A Hong Kong company has won a case against the Comptroller of Income Tax who slapped it with a $3.3 million-plus tax bill after it sold 17 units

A Hong Kong company has won a case against the Comptroller of Income Tax who slapped it with a $3.3 million-plus tax bill after it sold 17 units in upscale Leedon Road.

The tax department said the sale by Madison Lighters & Watches Company, a wholly-owned subsidiary of Hong Kong property developer Far East Consortium International, was in the ordinary course of business and the profit was taxable.

But the company’s lawyer Edwin Lee, of Rajah & Tann, argued that the property was an investment and the gains were therefore capital in nature and non-taxable.

Madison appealed against the Inland Revenue Authority of Singapore’s (IRAS) ruling.

And the Income Tax Board of Review, chaired by former High Court Judge Goh Joon Seng, ruled in favour of the company.

Madison bought 17 of the 18 units at Leedon Court in September 1987 for a total of $10.77 million. Being a foreign entity, it could not buy the whole block, so the remaining unit was bought by a related company, Hepworth Investment.

All the units were sold en bloc to unrelated Glory Development on Nov 25, 1993 for $24 million, with Madison getting $22.67 million. IRAS served the company with a demand for $3.34 million tax in June 1995, being 27 per cent of its profit of $12.38 million for Year of Assessment 1995.

Madison’s auditors lodged an objection on July 4, 1995 saying the gains were capital in nature and therefore not taxable.

They also said that loan interest incurred in buying the property ought to have been tax deductible against rental income, and that with the exception of one item, IRAS had failed to convert the figures from Hong Kong dollars into Singapore dollars.

The review board, in finding in favour of Madison, notes that the company had consistently classified the property as an investment and ‘fixed assets’.

It also notes that the property was held for six years and was sold collectively in one lot to an unrelated buyer who made an unsolicited offer, that Madison was in a position to hold the property for the long-term and that it ‘was actually in a tax-paying position for most of the years during which it held the property’.

The board said: ‘We therefore find that it was the intention of the appellant (Madison) to acquire the property for long-term investment and for resale at a profit.’

It allowed the expenses to be deductible with the tax to be discharged on account of the bank loan interest agreed at $87,635.52.

The board also said IRAS wrongly used Hong Kong dollars in its computation of chargeable income and the tax to be returned as a result of this error was agreed at $265,009.59.

Source: The Business Times, 27 June 2007