4 February 2014

Revenue Law — Property Tax — Occupier

Facts

This is an appeal of the Appellant for property tax refunds (“vacancy refunds”) in respect of its various leased premises (hereinafter referred to as “the Units”) for the period between issuance of the Temporary Occupation Permit (“TOP”) for the Units, and the commencement of the lease (“Term Start Date”).

The Appellant is the owner of two tower blocks at Marina Bay Financial Centre and had, prior to the issuance of TOP for the Units, secured a number of tenants. The tenants had each signed the acceptance of a Letter of Offer, enclosing the Form of Lease agreement, providing for a rent-free fitting-out period starting on the date on which the tenant was required to take possession of the premises (“Possession Date”). The fitting-out periods varied amongst the different tenants.  Rent was only payable from the date of commencement of the lease, which was immediately after the end of the fitting-out period. During the fitting-out periods, the tenants did not move into the Units, but their contractors conducted fitting-out works in the Units.

The Appellant filed claimed vacancy refunds from the date of issuance of TOP until the Term Start Date (“Claim Period”), which included the fitting-out period. The Comptroller of Property Tax (“the Respondent”) had initially allowed the refund claims for the entirety of the Claim Period, but later withdrew the refunds on the grounds that the Units were not “unoccupied” for the purposes of sec 8 of the Property Tax Act (Cap 254, 2005 Rev Ed) (“the Act”) as the Appellant had by then secured tenants, who had taken possession of the Units and were carrying out fitting-out works. The Appellant consequently applied for a Mandatory Order that the Respondent refund the property tax in respect of the Units during the fitting-out period, and a declaration that it was entitled to such refunds.

The High Court Judge heard the parties on 25 October 2012 and dismissed the Appellant’s application by a written judgement on 28 November 2012 on the grounds that:

• The Units were not “unoccupied” within the meaning of sec 8 of the Act during the fitting-out periods, and
• No refund shall be allowed unless ALL four conditions listed in sec 8(4) are satisfied, and the Appellant could not have fulfilled the requirement in sec 8(4)(b) that presupposed that no tenant had been found for the Units since it has already secured tenants for the Units;
• The tenants’ taking of possession of the Units gave them a sufficient degree of control so as to constitute occupation.
• He disagreed with the Appellant’s argument that refunds ought that to be made during any period where rent was not collected, as this would open the vacancy refund scheme to abuse if owners grant their tenants long rent-free periods and backload the rent after the commencement of the lease.

Consequently, the Appellant filed an appeal to the Court of Appeal.

(For a summary of the High Court case, please refer to the TAX@SG article “High Court – BFC Development LLP v Comptroller of Property Tax – [2012] SGHC 237” dated 3 February 2013.)

Issues

1. What was the Parliament’s rationale for providing for a refund in respect of vacant properties under the Singapore property tax legislation (“vacancy refund provision”);
2. Was the High Court Judge correct in his interpretation of the term “occupation” as used in sec 8 of the Act; and
3. The significance of the four conditions under sec 8(4) of the Act, and whether they were fulfilled during the Claim Period in the circumstances in relation to the Units.

Conclusion

The Appellant’s appeal was allowed.

The Court of Appeal ruled that Appellant was entitled to the vacancy refund under sec 8 of the Act as the Units were “unoccupied” during the fitting-out period for the purpose of sec 8 of the Act because the Appellant was not obtaining the beneficial use of the property for which it was intended, during the rent-free period. In addition, the tenants did not obtain beneficial use of the Units for the purpose of their businesses when the Units were undergoing fitting-out works.

The key points in arriving at the decision were as follows:

• From past Parliamentary debates, it is clear that the vacancy refund was intended to grant relief to owners who genuinely intend to let out their properties, rather than keep the properties vacant for other reasons. In the Parliamentary speeches, there were no reference to the receipt of rent, but only to the property being unoccupied and provided there must have been a genuine procurement of a tenant for the property.  The reference to procurement of a tenant instead of receipt of rent in the Parliamentary speeches suggests that the Parliament recognised that a property could well be occupied and not generating rent for the owner. The Court of Appeal concluded that the underlying purpose of the vacancy refund scheme was to provide financial relief to an owner who is not able to reap the return for which his property was intended, through no neglect or unreasonableness on his part.
• The Court of Appeal found that the term “occupation” should be construed to mean beneficial use for the purpose for which the property is intended. Possession per se should not be the basis to determine whether an owner would be eligible for property tax relief under sec 8 as a property, even when not unoccupied, would be under the possession of the owner. Therefore, to deny the owner the refund because he was in possession of the property would run counter to the object of the vacancy refund scheme.  The provision in sec 8(5) of the Act suggests 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.
• The Court found that the Appellant had met the four conditions under sec 8(4) of the Act throughout the Claim Period as:
  • The Units were in good repair and fit for occupation as required under sec 8(4)(a) of the Act, when TOP was granted;
  • The Appellant had made reasonable efforts to secure tenants by enlisting the services of various estate agents, and by asking for a reasonable rent, thereby satisfying the conditions under sec 8(4)(b) and (c);
  • The securing of a tenant for the Units does not mean that the conditions under sec 8(4)(b) and (c) could not be satisfied. Once a tenant is found for a property, and where the tenant would only take occupation of it in a couple of months’ time, one cannot 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 sec 8(4)(b).

From past Parliamentary debates, it is clear that the vacancy refund was intended to grant relief to an owner of a building which was at all material times meant to be rented out rather than kept vacant for other reasons. Furthermore, it was stated in the second reading of the Property Tax (Amendment) Bill 1960 that the four requirements were intended to serve as “precautionary steps” to prevent an owner who kept his property vacant for other types of benefit, such as sale with vacant possession, from claiming the refund. In light of this, the four 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. As such, the owner should still be entitled to claim refund for the gap period being used by the tenant to do fitting-out works.

The Court of Appeal also dismissed the High Court’s finding that allowing relief in respect of the fitting-out period might encourage the owner to “provide tenants with longer rent-free fitting-out periods in order to claim tax refunds while recouping the rent lost … by back-loading the rent after the [lease formally commences]”. It found the possible abuse of the vacancy refund scheme to be unlikely. A fitting-out period, by its very nature, must be relatively short and reasonable. When there is an abuse, the Respondent would no doubt react appropriately and refuse to grant a refund for the entire period claimed. Furthermore, the back-loading of rent could have the effect of raising the annual value of the property, thereby resulting in higher taxes for the owner.

The above judgement was delivered on 24 January 2014.