BSL Bulletin

Singapore’s very own landmark court of appeal case of ZF v Comptroller of Income Tax [2010] SGCA 48 has indeed clarified many doubts that taxpayers have had on the question of what constitutes plant vis-à-vis a building. A plant will obviously qualify for capital allowances claim whereas the latter will not, unless in very limited circumstances, it would qualify as an industrial building for which there are specific type allowances.

There has always been some confusion as to the definition of what constitute a plant as this has never been defined in the Singapore Income Tax Act (“ITA”). Tax practitioners have time and time again, relied on UK tax cases as well as other jurisdictional case laws developed over the last century or more to understand the concept of plant as opposed to a building.

In the instant case, the appellant and the taxpayer is ZF. The site was leased from the Building and Construction Authority (“BCA”) by C who had in turn given the contract to design, build and operate the workers’ dormitories to Z. Z together with F had formed a joint venture ZF. ZF was then awarded a contract to build and operate workers’ dormitories on the site. However, the lease for the site was only for a 3 years with a fresh term of another 3 years, including another further term of 3 years at the sole discretion of BCA. The BCA contract also provided that if required the site will have to be vacated within 90 days.

Due to the possible 90 days’ notice period to vacate the site, ZF constructed the dormitories out of prefabricated materials which were assembled together with bolts and nuts that could be dismantled at short notice and minimum cost. These dormitories were portable and demountable, as they were capable of being dismantled, stored away and re-used on another site. The appellant has already admitted and accepted that a portion of costs relating to the permanent structure such as the concrete foundation used to mount the dormitories would not qualify for capital allowances.

The issue for consideration was whether the $2.6m costs directly attributable to the construction of the movable parts of the dormitories would qualify as plant for capital allowances claim within the meaning of s19 and 19A of the ITA.

The Comptroller of Income Tax did not allow the claim by the taxpayer. The taxpayer appealed to the Board of Review that its dormitories are apparatus with which they carry on their business. The Board rejected the appeal on the grounds that the appellant’s business is the provision of accommodation to workers. Therefore, it is of no consequence or use that the dormitories happened to be portable or demountable.

The taxpayer had then appealed to the High Court on the grounds to review their  business in its entirety which involved the dismantling and relocation of the dormitories to other sites. Hence, the portability and demountability of the dormitories were additional functions and accordingly, the dormitories were not just used to provide accommodation to workers.

However, the High Court ruled in favor of the Comptroller of Income Tax on grounds that although the dormitories passed the “functional test” but it failed on the “premises test” because their only function was provision of accommodation. The portability and demountability of the dormitories were mere features of the property and not additional functions.

Consequently, the case came before the Court of Appeal. Judge Phang in delivering the judgment analyzed in very much detail the concept of what constitute plant and what is not plant but are actually buildings by going through many relevant case laws delivered on this subject over the last century or so.

Yarmouth v France (1887) defined plant as an apparatus used by a business man for carrying on his business, not his stock in trade, fixed and moveable which he keeps permanently employed in his business. In the Cole Brothers Ltd v Phillips (1981), the difficulty in trying to identify between “plant” and “building” was described by one of the judges as follows:

“It (plant) has lost what resemblance to machinery it may once have had, and any contrast with buildings or structures is now misleading, however strong the temptation to go back to those simple similarities and differences which the word might have suggested before repeated difficulties of application drove judges to gloss over them.”

Setting and/or premises test

The setting and premises are typically used as characteristics of a building. However it does not always follow that assets which provide the setting or premises of a business are always taken as building. In the Commissioner of Inland Revenue v Barclay, Curle & Co Ltd (1969), the House of Lords held that a dry dock is a plant regardless that it constituted a permanent structure of a building. A building or structure could be a “plant” if it performs some independent operation in the taxpayer’s business beyond providing the setting or premise in which the business was carried out. A dye house was held to be a plant although the external walls and roof were not, Wangaratta Wollen Mills Ltd v The Commissioner of Tax (1969).

In Jarrold (Inspector of Taxes) v John Good & Sons Ltd (1963), the concept of whether an asset is part of the premises in which the business is carried on or part of the plant with which the business is carried on was used. In this case, moveable partitions used in the office were held to be plant. In another often mentioned case, Schofield (HM Inspector of Taxes) v R&H Hall Ltd (1974), a silo was simultaneously held to be a building as well as plant.

On the other hand, in Benson (HM Inspector of Taxes) v Yard Arm Club Ltd (1979) it was held that a second hand ship which was converted into a floating restaurant, moored to a permanent site did not constitute plant. Neither did a gymnasium and chemical lab in a school constitute plant in the case of St John’s School v Ward (HM Inspector of Taxes) (1974).

Judge Phang, in the instant case, deemed the business use and functional tests unhelpful. The business use test is too broad as both plant and building are used for the business or trade of the taxpayer. He found the functional test to be neutral, as the fundamental question to ask per se is whether the asset functions as a plant or as a building.

Judge Phang stated that there has been confusion over the years with regard to the terms “setting” or “premises” with the concept of building. He is of the view that these terms are not necessarily interchangeable. The setting in which a business is conducted can include the plant used to carry it on. For example, special items of décor acquired by restaurants and hotels to provide the “setting” to attract and for the enjoyment of customers is in an important way such businesses are conducted. This was described as creating the “atmosphere” or “ambience” in the Inland Revenue Commissioners v Scottish & Newscastle Breweries (1982) case. In this instance, the items of décor qualified as plant regardless that they provided the “setting”, as they were regarded more as an apparatus with which the restaurant business was operated.

Tents or makeshift shelters for road stalls can be described as setting or premises in which a taxpayer’s trade or business is carried on, but it would be not right to conclude that they were building. A building carries with it a degree of magnitude and permanence.

Therefore, he did not accept that an asset can be simultaneously categorized as plant and building. He is of the view that these classes of assets are mutually exclusive. An asset may be considered “plant” in some respects and a building in others but, ultimately it can only be depreciated purely as “plant” or purely as a building for the purposes of income tax. Where an assets possesses features of both then the question is whether the asset can be more appropriately described as “plant” or a building.

Plant can be identifiable as equipment or apparatus either fixed or unfixed. In Carr (HM Inspector of Taxes) v Sayer (1992) moveable kennels were held to be plant. Large equipment fixed to the ground may be described as a structure but that in itself will not make it a building, and will still normally be regarded as plant. Commissioner of Inland Revenue v Barclay, Curle & Co Lt (1969) illustrated this clearly when a dry dock was held to be plant. Furthermore, an equipment does not cease to be a plant merely because it also discharges an additional function such as providing the place in which the business is carried on. In the Commissioner of Inland Revenue v Waitaki International Ltd (1990), an entire cold store used in the business of meat work was held to be plant as it was regarded as akin to a large refrigerator.

On the other hand buildings generally would not be regarded as plant even if they are purpose built for a particular trading activity. A greenhouse, a special built structure was held not to be plant in Gray (Inspector of Taxes) v Seymour Garden Centre (Horticulture) (1995). A building’s normal functions are to provide the shelter and security for people using it and for the goods inside it.

So what is building?

Judge Phang listed the following four criteria:

1. The operational role the asset play in the taxpayer’s business

2. The physical nature of the asset

3. Whether the asset is intended to be only temporarily located

4. Whether the asset form parts of a building proper

In Quarries Ltd v Federal Commissioner of Taxation (1961), portable sleeping units used at work sites were held to be plant. In a 1969 Australian Tax Office case, sheds built at a contract sites were held to be plant as they are located there only temporarily for the duration of the particular jobs. Therefore, the temporary presence of an asset can be the decisive factor making it “plant” whereas another item with exact same function and physical characteristics but located permanently might not be “plant”.

A crane fixed permanently cannot be considered to be a building. Curtains and moveable partitions are plant because they cannot physically resemble the building to form part of the building. An office, wooden sheds or storehouses located permanently at a site would be buildings. On the other hand, tents used for accommodation and shelter are plant. Plant is utilized for carrying on the trade or business. Whereas building is a permanent structure that houses the trade or business.

In ZF’s case, the Court of Appeal Judges ruled that even though the dormitories were not large piece of equipment and also resembled buildings, they were not made of lasting materials. They were never intended to be permanent structures in the manner building proper is intended for.

The critical factor in favor of the taxpayer was the fact that the dormitories would have been required to be dismantled at 90 days notice from BCA. This feature is akin to an apparatus or equipment or machinery. The appellant intended that they be located only temporarily and would be moved from place to place when the need arises. ZF required for the purposes of its trade that the dormitories be portable and demountable in order for it to carry out its business of providing accommodation on a temporary basis. The taxpayer specially constructed the portable and demountable dormitories which are the very tools with which the appellant carried out its business. Therefore, the dormitories qualify as plant.

DID YOU KNOW?

Changes in Employer’s CPF Contribution

On 18 February 2011, Mr Tharman Shanmugaratnam announced in the FY2011 Budget Statement on an increase in the employer’s CPF contribution rate by 0.5% with effect from 1 September 2011. The increase will be paid to the Special Account (SA) to meet Singaporeans retirement needs.

For employees who are above 35 years old and earning monthly wages of up to $1,500, the higher employer CPF contribution rate will apply from 0% at $50 to the new full rate at wages of $1,500.

However, the additional 0.5% does not apply to employees who have obtained their Singapore Permanent Residents (“SPR”) status in the 1st and 2nd year and contributing CPF at graduated employer and employee rates.

Concurrently, with effect from 1 September 2011, the Ordinary Wage (“OW”) Ceiling for all Singaporeans and SPRs will also be adjusted upwards from $4,500 to $5,000 per month.

With the increase in OW Ceiling, the total limit on CPF contributions for 2011 and 2012 will also be revised from $76,500 accordingly.

In addition, the CPF Annual Limit is revised from $27,158 to $30,600 for both mandatory and voluntary CPF contributions.

You may wish to visit www.cpf.gov.sg for the updated CPF Contribution Calculator and/or new CPF contribution rate booklets.