Taxman loses court case against insurer

The High Court has ruled against the taxman in a closely watched test case that centred on whether a capital gain made by an insurer was taxable.

Justice Lai Siu Chiu said in judgment grounds released last week that the $99 million reaped by the insured after it sold shares it had held as part of its core assets could not be taxed.

The Comptroller of Income Tax had claimed that the gains were taxable profits based on the Income Tax Act.

The insurance company, which cannot be named, had used its funds to buy three different lots of shares as part of its assets.

It later sold them between 2001 and 2002, reaping total gains of $98,633,380.

The Comptroller made clear on assessments for the years 2002 to 2003 that the income was taxable and in April 2010 notified the insurer it would not amend its stand.

The insurer appealed to the Income Tax Board of Review, which ruled in favour of the insurer last June. This led the Comptroller to ask the High Court to overturn the Board's decision.

It argued that the insurer had sold such "core shares" before and so the gains represented its circulating capital.

Inland Revenue Authority of Singapore lawyers Foo Hui Min and David Lim added that the Income Tax Act and guidelines from the Monetary Authority of Singapore pointed to the gains from the sale of the core shares being taxable.

Lawyers Tan Kay Kheng and Tan Shao Tong for the insurer countered that the shares - described as "core shares" - were part of the insurer's capital holding to preserve its corporate structure and served as a defence mechanism to prevent any hostile takeover.

They argued that relevant tax law did not provide that all gains arising from the sale of investments by insurance companies were liable to tax.

Justice Lai noted in her ruling that Singapore does not have a capital gains tax, unlike many countries. She also cited a 2009 Finance Ministry press release which said that income is revenue in nature and does not include capital gains.

Justice Lai held that whether the core shares were capital assets would depend on several factors that had to be examined.

She noted that the insurer held on to the shares for a very long time and they were not managed by the group's fund manager for trade and profit as circulating assets.

The group also did not borrow to acquire the shares, which showed its ability to hold on to them for the long term.

The judge found the various factors showed the core shares were capital assets and not for revenue generation.

"Therefore the gains from the sale... are not taxable as income," she ruled.

"It is... not disputed that the income versus capital dichotomy is the cornerstone of the income tax regime in Singapore, as framed by the Act. Income tax is a tax on income or revenue gains, not capital gains."

vijayan@sph.com.sg

Get a copy of The Straits Times or go to straitstimes.com for more stories.