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It is trite that income tax in Singapore is only chargeable on gains of an income nature, and not on gains of a capital nature. The question in every case is whether a gain is income or capital in nature. The paramount factor in determining whether a gain is of a capital or revenue nature is the objectively-determined intention of the taxpayer (i.e. whether he has an intention to trade) at the time of acquisition of the asset.

The law
The relevant provision is section 10(1) of the Income Tax Act (“Act”), which provides:

“Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of –

(a) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised;

(g) any gains or profits of an income nature not falling within any of the preceding paragraphs.” (emphasis added).”

 

Paramount factor – taxpayer’s objective intention at time of acquisition

Now, what exactly does “an intention to trade” mean? The following factors delve a little deeper into the issue of whether “an intention to trade” exists.

  • Reasonable prospect of bringing about the state of affairs intended

In the English Court of Appeal case of Cunliffe v Goodman [1950] 1 All ER 720 (applied by the Malaysia Supreme Court in Lower Perak Co-operative Housing Society Bhd v Ketua Pengerah Hasil Dalam Negeri [1994] 2 MLJ 713 in assessing whether a disposal gave rise to taxable gains), Asquith L.J. held as follows:

“An “intention,” to my mind, connotes a state of affairs which the party “intending”—I will call him X—does more than merely contemplate. It connotes a state of affairs which, on the contrary, he decides, so far as in him lies, to bring about, and which, in point of possibility, he has a reasonable prospect of being able to bring about by his own act of volition. X cannot, with any due regard to the English language, be said to “intend” a result which is wholly beyond the control of his will. He cannot “intend” that it shall be a fine day tomorrow. At most he can hope or desire or pray that it will. Nor, short of this, can X be said to “intend” a particular result if its occurrence, though it may be not wholly uninfluenced by X’s will, is dependent on so many other influences, accidents, and cross currents of circumstance that not merely is it likely not to be achieved at all, but, if it is achieved, X’s volition will have been no more than a minor agency collaborating with, or not thwarted by, the factors which predominately determine its occurrence.” (emphasis added).

Hence, a person cannot have an intention to trade at the time of acquisition of an asset, regardless of what he contemplates, if the circumstances do not allow him to trade. Take for example a taxpayer who acquires a plot of land with sale restrictions such that he has no reasonable prospect of being able to sell the land at a profit. In the event that he subsequently gets approval to divest of the land for genuine business reasons, should he be retrospectively be saddled with an intention to trade. We think not.

  • Positive intention or purpose at the time of acquisition of making a profit from the acquisition and divestment of the asset

In Simmons v Inland Revenue Commissioners [1980] 1 WLR 1196 (approved locally in TN v Comptroller of Income Tax [2007] SGITBR 2 and NP and Anor v Comptroller of Income Tax [2007] 4 SLR(R) 599), Lord Wilberforce held:

Trading requires an intention to trade: normally the question to be asked is whether this intention existed at the time of the acquisition of the asset. Was it acquired with the intention of disposing of it at a profit, or was it acquired as a permanent investment?” (emphasis added).

Where a taxpayer merely has an intention to divest of an asset at the time of acquisition, but no positive intention to make a profit therefrom, is this automatically an intention to trade? Arguably not. Taking the example of a subsidiary that enters into an agreement to purchase and develop a piece of land as its parent company did not have the necessary expertise and the intention from the outset is to divest of the developed property to its parent company upon completion of development. While the intention to divest of the property exists upfront, there is no positive intention on the part of the subsidiary to make a profit therefrom and hence, there should not be considered an intention to trade.

Even in respect of the wider charging limb, section 10(1)(g), it is necessary to find a positive intention to make a profit from the acquisition and divestment of an asset. In IB v Comptroller of Income Tax [2004] SGITBR 10, the Board held:

“In our view, section 10(1)(g) can apply to profits arising out of a transaction which is not an activity in the ordinary course of trade or business, or an ordinary incident of some other business activity, and at the time the transaction was entered into the taxpayer had the intention or purpose of making a profit from that transaction. The means or mode of realizing the profit need not be specific or precisely determined at the outset. Nonetheless, the Board is of the view that the words “gains or profits of an income nature” (emphasis added) would preclude capital gains arising from the disposal of long-term investments from being taxed under section 10(1)(g). The Appellants would be able to succeed in this appeal if they were able to prove that the gains were made by them on the disposal of properties that were acquired with the intention of being held by them as long-term investments.” (emphasis added).

  • Disposal in the course of the taxpayer’s trade

Even where there is an intention to dispose of an asset to make a profit, it should be noted that for the gain to be chargeable to tax under section 10(1)(a) as gains from any trade, there must be an intention on the part of the taxpayer to dispose of the assets in the ordinary course of trade for profit.

The English Court of Appeal in New Angel Court Ltd v Adam (Inspector of Taxes) [2004] EWCA Civ 242 held that a trading purpose exists only where the asset transferred to the taxpayer is of a kind sold in the ordinary course of the taxpayer’s trade and acquired by the taxpayer with a view to resale at a profit.

An intention to dispose of an asset in the ordinary course of the taxpayer’s trade for profit was found in New Angel Court Ltd where a taxpayer in the business of developing and dealing property was transferred certain properties by a related company for the purpose of sale by the taxpayer on the open market. As the properties were assets of a kind sold in the ordinary course of the taxpayer’s trade and were acquired for the purpose of that trade with a view to resale at a profit, the properties were found to be trading stock.

In contrast, in Coates (Inspector of Taxes) v Arndale Properties Ltd [1984] STC 637, the taxpayer acquired a property lease and immediately reassigned the lease to another group company with the object of obtaining group relief of a trading loss. As the taxpayer did not trade and never had any intention of trading with the lease, it was found that the lease was not acquired by the taxpayer as trading stock.

 

Disposal for reinvestment

Where it can be shown that the intention of the taxpayer at the acquisition of the asset is that of investment, a subsequent quick disposal of the asset for the purpose of reinvestment does not detract from the original intention. Lord Wilberforce in Simmons held:

“[A] permanent investment may be sold in order to acquire another investment thought to be more satisfactory; that does not involve an operation or trade, whether the first investment is sold at a profit or at a loss.”

In the local case of IP and another v Comptroller of Income Tax [2007] 4 SLR(R) 599, which involved the purchase of eight residential properties and the subsequent disposal of seven of the said properties within eight years, the issue concerned whether the gains arising from two of the seven properties sold were income in nature and hence taxable. The High Court held that:

“Where the proceeds of sale [of a first investment] are reinvested, this would generally negative a finding of trading notwithstanding the fact that the property had been held for only a short time”.

 

Taxpayer as part of a group

Where the taxpayer to which a gain accrues is a company which is part of a group, the relevant intention is that of the group, and the intention of the company is not viewed in isolation. This was held in Commissioner of Inland Revenue v Waylee Investment Ltd [1990] HKLR 107 (and approved locally in HG v Comptroller of Income Tax [1991] SGITBR 1):

When a transaction is carried out by a company (the taxpayer company) being one of a group the relevant purpose is that of the group and not of the particular company viewed in isolation. Further, due attention must be paid to the context in which the acts of the particular subsidiary were performed. The respondents to this appeal played the part ordained by and for the benefit of the Group, of which the Bank provided the governing mind, within the overall rescue operation.” (emphasis added).

 

Practical considerations

While it is the actual intention and not merely the stated or professed intention of the taxpayer which is decisive (All Best Wishes Limited v Comptroller of Inland Revenue (1992) 3 HKTC 750), documentary evidence of the taxpayer’s commercial intention has been held to be relevant (HT v Comptroller of Income Tax [1998] SGITBR 3). Given the importance of the taxpayer’s intention at the time of acquisition, where the intention is investment, it would be prudent to consider contemporaneously recording that intention.

 

Conclusion

As can be seen, an intention to trade takes on a more nuanced and specific meaning within the meaning of the Act. It calls for the consideration of a number of factors including but not limited to the circumstances leading to the acquisition of the asset, whether there was a positive intention to make a profit and whether the disposal of the assets was in the ordinary course of trade for profit. Unfortunately, we have seen many cases where tax advisors have waved the white flag prematurely before an informed and holistic consideration of the relevant factors was made. This is particularly the case where there is an agreed divestment of the asset upfront. If the focus had been drawn to the right issue, the conclusion may well be that there was no need to concede the case.