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Singapore – Property Tax Refund Allowed For Fitting-Out Period.

6 February, 2014

 

Legal News & Analysis – Asia Pacific – Singapore – Tax

 

The Singapore Court of Appeal has issued its decision in BFC Development LLP v Comptroller of Property Tax [2014] SGCA 09. The issue in this case was whether the Appellant (BFC Development LLP) was entitled to property tax refunds (also known as “vacancy refunds”) pursuant to section 8 of the Property Tax Act (“Act”), in respect of various units at Marina Bay Financial Centre (“MBFC”) Towers 1 and 2. The Appellant is the owner of both MBFC Towers 1 and 2. It had entered into lease agreements with various tenants in which the tenants were provided with a rent-free period for the units to be fitted out for occupation before the commencement of the lease.


As the Appellant was of the view that the units were vacant (unoccupied) during the fitting-out periods, the Appellant sought vacancy refunds under section 8 of the Act from the Comptroller of Property Tax (“Comptroller”) for the said periods. However, the Comptroller was of the view that the units were occupied during the said periods and hence, did not allow the claims for refunds. Accordingly, the Appellant appealed to the Singapore High Court but was unsuccessful. The Appellant then appealed to the Singapore Court of Appeal where its appeal was allowed. WongPartnership acted for the Appellant. This update takes a look at the case.


Facts

 

As noted above, the Appellant is the owner of the MBFC Towers 1 provided for and 2. Prior to the issuance of the Temporary Occupation Permits rent-free fitting- out period (“TOPs”), a number of parties had already committed to leasing various units. Following the issuance of the TOPs, the Appellant wrote to these parties to take possession of the units for which they had agreed to take leases. In the lease agreements, the Appellant had provided a fitting-out period in order that the units could be fitted out for occupation by the would-be tenants. No rent was payable for the fitting-out periods. During the fitting-out periods, the tenants did not move into the units, but their contractors conducted fitting out works in the units.


Property tax in respect of the units was duly assessed from the respective dates of the TOPs. In assessing property tax commencing from the date of the TOP, the consequence was that property tax was paid for each unit even when the unit was unoccupied, including the period when the unit was being fitted out before occupation by the respective tenant. As such, the Appellant filed claims for vacancy refunds for periods starting from the TOP date and ending at the commencement of the respective leases. The claims were made pursuant to section 8(1) of the Act,which provided for a refund of property tax where the property was “unoccupied” for an unbroken period of at least 30 days

 

The claims were initially allowed by the Comptroller but later allowed for fitting-withdrawn as the Comptroller took the view that since the Appellant had by then secured tenants and the tenants had taken possession of the units and were carrying out fitting-out works, the units were not “unoccupied” for the purpose of section 8 of the Act. The Comptroller explained that the vacancy refund was meant to give relief in situations where a building was either fit for occupation but could not be rented out, or unfit for occupation and was undergoing repairs to make it so fit. The fitting-out period did not fall into either of these categories and, hence, the Comptroller disallowed the Appellant’s claims for property tax refunds.


The Appellant appealed to the High Court, and subsequently the Court of Appeal.


Legal Background

 

Section 8 of the Act provides that a refund on property tax may be claimed where a building is unoccupied. The requirements of section 8 must be met. These are set out in sections 8(1) and (4). Section 8(1) states:


“Where tax has been paid under the provisions of this Act in respect of any building, the Comptroller shall, subject to this section, refund a part of the tax proportionate to any period during which the building is unoccupied except that no refund shall be allowed in respect of any unbroken period of less than 30 days or a calendar month.”

 

Section 8(4) states:


“No refund shall be allowed in respect of any building unless the owner satisfies the Comptroller —


(a) that the building is in good repair and fit for occupation;

(b) that every reasonable effort to obtain a tenant has been made;

(c) that the rent demanded is a reasonable one; and (d) that the building has been vacant during the whole of the period in respect of which a refund is claimed.”

 

Decisions

 

The Court of Appeal allowed the appeal. It accepted the Appellant’s argument that “occupation” for the purposes of section of “occupation” accepted 8 of the Act should be understood as meaning “the enjoyment and use of the premises for the purpose for which those premises were created”. Accordingly, as the units were not occupied in this sense during the fitting-out period, the Appellant was entitled to a refund of property tax for that period.

 

The Court first considered the purpose behind section 8 of the Act, and held that it was for the provision of financial relief to an owner who was not able to reap the return for which his property was intended, through no neglect or unreasonableness on his part. Reading the conditions in section 8 of the Act together with the Parliament speeches, the Court disagreed with the High Court Judge, taking the view that it would be appropriate and consistent with the rationale behind the vacancy refund provision to grant a vacancy refund to an owner (like the Appellant) who had secured a tenant whose tenancy commences at a date later than the lease agreement date.

 

The Court then went on to consider the shade of meaning that should be given to the term “occupation” which would best promote the legislative object of granting financial relief to owners of rental properties as envisaged under section 8 of the Act.

 

The Appellant had argued that the term “occupied” should be understood as meaning “the enjoyment and use of the premises for the purpose for which those premises were created”. The Comptroller, on the other hand, had argued for a definition of occupation that was tied to a “sufficient measure of control”. Such control would arise when a tenant took possession of the property.


The Court considered both meanings, and found that the meaning of “occupation” advocated by the Appellant best advanced the intention of Parliament: 


  • It explained that, viewed in its proper context, the vacancy refund was really a means of granting financial relief to the owner of the property for his inability to obtain the use value of his or her property. When an owner is staying in the property, he does not receive rent but has personally enjoyed the value of his own property. When the owner neither stays in the property nor attempts to rent it out because he wishes to sell it with vacant possession, it may be said, in an extended sort of sense, that he is enjoying the financial advantage of that potential value. When the owner holds out a property for rental, the intended use value of the property is clearly the rent. To attribute the sense of beneficial use to the term “occupation” best captures this paradigm, because the beneficial use of the property can be seen as the ability to realise the use value of the property as it was intended to be used. Tenant did not
  • The Court also explained that it did not consider the tenant as obtain beneficial obtaining the beneficial use of the premises for which he use of premises during fitting- out period intended them during the period when fitting-out works were being conducted. In its view, during this fitting-out period, no one was in fact really enjoying the use of the premises. The Court noted that section 8(5) of the Act identified the conduct of essential repairs, coupled with the vacant state of the premises, as a situation in which the vacancy refund may be granted. This indicated that Parliament accepted that buildings undergoing works so that they could be used for the intended purposes, could not be put to beneficial use by anyone and therefore a lack of tenancy in such circumstances would be wholly expected and excusable. It did not matter whether the works were commissioned by the owner, the tenant-to-be, or by someone else as it was the condition of the property which was under examination.

 

The meaning of the term “occupation” contended for by the Comptroller would, on the other hand, give rise to a number of difficulties:


  • It is well-established that the concept of legal possession is quite distinct from “occupation”, whatever the shade of definition was given to the term.
  • Equating legal possession with occupation would not sit well with the construction of section 8 of the Act. If this were the test, a property could never be truly unoccupied by its owner even if he has not secured a tenant as he always remains in legal possession of it. All the more would this be the case if he were carrying on repairs on the property, when section 8(5) clearly allowed him to claim a refund when he was repairing vacant property.
  • To apply this meaning of the term “occupation” would require it to be applied only to the tenant’s occupation and not the owner’s. However, there was nothing in the Act nor in the relevant Parliamentary debates that sanctioned such an approach.

 

The Court also rejected the Comptroller’s argument as to the application of section 8(4) of the Act. This section sets out four requirements that had to be met before a claim for refund could be allowed in respect of a period. The Comptroller argued that, during the period of the gap, two of the requirements in section 8(4) could not be met, namely, that every reasonable effort to obtain a tenant has been made and that the rent demanded was a reasonable one.

 

The Court, however, considered such a construction of section 8(4) to be against the spirit of the provision. In its view, the four for differentiation conditions should be understood as a specific mechanism prescribed by Parliament to differentiate between owners who genuinely intended to let out their properties and those who kept their properties vacant for other reasons. Its legislative purpose was to discourage the inefficient holding out of property, and not to penalise those who through great efforts managed only to obtain a tenant who wanted the tenancy to start only a couple of months later. The Court noted that, in such circumstances, one could not sensibly expect the owner to make any further effort to find another tenant to fill the gap period in order to literally satisfy the condition in section 8(4)(b)—no one would take up a tenancy of such a short duration and no estate agent would accept such an engagement.


In the premises, therefore, the Court allowed the appeal.


Our Comments / Analysis

 

It was noted by the High Court that the amount of refund in this case (if allowed) was around S$6.9 million. This is a sizable amount, and since landlords would typically pass down property tax costs to the tenants, had the Court of Appeal agreed with the High Court and the Comptroller of Property Tax, the property tax costs would have increased for many tenants in commercial and office buildings.


In light of the Budget Statement 2013, the vacancy refund provision will be withdrawn with effect from 1 January 2014. However, according the IRAS e-Tax Guide issued on 26 November 2013, claims relating to periods commencing on or after 1 November 2012 and ending on or before 31 December 2013 may still be submitted by 31 March 2014. The e-Tax Guide (at paragraph 7.7) which states that refunds cannot relate to rent-free fitting out periods is no longer accurate, in light of the Court of Appeal’s decision in BFC Development LLP v Comptroller of Property Tax. Owners should therefore include fitting out periods in the period under claim for a refund.

 

Notwithstanding the cessation of the vacancy refund provision in 2014, it should be borne in mind that this is not a new development; such a provision had been withdrawn and reinstated previously, in the 1960s, as noted by the Court of Appeal. The changes then and now are policy-driven and one cannot rule out yet another reinstatement in the future.

 

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Tan Kay Kheng, WongPartnership

kaykheng.tan@wongpartnership.com

 

Tan Shao Tong, Partner, Wong Partnership

shaotong.tan@wongpartnership.com

 

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