17 February 2014
Revenue Law — Income Taxation
The Appellant is the Comptroller of Income Tax, while the Respondent is a Singapore-registered company and part of the [C] Group of companies. The Respondent carried on the business of a general insurer in Singapore and was registered under the Insurance Act (Cap 142, 2002 Rev Ed) (“the Insurance Act”) until December 2009.
Pursuant to sec 17(1) of the Insurance Act, an insurer is required to establish separate insurance funds for each class of insurance business and to ensure that all assets, receipts, liabilities and expenses are properly attributed to the relevant fund. Accordingly, the Respondent established the Singapore Insurance Fund (“SIF”) and the Offshore Insurance Fund (“OIF”) in respect of its Singapore and overseas policies respectively. The SIF and OIF were used to invest in [C], [D] and [E] shares.
In 2001, the Respondent sold its entire holding of [C] shares to [F], an unrelated company, and made a gain of about S$89.2 million. In 2002, the Respondent also sold its portfolio of [D] and [E] shares in the OIF and made gains of about S$7.9 million and S$1.4 million from the sale of [D] shares and [E] shares respectively.
The Appellant took the view that the gains made by the Respondent were taxable and issued revised assessments for the year of assessment (“YA”) 2002 and YA 2003 to the Respondent. Following this, the Respondent made a request for amendment. In 2010, the Appellant issued a Notice of Refusal to Amend the Assessments for YA 2002 and YA 2003.
Subsequently, the Respondent filed Notices of Appeal against the Appellant’s revised assessments for both YA 2002 and YA 2003. The appeals were allowed by the Income Tax Board of Review (“the Board”) in 2012. The Appellant then appealed against the Board’s decision to the High Court but the appeal was dismissed. In 2013, the Appellant filed a Notice of Appeal against the decision of the High Court.
- Whether the gains arising from the sales of the shares were profits of the Respondent’s business, falling with sec 10(1)(a) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“ITA”), and therefore liable to be taxed.
- Whether the Insurance Act was determinative of whether the gains attributable to the shares arose in the operation of the Respondent’s insurance business in carrying out a scheme for profit-making.
The Appellant’s appeal was unsuccessful.
The Court of Appeal was satisfied on the totality of the evidence that the Board was well entitled to find that the shares were in fact capital assets, the gains attributable to which were not taxable under the ITA. It follows that the High Court did not err in affirming the determination of the Board.
In coming to this decision, the Court of Appeal considered the following:
1. Relevance of the Insurance Act
The Appellant’s argument that the gains from the sales of the shares were taxable as income, largely relied on sec 17 of the Insurance Act. Section 17(1) of the Insurance Act provides for the establishment by an insurer of separate insurance funds for each class of its insurance business, while sec 17(4) stipulates what must be paid into an insurance fund and the restrictions on what an insurance fund may be used for.
The Appellant’s primary argument was that the shares were attributable to the Respondent’s insurance business as the shares were acquired, by applying the proceeds of premiums received, in the course of the insurance business and were at all times in its insurance funds.
The Court of Appeal disagreed with the Appellant’s argument, and held that the regulatory requirement for the establishment and maintenance of insurance funds could not without more restrict an insurance company from holding capital assets in its insurance funds. Furthermore, assets which are acquired with the receipts of income would not invariably be of a revenue nature. The relevant enquiry to be undertaken in cases involving the taxation of investment gains by insurance (or similar) companies may be summarised as follows:
(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).
Therefore, the Court of Appeal were of the view that the Insurance Act was not determinative of whether the gains attributable to the shares arose in the operation of the Respondent’s insurance business in carrying out a scheme for profit-making.
2. Application of the relevant legal principles to the facts
The Court of Appeal held that the shares were capital assets and the gains attributable to them were therefore not liable to tax, based on the following factors:
(a) Motive of the taxpayer
The Respondent did not acquire the shares with an intention to trade in them. Instead, the Respondent’s intention in holding the shares was to promote the long-term strategic interests of itself and the [C] Group. This was evidenced by the numerous cross-holdings of shares and cross-directorships between companies within the [C] Group. Any decision to sell any shares or rights in the companies within the [C] Group was closely scrutinised and reviewed to ensure that the appropriate level of shareholding and effective control was maintained. The Respondent was not allowed to sell any of its shares and rights in relation to companies within the [C] Group without the requisite approval from [C]. The shares were also treated differently and segregated from shares that were readily traded by the Respondent. It was therefore evident that the shares were held as part of a corporate preservation strategy as opposed to for the purposes of trade.
(b) Duration of ownership
The [C] shares, [D] shares and [E] shares were accumulated over a period of 30 years, 20 years and 27 years respectively. This is in line with the Respondent’s stated intention of holding the shares for an indefinite period pursuant to its corporate preservation strategy.
(c) Multiplicity of disposal of the shares
Consistent with the stated corporate preservation strategy, there were few disposals of the shares by the Respondent throughout its relatively long period of holding. Prior to 2002, there were no disposals for the [D] and [E] shares.
The Respondent did not need to and did not in fact liquidate the shares to meet its liabilities in the insurance business. As such, there was a weak nexus between the sale of the shares and the carrying on of the Respondent’s insurance business.
(e) The insurance funds
The statutorily mandated insurance funds and solvency requirements are not determinative of whether an investment is a capital asset for the purposes of income tax. Insurance companies (whether holding assets in the insurance fund or shareholders’ fund) can and should only be taxed according to the ordinary principles of revenue law. While the holding of an asset in a particular fund can be a relevant factor in ascertaining whether the investment is intended to be held as a capital asset, in the Respondent’s case, the shares were held pursuant to its corporate preservation strategy. In these premises, the relevant regulatory framework is insufficient to offset the very strong inference that the Shares were intended to be (and were in fact) held as capital assets.
The above judgement was delivered on 4 February 2014.
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