The judgment of ZF vs. income tax auditor was a landmark decision by the Singapore Court of Appeal in 2010, which influenced the way write-offs were sought and awarded in the years that followed. No challenge had been heard by the Income Tax Review Board for over a decade, until the Board’s decision in GEY v. income tax auditor of August 29, which provides a long-awaited overview of how the principles and concepts set out in ZF have been approached and must be considered. This LawFlash highlights facts and learning points for companies that have requested or intend to request write-offs for their assets.
FACTS OF GEY
The plaintiff company built a new silo in 2013 in anticipation of an increase in market demand for cement. Over $18 million in total was spent on the construction of the new silo, for which the appellant claimed accelerated capital cost allowances (where the full claim may be over three years or two years as desired) in under Section 19A of the Income Tax Act (ITA). The Comptroller authorized expenditures incurred for mechanical and electrical equipment (amounting to $3,443,890), but disallowed the remaining construction costs and incidental professional fees. The appellant therefore seized the Commission.
LEGISLATIVE DEVELOPMENT AND RELEVANT CONTEXT
In the past, industrial construction deductions (IBAs) co-existed with other categories of capital cost allowances (e.g. accelerated deductions under ITA Section 19A for “factories”) and could be claimed if capital expenditure was incurred for the construction of an industrial plant. building or structure”.
However, the IBA scheme was phased out in 2010. Existing claimants continue to benefit from the IBA until the expenses are fully amortized, but the IBA would not be available to those who have incurred capital expenditure after its abolition.
In fact, the Appellant is still claiming the IBA for its other cement silos which were built in the 1990s. The IBA would not be available to the Appellant with regard to the new silo, since the capital expenditure were hired after 2010.
To succeed in its appeal to the Commission, the Appellant must therefore prove that the new silo is, in fact, a “factory” for the purposes of an accelerated claim for depreciation under Article 19A of the LIR.
ARGUMENTS OF THE PARTIES
The Appellant focused on the new silo as an integrated whole and its main arguments were as follows:
- The new elevator is considered a “factory” because it plays an active operational role in the appellant’s business.
- Although the new silo looks like a building, it is more appropriate to describe it as equipment.
- The Singapore Court of Appeal in ZF endorsed a foreign case ruling that grain elevators are referred to as “factories” on its facts.
On the other hand, the monitor based its arguments on the factors set out in ZF to determine whether an asset is a “plant” or a “building or structure”, which include:
- the physical nature of the asset;
- if the relevant asset is only intended to be located temporarily;
- the operational role of the asset in the taxpayer’s business; and
- where it appears that the property, although not being real property, is nevertheless inextricably linked to real property, it may be considered part of the real property for income tax purposes. (collectively, the “four factors”)
The Comptroller also argued that the amount of allowances granted by the ITA on capital expenditure has a direct correlation with the rate of depreciation of the asset. In ZFthe Singapore Court of Appeal considers “factory” and “building or structure” as mutually exclusive concepts with a clear distinction to be drawn between the depreciation deductions granted in respect of each, as the latter category depreciates at a much slower pace.
The Council agreed that the legal principles established by the Singapore Court of Appeal in ZF to determine whether an asset is a “plant” or a “building or structure” is appropriate to determine the true nature of the new silo in the context of the Appellant.
These legal principles include the following:
- There must be a fundamental distinction between “factory” and buildings.
- “Facility” means a device used to carry on the trade or business in question.
- A building “consists of a permanent structure or part of a permanent structure that houses the trade or business”. Thus, 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.
- In order to determine whether or not a particular asset is a “building” or a “factory”, the four factors mentioned above are useful.
After reviewing the facts of this case and the submissions made, the Board has concluded that:
- In fact, the new silo was built as a large concrete structure which clearly reflects its permanent character.
- The exact operational role of the new silo was to store and house both material and cement.
- However, the new silo is not intended to be temporarily located but is an integral part of all the buildings in which the taxpayer carries out his activity.
- The new silo should be called a structure and not a “factory”.
- The previous tax treatment of old silos is correct.
- The new silo should not be allowed to claim capital cost allowance under Section 19A of the ITA, as the scope of the current legislation does not provide for silos to be treated as a “factory”.
- Although the Appellant provided evidence of the functions of the inverted cone, the Appellant focused on the new silo as an integrated whole and did not argue that the inverted cone or other parts of the new silo were to be considered a “factory” in itself, other than those parts which were authorized by the controller. Therefore, the Commission did not consider whether the inverted cone could be treated separately from the rest of the new silo.
KEY TO GO
From the Commission’s decision, it is clear that the principles set out in ZF will apply where a dispute arises as to whether an asset is a “building or structure” or a “factory”. All four factors must therefore be carefully considered and properly substantiated by prospective claimants, bearing in mind the distinction between “factory” and “building or structure” in the context of the capital cost allowance regime.
The Commission noted that the Appellant had centered its argument on one criterion, namely that the new silo should be considered as an integrated whole and that it fulfilled a key operational function in its activity of importing and distributing cement. In this regard, the Commission indicated that the Appellant seemed to have ignored all the other criteria in ZF.
On the other hand, the monitor not only based its arguments on the four factors ZFbut also indicated that the appellant had built other silos (located next to the new silo) which continue to benefit from IBA, as well as the fact that the construction of the new silo required the approval of the Building and Construction Authority.
The importance of the case strategy therefore cannot be overstated. When dealing with tax disputes, taxpayers should always consider whether a more holistic approach can be taken to better support their positions.