Charging Section of 10 (1) of the Singapore Income Tax Act

As explained under the charging Section of 10 (1) of the Singapore Income Tax Act (Section 10 of the ITA) every income which is accrued in nature derived from Singapore or received from out of Singapore will be liable for taxation (Bobek et al., 2017). Section 10 of the Income Tax Act is controlling the below stated income;

1. Gains or profits that is yielded from any business or trading activities
2. Revenue generated from investment such as dividends, interest or discount
3. Revenue received from employment
4. Any income received from rents, royalties, premiums that is generated from property and;
5. Any other income

The tax regime of Singapore applies tax on income and gains that are capital in nature are free from taxation. Capital receipts of non-taxable in nature consist of gains from the sale of fixed assets and gains from foreign exchange on the capital transaction (Awasthi, 2017). However, section 10 of the ITA does not offers explanation to the term of income in the proviso. Both the court and the taxpayer often faced problems in segregating the two. Receipts that are voluntary in nature particularly unexpected gifts received on termination of contracts would be treated as capital in nature. The impact of characterizing the nature of income can be important to the business. Due to this, it is necessary to distinguish the income and capital gains.

The Inland Revenue Authority of Singapore (IRAS) has considered the six badges trade in order to characterize the income, separately from the situations where the payment that is made is in regard for the services. Each of the six badges must be considered as alone no pin can provide outcome on its own (Ashari et al., 2014). The six badges of trade are stated below which is used at the time of evaluating the nature of income;

1. Topic of the realization
2. Time involved in the span of ownership
3. Frequency
4. Supplementary work relating to the usage of property

There are two types of conceptual framework in determining whether it the receipts are is income or capital in nature. The same is listed below;

The Obiter Dictum was referred in the landmark case of Eisner v Macomber in 1919 that was used in the form of reference in deciding the outcome in several cases. It acts as judicial precedent in creating a difference between the receipts that are of income and capital in nature. As stated in the Wisner’s case gains that are generated from capital is related to tree producing fruit, i.e. income (Chan, 2017). For example, if an individual has made investment in property with the purpose of collecting rents, the income that is generated from property would be treated as tree, i.e. capital income. Identically, if an individual purchases a plantation, it would be treated as capital (i.e. the tree) resulting in crop income (i.e. the fruits). Any type of gains that is generated from selling of plantation would be treated as capital in nature.

Taxation of Capital Receipts in Singapore

Fixed capital is defined as the asset with the objective of deriving profit and it is non-recurring phase in business. Circulating capital is a frequent episode where an asset is purchased in the normal business circumstances. Only the receipts of income generated from the disposal of circulating capital would be held liable for taxation.

The question that arises now is relating to the need of distinguishing the income and capital under the tax regime of Singapore. The tax legislation of Singapore states that there is no such clear lines are drawn to distinguishing the receipt of income and capital in nature. Hence, it makes it difficult to create a separation between the income and capital receipt. According to Chua & Ming (2015), in several cases it is difficult to appropriately depict, that spinning of a coin would conclude the subject as nearly satisfactory as the attempt to identify the reason Inland Revenue Commissioners v British Salmson Aero Engines Limited (1938). There have been numerous cases of tax that fall on the border of categorization, which is in the nature of receipt. The court can relevantly cite the earlier cases as a support and guidance to understand the law relating to tax since there are no precise statutory of distinguishing the fixed capital from the circulating capital.  

According to Digumber et al., (2015) the study summarizes the general proposition derived from the case laws in five propositions;

Receipts that are derived from the disposal of assets were prima facia capital to the business: Sale of assets from the company would not be treated as trading profit except those assets were in nature of trading stock.

Compensation that are receipted at the time of terminating the ordinary trading contract should be recognized as income receipt. However, compensation would be identified as capital income in those circumstances where payment is made for the destruction of profit-making device. For example, compensation that is received during fundamental trading contract may create an effect on the overall structure of business function. As held in the case of Van Den Berghs Ltd v Clark (1935) the House of Lords concluded that compensation would be treated as income of capital in nature. The cessation of trading contract may result in breakdown of the appellant’s functions (Gargouri, 2017). In the present scenario, Lord Macmillan differentiated the agreements from the trading contracts, which was created during the normal business course. The decision passed in Van Den Berghs Ltd v Clark (1935) underpinned on the revenue law where the receipts incurring from the trading contract loss should be treated as capital in nature.      

Six Badges of Trade in Singapore

The receipt is taxable given the receipt is made in lieu of trading revenue. If the taxpayer receives compensation as liquidated damage due to the loss of rental, income from the phase until it is delayed on the completion of property. This receipt would be held as taxable because it was trading income of the taxpayer. As stated in section 10 (3) of the ITA, any insurance received from trading should be held as trading receipt.

Cessation of agreement either wholly or substantially of trading structure must be recognised as chargeable income receipt. For instance, IRAS does not levy taxes on the receipt of compensation generated from the agreement of trading loss as no effect is created on the taxpayers profit-making device (Joseph, 2016). Referring to the case of London and Thames Haven Oil v Attwooll (1967) payment that was received by taxpayer because of breach in tort law. Therefore, negligent payment will be considered as assessable income receipt.

Income received in return for the imposition of substantial of substantial limitations on the actions of business was treated as capital in nature. On receiving payment by the taxpayer substantial limitation on the business activities of taxpayer would be considered non-assessable capital income from property. For example, Coca-Cola Company pays a certain amount to the taxpayer to restrict the sales of coca-cola products in a specific area and such income would be assessable as capital receipt. This is because the structure of taxpayers implies restrictive covenants.

If the receipts are incurred on regular basis and originates from current trade, it would be treated as ordinary income. For example, income generated from disposal of property would be held as capital receipt in first instance on the other hand if the transaction is purchased and sales taking place at regular instance would be held as trading income instead of recognising the same as capital receipt (Koh & Lee, 2017). As held in the case of Rolls-Royce Ltd v Jeffrey (1962)’s lord Reid determined that there is flow of similar transactions. The “Know-How” sold by the taxpayer was assessable as ordinary income. Lord Reid identified the transaction as revenue in nature and held it taxable.

Gains arising from investment in shares, disposal of assets and realization of exchange gains would be held as revenue in nature and would be held as assessable (Miller & Oats, 2016). It is mandatory to determine the categorization of difference in exchange whether it is capital or income in nature. For example, exchange difference regarding purchase and selling of trading stock would be identified as income. Conversely, exchange difference in regard to the acquisition of fixed assets would be treated as capital.

Conclusion: 

On arriving at the conclusion, it is noticed that the tax regimes of other countries namely Australia, where capital gains is generated will be considered for taxation. Therefore, due to the non-existence capital gains tax it has resulted as one of the chief factors of attracting investors to start the business in the country of Singapore.

Reference List:                         

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Ariff Ismail Loh, M., & Zubaidah, A. L. (1997). Compliance costs of corporate income taxation in Singapore. Journal of Business Finance & Accounting, 24(9?10), 1253-1268.

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