Income versus Capital – The Comptroller of Income Tax v BBO [2014] SGCA 10


On 4 February 2014, the Court of Appeal has dismissed the appeal by the Comptroller of Income Tax {“CIT“) [see the Comptroller of Income Tax v. BBO [2013] SGHC 74].

The Court of Appeal agreed with the finding of the High Court in that gains arising from the disposal of investments in the insurance industry could under certain circumstances, be treated as non-taxable capital gains, and not income assessable to tax under Section 10(1)(a) of the Income Tax Act (“ITA“).

Brief Review of the Facts 

  • Taxpayer (BBO) carried on the business of a general insurance registered under the Insurance Act.   It was part of the C group of companies.  BBO used the Singapore Insurance Fund (SIF) and the Offshore Insurance Fund (OIF) to invest in C’s shares and used OIF to invest in D and E shares.
  • Between 1972 and 1994, BBO sold a proportion of its C and D shares and treated the gains arising therefrom as taxable income.
  • In 2001, an unrelated company (F) offered to acquire C.  Pursuant to the takeover, BBO sold its entire holding of C shares to F and in 2002, BBO also sold its portfolio of D and E shares.  BBO however took the position the gains arising from these disposal are capital in nature.  The CIT disagreed and issued revised assessments to BBO, treating such gains as taxable income.

BBO made an appeal to the Income Tax Board of Review, which ruled in favour of BBO. The CIT appealed to the High Court, which dismissed the CIT appeal.  The CIT made a final appeal to the Court of Appeal.   Andrew Ang J delivered the judgement of the Court of Appeal.

CIT’s sole arguments in this appeal

The CIT submitted to the Court of Appeal that the profits made by BBO represents profits falling within {sic} Section 10(1)(a) of the ITA as income … in respect of gains or profits from any trade [or] business.

Court of Appeal’s Decision

    1. The question whether investment gains are properly attributable to income or capital is ultimately a question of facts, to be determined according to the ordinary concepts and usages of mankind (See Scott v. Commissioner of Tax (NSW)) (1935) SR (NSW) 215.  The Court of Appeal reviewed a number of overseas cases and conclude that “caution must be exercised not to extend any broad and generalised statements … beyond the actual ratio decidendi of those cases.”
    2. The Court of Appeal considered that the charging section in the New Zealand tax legislation is persuasive and reviewed a New Zealand decision, where by the issue before the NZ High Court was whether the gains arising from the sale of shares by the taxpayer pursuant to a takeover or a merger were properly characterised as capital gain or revenue.  In deciding the gains were of a capital nature, the NZ High Court placed great emphasis on the fact that claims submitted by the taxpayer could easily be met from its cash flow and cash reserves without the need to liquidate any of its shares to meet the claims and liabilities.  It took into consideration the lack of intention on the shareholders’ part to trade in the shares and the fact that the shares were sold pursuant to a compulsory acquisition.
    3. The Court of Appeal laid down the following principles: “(a)   The crucial question is whether the gain in question is a mere enhancement of value by realising a security or whether it was made in an operation of business in carrying out a scheme for profit-making

      (b) This is ultimately a question of fact to be determined according to ordinary concepts having regard particularly to the circumstances under which, and the purposes for which, the investments were acquired and held by the taxpayer.

      (c) However, as a matter of practicality, the nature of insurance (or similar) businesses would ordinarily give rise to an inference that the gains concerned arose in the course of trade or in the operation of business in carrying out a scheme for profit-making (unless, of course, there is cogent evidence that the investments were acquired and held as capital assets).”

 

  • The Court of Appeal is of the view that the Insurance Act is not determinative of the central issue in this appeal.  In other words, it is possible for an insurance company to derive non-taxable capital gains.

 

 

 

  • The Court of Appeal went on to discuss the Badges of Trade and concluded the following

 

 

    • The C, D and E shares were acquired and held as part of a group corporate preservation strategy, which gives rise to a very strong inference that they were capital assets.
    • These shares were held for a long period of time, indicating that BBO intended to hold the investment for an indefinite period.
    • BBO did not need to and did not in fact liquidate these shares to meet its liabilities in the insurance business.
    • The earlier tax treatment on the disposal of certain shared held by BBO were rightfully found to be unpersuasive  or at most neutral factor.

What does this mean to you?

In our view, the Court of Appeal has affirmed the principle that in determining whether a gain derived by an insurance company is assessable to tax, Section 10(1) comes first before Section 26.  The Court of Appeal essentially agrees that an insurance company can derive non-taxable capital gain.

The Court of Appeal has reiterated that the question as to whether a gain is capital or income is ultimately a question of fact. As we can see from the case, the Court of Appeal applies the famous badges of trade – the motive of the taxpayer, the duration of ownership of the asset, the frequency of similar disposals, financing, the subject matter of the disposal and circumstances responsible for the disposal.

The fact that an insurer may hold assets in its insurance funds and/or use them in the
calculation of its solvency margin are not factors to be considered determinative of whether the assets concerned were revenue or capital. Thus, it is irrelevant to the “income vs capital” analysis whether an asset is held in an insurer’s insurance fund or not.

At present, insurance companies are excluded from the certainty of tax treatment provision under Section 13Z of the ITA. Probably it is time for the Ministry of Finance to consider an amendment to this provision as soon as possible because there is no policy reason for insurance companies to be excluded from this provision in view of the Court of Appeal’s decisions.

If you have any questions regarding the above, please contact us at support@whm-consulting.com.

Be Well!
Jack Wong
for WHM Consulting Pte Ltd

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