24 June 2012

The case relates to the Chief Assessor’s appeal against the Valuation Review Board (“the Board”) made on 24 May 2011. The Respondent, HSBC Institutional Trust Services (“the Landlord”), is the trustee of CapitalMall Trust which owns the shopping centre known as Bugis Junction. Bugis Junction has 180 units which are normally leased to tenants carrying on various types of businesses at the shopping centre.

The Chief Assessor did not exclude a portion in the gross rent for depreciation arising from wear and tear of escalators, lifts, air-conditioning and fire safety systems installed in Bugis Junction, in the computation of the annual value of the various tenanted units for the valuation years of 2004 and 2005.

Dissatisfied with the assessment made by the Chief  Assessor, the Landlord appealed to the Board.  The Board accepted the Landlord’s contention and ruled that the claim for depreciation was a constituent part of the total cost of the services provided by the Landlord, and that it should be excluded from gross rent in the determination of annual value for the relevant tax years.

It was agreed between the parties that the question of law for this appeal is whether, as a matter of principle, a component in the gross rent for depreciation of the asset items (ie, escalators and lifts, air conditioning and fire safety  systems) should be excluded from gross rent in the computation of annual value.

The Chief Assessor submitted that the Board had erred in allowing the exclusion of a portion of the gross rent for depreciation in the computation of annual value and argued that the Board had focussed on the wrong question, viz, whether the Landlord required the asset items to provide services to the tenants. The Chief Assessor argued that the Board was wrong to have ruled as irrelevant its own findings that the asset items were permanent features and, hence, an integral part of the building.

The Landlord’s argument, on the other hand, was that as depreciation constituted part of the total cost of the services provided and the gross rent was formulated with the depreciation in mind, then it ought to be excluded from the gross rent in order to arrive at the annual value of the property. The Landlord accepted that the asset items are in the nature of plant and machinery, but disagreed that they formed “integral parts of the building”.

The Chief Assessor’s appeal was allowed with costs as:

1. The Board did not consider whether the asset items were potentially assessable to tax together with the subject building under section 6(1) of the Property Tax Act (“PTA”). Tax is payable on immoveable properties such as houses, buildings, lands and tenements. Therefore, a building is assessable together with fixtures that are on or in the building unless the fixtures are manufacturing or industrial machinery exempted under section 2(2) of the PTA. The Board found that the asset items were fixtures and, hence, part of the building, but nevertheless ruled that its findings were irrelevant and had no application in law to this case. Consequently, it cast aside the statutory imposition of tax on fixtures in or on immoveable property in the determining what constitutes “building” for property tax assessment.
2. Following from the first error, the Board’s focus on services led it to decide that its finding that the asset items were fixtures and an integral part of the building that comprises Bugis Junction was irrelevant to the issue before it. As the asset items are assessable to tax together with the building, in assessing annual value, it cannot be said that depreciation of the asset items has nothing to do with letting of the Premises.
3. The Board erred in its ruling that a portion of the gross rent for depreciation was related to the total cost of services. The mode of finding out the annual value is laid down in the PTA which is to ascertain the rent which a hypothetical tenant (not the tenant) taking one year with another might reasonably be expected to pay.
4. As the Board found on the facts in evidence, the asset items were fixtures and they formed integral parts of the building. In a sale of property, the transfer of the real estate would include the fixtures and the transfer instrument to be assessed for duty would include the transferor’s title to or interest in the fixtures. Either test should reach the conclusion that the asset items are affixed to land so as to become part of the land and, thus, be assessable to tax together with the building concerned under section 6(1).
5. It follows that the portion of the gross rent for depreciation of the asset items in question has to do with the letting of the premises, which, in turn, means that the depreciation component in the gross rent is related to rent or letting of the premises. Therefore, the depreciation component in the gross rent has to be included in the computation of annual value in the valuation years of 2004 and 2005.

The decision was delivered on 4 June 2012.