BSL Bulletin

Following the landmark court case of Z.F. v Comptroller of Income Tax (2010) SGCA, the recent court case at the Income Tax Board of Review, GEY v Comptroller of Income Tax (2022) SGITBR, has thrown a spanner in the works concerning what constitutes plant in a taxpayer’s trade or business.

What constitutes a plant qualifying for capital allowance is a question that poses many challenges and confusion, in particular to expenditures that are fixed or immovable structures.

The courts have repeatedly spelt out the relevant criteria to define what a plant should be based on the business, functional and premises tests to determine whether a capital expenditure should be treated as a plant or premises. The latter serves to house the business; in contrast, the former is an apparatus used to carry on that trade.

In the ZF case, the capital expenditure in question was workers’ dormitories built on a site leased from the Building and Construction Authority (“BCA”). From the go, the CIT challenged them as premises, not a plant, as the dormitories were used to house the workers. The taxpayer lost their case in Income Tax Board of Review (“ITBR”) and the High Court. When it came before Judge Phang in the Court of Appeal, he came out with his own set of factors to determine whether or not the workers’ dormitories should be treated as premises or plant based on the following four aspects.

1. The operational role of 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 forms part of a building proper

Even though the workers’ dormitories resembled buildings and did not look like large pieces of equipment or machinery, it was concluded that they were not premises. The workers’ dormitories can be dismantled with a 90 days-notice from BCA. Judge Phang ruled that since the workers’ dormitories were not intended as permanent structures, which generally normal buildings are intended for, they should be treated as a plant.

Please note that the ZF case had a unique set of facts that started with a structure that even an ordinary person would have treated as a building or premises to house workers. The taxpayer won the case on the basis that regardless that it performed the function of housing staff (premises), the fact that it was built as a temporary structure allowed them to be treated as a plant.

To rely narrowly on the ZF case, to rule all subsequent cases on capital allowances claims may put taxpayers in an inequitable position. A capital expenditure that is a plant cannot be deemed as “premises” just because it is fixed or immovable and permanent. Consideration must be given to all the established case laws that expound the fundamental principles of the characteristics of a plant.

Well-established tax case laws promulgate that even an immovable and permanent structure can be treated as a plant.

Cement Silo

In the instant case of GEY, the ITBR ruled that a specially built silo used in the taxpayer’s cement business is a building that does not qualify as a plant. In the GEY case, the attached electrical and mechanical items to the cement silos were allowed the capital allowance claim. However, ITBR disregarded the bulk of the capital expenditure on constructing the cement silo as building costs.

To a layperson, a silo that looks like a huge inverted conical structure hanging from above would be nothing he would imagine would be a building. Despite the obvious, it was ruled that a cement silo was not a plant because it was permanently attached to the ground. It was also deemed that it was merely used for housing and protection of the cement materials.

In the ZF case, Judge Phang commented that a very large asset could be considered both equipment and setting or premises in which the business is carried on where he quoted the examples of the grain silos in the tax case of Schofield (H.M. Inspector of Taxes) v R.&H. Hall Ltd [1974] 49 TC 538 and the dry dock in the tax case of Inland Revenue Commissioners v Barclay, Curle & Co Ltd [1968] 45 TC 221.

Justice Phang also stated the following

“Significantly, in our view, it was observed (by Jones LJ at 556) that “the silos are really collections of built-in bins rather than buildings capable of housing bins which could be put to any other use as buildings” [emphasis added]. In other words, as was the case in Barclay Curle, the silos in this case also constituted large apparatus or equipment or machinery (as opposed to buildings proper).”

In the Schofield case, the U.K. court held that the grain silos simultaneously constituted a building or structure in which the taxpayer conducted the business of grain importing and distribution and “plant” insofar as they also performed the function of conveniently discharging the grain contained therein to customers. The grain silos in the Schofield case had basically the same functions as GEY’s cement silos.

Consequently, the cement silos should qualify as a plant. The silos are specially built apparatuses which the taxpayer uses to hold and discharge the cement to make ready-mix concrete.

The cement silos are not premises within which the taxpayer is conducting its trade. They are special vessels used to contain the cementitious materials, which are subsequently discharged to the waiting cement trucks on the weighbridges below the mouth of the silos. The walls of the cement silos are specially built with special aeration materials to prevent the hardening and deterioration of the cement. An air slide system transports the cement by a blower fan. The cementitious materials are transported via a conveyor belt from the special cargo ships in the port nearby where the cement silos are located.

The cement silo is not a warehouse. It is a specially built apparatus with an inverted cone structure, located in a port facility where a special cargo vessel delivers the cementitious materials vide a conveyor belt system, including the bucket elevator that carries the cement materials from lower level to higher level. The cement materials are stored in the cement silo to be delivered to the waiting cement trucks.

The primary function of the silo is to hold the cementitious products for distribution and delivery to customers. The storage or holding of the cementitious materials in the cement silo is temporary until they are delivered to the customers. The cement silo is an integral part of the delivery and transport of cement materials, without which the conveyor belt or the bucket elevator system cannot function.

UK Decisions

The view to support that a cement silo should be treated as a plant is further cemented in the recent U.K. tax cases.

In Stephen May V HMRC (2018), the First-Tier Tribunal case ruled that a horizontal silo is a qualifying plant. The facts of the case are that a farmer constructed a barn fitted with special equipment to keep the harvested grains in optimal conditions. The barn’s walls were specially designed, and the construction cost was twice that of an ordinary barn.

In another UK First-Tier Tribunal case, JRO Griffiths Ltd v HMRC (2021) a potato storage facility was ruled as a plant. The storage facility was held to be critical to the business of cultivating and selling potato chips. The potatoes have to be stored in a special environment to achieve the crispiness required by customers to optimize the selling price.

The above recent U.K. cases support the earlier arguments that a cement silo is a plant integral to the business of importing, distributing and delivering cement to the construction industry in Singapore.

A taxpayer in a cement business has to incur substantial capital costs and investment in constructing cement silos. The operating margins in cement are very competitive and subject to volatility in the construction sector. The construction sector is affected by economic factors, supply chain and logistics restrictions amongst other things. Suppose the taxpayer cannot claim the capital allowance on such a huge capital investment which is integral to selling cement to the construction sector. In that case, this may have a domino effect to increase the overall costs of the construction sector. The increased property prices would ultimately affect people and businesses adversely.

Conclusion

In conclusion, the cement silo is distinctly a plant used in carrying on the trade of importing, distribution and delivery of cement. As it does not function as premises per se, the question of whether it is a temporary or permanent structure should not be relevant. The exact operational nature of the cement silo, along with its physical characteristic and functional aspects of the inverted cone structure, provide the critical factors for considering a cement silo as a plant. Therefore, the cement silo, in its entirety, and the equipment installed is a plant that should qualify for a capital allowance claim. It is hoped that further arguments will be made in the higher courts to right the decision at the ITBR.

Contact Details
BSL Tax Services Pte Ltd

N Vimala Devi
Email: devi.vimala@bsl.sg
DID: +65 6833 6322

Writers’ Caveat
These articles have merely attempted to provide a broad overview on the subject matters. They are not in any way intended to be comprehensive and no specific action should be taken on the basis of the above without consulting your professional advisors.