court Decision On Taxation Of Management Corporations.

18 July, 2014

 

Legal News & Analysis – Asia Pacific – Singapore – Tax

 

Special Levy Contributions Collected From Subsidiary Proprietors Held To Be Of A Capital Nature

 

In the case of BLP v Comptroller of Income Tax [2014] SGHC 127, the Singapore High Court recently held that special levy contributions collected by the management corporation (“appellant“) of a development (“Development“) for the purposes of retrofitting and upgrading the Development were not revenue but capital. The consequence of this finding is that the contributions were excluded from the “operative equation” spelling out the applicable tax treatment for clubs and similar institutions (including management corporations) under section 11 of the Income Tax Act (“ITA“). The Comptroller of Income Tax had determined that the contributions were revenue and should be included in the operative equation, and the appellant successfully appealed to the Singapore High Court.

 

Facts

 

 As noted above, the appellant is the management corporation of a Development. Sometime in 1997, it sought to retrofit and upgrade the Development (the “Project“). To finance the Project, the appellant obtained a loan of SGD 11.6m. As the sums in the existing management and sinking funds were inadequate to finance repayment of the loan, the appellant resolved, via a special resolution, to collect a “special levy” from each of the subsidiary proprietors.

 

The special levy was collected for the sole purpose of financing that loan. This levy was payable monthly over a period of 13 years, between 1 August 1997 and 31 July 2010. Over the period of the 13 years, an amount of about SGD 16.4m was collected.

 

When the appellant filed its tax computation for the year of assessment 2006, it did not include the special levy contributions in relation to the application of the operative equation under section 11 of the ITA. The respondent, the Comptroller of Income Tax, decided that it should have. The Income Tax Board of Review agreed with the respondent, and the appellant appealed to the Singapore High Court.

 

Legal Background

 

The question of whether the special levy contributions should be included in the operative equation determining the appellant’s tax treatment turned on whether it should be considered revenue or capital in nature.

 

Section 11(1) of the ITA provides as follows:

 

“Where a body of persons, whether corporate or unincorporated, carries on a club or similar institution and receives from its members not less than half of its gross receipts on revenue account (including entrance fees and subscriptions), it shall not be deemed to carry on a business; but where less than half of such gross receipts are received from members, the whole of the income from transactions both with members and others (including entrance fees and subscriptions) shall be deemed to be receipts from a business, and the body of persons shall be chargeable in respect of the profits therefrom.”

 

Accordingly, under the operative equation set out in section 11(1), if the result of the revenue receipts from members divided by total revenue receipts from both its members and others is half or more (or the equivalent percentage 50% or more), the management corporation will not be considered a business. Conversely, if the result is less than 50%, the management corporation will be deemed to have derived the receipts from both its members and others from a business, and the corollary of this deeming is that it can claim deductions for expenses such as wear and tear under section 19A of the ITA.

 

In this case, as observed by the Court, the results of the competing characterisations of the special levy contributions by the appellant and respondent would have been as follows:

 

 

  Figures Based on Appellant’s Contentions Figures Based on Respondent’s Contentions
Gross Receipts from Members: (a) $2,548,138 $2,548,138 + $1,483,197 (special levy contribution) + $710 (sinking fund) = $4,032,045
Figures Based on Respondent’s Contentions Total Gross Receipts: (b) $5,253,491 $5,253,491 + $1,483,197 (special levy contribution) + $710 (sinking fund) = $6,737,398
Proportion : (a)/(b) x 100% 48.5% 59.8%
Result under Section 11(1) Business would be deemed Business would not be deemed

 

Decision

 

The Singapore High Court decided in favour of the appellant, holding that the special levy contributions were capital and not revenue. 

 

It noted that in order to determine whether a transaction was capital or revenue in nature, the test to be applied was as determined by the Court of Appeal in Comptroller of Income Tax v IA (2006) as follows:

 

  • To determine the purpose of the transaction, first, ascertain if there is a sufficient linkage or relationship between the loan and the main transaction or project for which the loan was taken.
  • If there is no linkage, the loan would merely add to the capital structure of the taxpayer and is therefore capital in nature. It may be proved that only parts of the loan do not have a linkage to the main transaction. One main indicator of this absence of a linkage is that those particular parts of the loan are not temporary and fluctuating in nature but are, instead, of a permanent (and therefore capital) nature.
  • On the other hand, if there is a sufficient linkage, proceed to ascertain if the main transaction is of a capital or a revenue nature. If it is of a capital nature, then, given the linkage to the loan, so too is the loan. Likewise, if the main transaction is of a revenue nature.

 

The Court then considered the purpose of the special levy. It noted that it had been sanctioned for the sole purpose of repaying the loan which financed the Project. The special levy, loan, and Project were hence inextricably linked. The Project, aside from the construction of ten new units of studio apartments, included the following:

 

  • Replacement of floor finishes at common areas, parapet walls, wall finishes in toilets, and ceiling finishes at common areas;
  • Installation of new building logo and external building name sign, along with floodlights and decorative motifs;
  • Repainting of concrete panels on the exterior of the building;
  • Improvement of lift lobby and entrances to the residential block with new wall treatment, floor finishes, lighting, etc;
  • Installation of new lift openings at the third storey, and six new escalators at the concourse; and
  • Upgrading of one existing transformer (to cater for the retrofitting works and future extensions).
 

The Court stated that the correct approach was not by dissecting the Project and scrutinising each item. Instead, the Project should be considered as a whole as this would lead to a more coherent approach. The Court then noted that in the appellant’s letter to the subsidiary proprietors seeking approval for the Project and the special levy, it had stated, “[The Development] was built more than 25 years ago… Throughout these years, no major retrofitting has been undertaken to improve the image of the building and upgrade its facilities/services…”

 

The Court then observed that, given the circumstances, the Project seemed more like a one-time overhaul than routine maintenance and repair. It was targeted at the strengthening of the Development, and even the creation of new assets (in the ten units of studio apartments). Accordingly, even though the contributions to the special levy were not donations and were of a recurring nature, the contributions were inextricably linked with the Project, which strengthened existing, and created new, assets and should thus be treated as capital and not income in nature.

 

 In reaching its decision, the Court also rejected the respondent’s reliance on provisions of the Building Maintenance and Strata Management Act (“BMSMA”) that spelled out the statutory duties of the management corporation including the carrying out of repair, maintenance, and improvement of the Development for the view that any transaction that the appellant engaged in would be of a revenue nature. The Court accepted the appellant’s argument that if the respondent were correct, all transactions would invariably be of a revenue nature, but the provisions of the BMSMA do not determine the question, following the Court of Appeal decision in Comptroller of Income Tax v BBO (2014) (“BBO“) where a seemingly similar argument of the respondent was rejected.

 

Our Comments / Analysis

 

Being the first Supreme Court decision on section 11 of the ITA, the Court has clarified the application of the operative equation in relation to the capital/income dichotomy which is fundamental to the whole framework of the ITA. This case offers clarity not only on how management corporations should be taxed under section 11, but also in relation to clubs and similar institutions generally.

 

In dismissing the respondent’s arguments based on the BMSMA, the Court has reinforced the important ruling by the Court of Appeal recently in BBO, viz. that where the purpose of an Act was the regulation of certain entities (e.g. insurance companies in BBO or management corporations in this case) and not the taxation of these entities, the provisions of that Act do not determine the tax treatment in relation to these entities.

 

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For further information, please contact:

 

Kay Kheng Tan, Partner WongPartnership

kaykheng.tan @wongpartnership.com 

 

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