Singapore Income Tax Board of Review Issues First Capital Allowance Decision in Over a Decade

The judgment of ZF v. Comptroller of Income Tax was a seminal decision by the Singapore Court of Appeal in 2010, which influenced how capital allowances were claimed and granted in the years since. There hasn’t been a challenge heard at the Income Tax Board of Review in over a decade until the Board’s decision in GEY v. Comptroller of Income Tax dated 29 August, which provides a much-anticipated insight into how the principles and concepts enunciated in ZF have been canvassed and are to be regarded. This LawFlash highlights the facts and learning points for companies who have claimed or are intending to claim capital allowances for their assets.

FACTS OF GEY

The Appellant company constructed a new silo in 2013 in anticipation of an increase in market demand for cement. Over $18 million in total was incurred in the construction of the new silo, which the Appellant claimed accelerated capital allowances (where the full claim can be over three years or two years on election) under Section 19A of the Income Tax Act (ITA). The Comptroller allowed the expenditure incurred on mechanical and electrical equipment (amounting to $3,443,890) but disallowed the remaining construction costs and incidental professional fees. The Appellant thus appealed to the Board.

RELEVANT LEGISLATIVE DEVELOPMENT AND BACKGROUND

In the past, industrial building allowances (IBA) stood alongside other categories of capital allowances (e.g., accelerated allowances under Section 19A of the ITA for “plant”) and were available for claim if capital expenditure was incurred on the construction of an industrial “building or structure.”

However, the IBA regime was phased out in 2010. Existing claimants continue to enjoy IBA until the expenditure is fully written down, but IBA would not be available to those who incurred capital expenditure after its abolishment.

As a matter of fact, the Appellant is still claiming IBA for its other cement silos that were constructed in the 1990s. IBA would not be available to the Appellant in respect of the new silo, as the capital expenditure was incurred post-2010.

To succeed in its appeal to the Board, the Appellant must therefore prove that the new silo is, in fact, “plant” for the purpose of an accelerated capital allowances claim under Section 19A of the ITA.

PARTIES’ SUBMISSIONS

The Appellant focused on the new silo as an integrated whole and its key arguments were as follows:

1. The new silo is considered “plant,” as it has an active operational role in the Appellant’s business.
2. Even if the new silo looks like a building, it is more appropriately described as a piece of equipment.
3. The Singapore Court of Appeal in ZF approved the holding in a foreign case that grain silos qualify as “plant” on its facts.

On the other hand, the Comptroller based its arguments on the factors laid down in ZF for determining whether an asset is “plant” or “building or structure,” which include:

1. the physical nature of the asset;
2. whether the asset concerned is intended only to be temporarily located;
3. the operational role of the asset in the taxpayer’s business; and
4. where it appears that the asset, although not a building proper as such, is nevertheless inextricably connected with a building, it can be regarded as part of the building for income tax purposes. (collectively, the “Four Factors”)

The Comptroller also submitted that the amount of allowances granted by the ITA on the capital expenditure has a direct correlation to the rate of depreciation of the asset. In ZF, the Singapore Court of Appeal views “plant” and “building or structure” as mutually exclusive concepts with a clear distinction to be drawn between the capital allowances accorded in respect of each, as the latter category depreciate at a much slower rate.

DECISION OF THE BOARD

The Board agreed that the legal principles established by the Singapore Court of Appeal in ZF for the ascertainment of whether an asset is “plant” or “building or structure” is appropriate for determining the true nature of the new silo in the Appellant’s context.

These legal principles include the following:

1. There must be a basic distinction between “plant” and buildings.
2. “Plant” consists in apparatus that is utilized for carrying on the trade or business concerned.
3. A building “consists of a permanent structure or part of a permanent structure that houses the trade or business.” As such, to the extent that a building houses the trade or business, it is to that extent with which a trade or business is carried on.
4. In order to ascertain whether or not a particular asset is a “building” or “plant”, the Four Factors abovementioned are helpful.

Having considered the facts of this case and submissions made, the Board concluded the following:

1. On the facts, the new silo was constructed in the form of a large concrete structure which clearly reflects its permanent nature.
2. The exact operational role of the new silo was that of storage and housing of both equipment and cement.
3. The new silo is nonetheless not meant to be temporarily located but is an inextricable part of the group of buildings in which the taxpayer conducts its trade.
4. The new silo should be characterized as structure and not “plant.”
5. The previous tax treatment of the old silos is correct.
6. The new silo should not be allowed a capital allowance claim under Section 19A of the ITA, as the scope of the current legislation does not provide for the treatment of silos as “plant.”
7. While the Appellant adduced evidence about the functions of the inverted cone, the Appellant focused on the new silo as an integrated whole and did not submit that the inverted cone or other parts of the new silo should be considered as “plant” on its own, other than those parts which have been allowed by the Comptroller. Therefore, the Board did not consider whether the inverted cone could be treated separately from the rest of the new silo.

KEY TAKEAWAY

Based on the Board’s decision, it is clear that the principles in ZF will be applied when a dispute concerns the determination of whether an asset is “building or structure” or “plant”. The Four Factors must therefore be carefully considered and properly substantiated by future claimants, keeping in mind the distinction between “plant” and “building or structure” in the context of the capital allowance regime.

CONCLUDING REMARKS

The Board observed that the Appellant had focused their arguments on one criterion, namely that the new silo should be regarded as an integrated whole and that it performs a key operational function in its business of importation and distribution of cement. In this regard, the Board expressed that the Appellant appeared to have ignored all other criteria in ZF.

In contrast, the Comptroller not only based its arguments on the Four Factors in ZF, but also put on record that the Appellant had constructed other silos (situated alongside the new silo) that continue to enjoy IBA, as well as the fact that the building of the new silo required the approval of the Building and Construction Authority.

The importance of case strategy cannot therefore be overemphasized. Where tax disputes are concerned, taxpayers should always consider if a more holistic approach may be adopted to better support their intended positions.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers, who are solicitors of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated ‎with Morgan, Lewis & Bockius LLP:

Singapore
Kai Lee Lau