BML v Comptroller of Income Tax: Deductibility of Interest on Shareholder Bonds

In BML v Comptroller of Income Tax, the Court of Appeal of Singapore addressed the deductibility of interest paid on bonds issued by BML to its shareholders during a capital restructuring exercise. The court dismissed BML's appeal, holding that the interest expense was not deductible under Section 14(1)(a) of the Income Tax Act because there was no direct link between the shareholder bonds and the acquisition of income. The court determined that the bonds did not enable BML to retain the mall, its primary income-producing asset, and therefore did not meet the statutory requirements for deductibility.

1. Case Overview

1.1 Court

Court of Appeal of the Republic of Singapore

1.2 Outcome

Appeal Dismissed

1.3 Case Type

Tax

1.4 Judgment Type

Judgment

1.5 Jurisdiction

Singapore

1.6 Description

The Court of Appeal held that interest paid on bonds issued to shareholders during capital restructuring was not deductible under s 14(1)(a) of the Income Tax Act.

1.7 Decision Date

28 August 2018

2. Parties and Outcomes

Party Name	Role	Type	Outcome	Outcome Type	Counsels
Comptroller of Income Tax	Respondent	Government Agency	Appeal Dismissed	Won	Foo Hui Min Felicia of Inland Revenue Authority of Singapore (Law Division) Lim Chun Heng Christopher of Inland Revenue Authority of Singapore (Law Division) Lim Weng Kee David of Inland Revenue Authority of Singapore (Law Division)
BML	Appellant	Corporation	Appeal Dismissed	Lost	Ong Sim Ho of Ong Sim Ho Keith Brendan Lam Xun-Yu of Ong Sim Ho Khoo Puay Pin Joanne of Ong Sim Ho

3. Judges

Judge Name	Title	Delivered Judgment
Sundaresh Menon	Chief Justice	No
Tay Yong Kwang	Judge of Appeal	Yes
Steven Chong	Judge of Appeal	No

4. Counsels

Counsel Name	Organization
Foo Hui Min Felicia	Inland Revenue Authority of Singapore (Law Division)
Lim Chun Heng Christopher	Inland Revenue Authority of Singapore (Law Division)
Lim Weng Kee David	Inland Revenue Authority of Singapore (Law Division)
Ong Sim Ho	Ong Sim Ho
Keith Brendan Lam Xun-Yu	Ong Sim Ho
Khoo Puay Pin Joanne	Ong Sim Ho

4. Facts

The Taxpayer owns and operates a mall in Singapore.
The Taxpayer's two shareholder companies each own 50% of its issued share capital.
In 2004, the Taxpayer conducted a securitisation exercise followed by a capital restructuring exercise.
The capital restructuring involved a capital reduction exercise and a bond issue to the Shareholders.
The Shareholder Bonds carried interest of 7.1% per annum and would mature in 2011.
The Comptroller of Income Tax disallowed the deduction of interest expense on the Shareholder Bonds.
The Taxpayer argued the interest expense was deductible because the Shareholder Bonds enabled it to retain the Mall.

5. Formal Citations

BML v Comptroller of Income Tax, Civil Appeal No 119 of 2017, [2018] SGCA 53

6. Timeline

Date	Event
2004-09-17	WM Limited incorporated by the Taxpayer
2004-10-27	WM raised $520m by a bond issue
2004-10-20	Loan agreements signed for Shareholder Advances
2004-11-26	Shareholders resolved to reduce the share capital of the Taxpayer
2004-12-02	Capital Reduction Exercise approved by the High Court
2004-12-15	Taxpayer issued Shareholder Bonds
2005-01-01	Year of Assessment 2005
2006-01-01	Year of Assessment 2006
2007-01-01	Year of Assessment 2007
2008-01-01	Year of Assessment 2008
2009-01-01	Year of Assessment 2009
2013-11-21	Taxpayer filed Notices of Appeals to the ITBR
2016-11-08	ITBR issued its decision affirming the CIT’s decision
2016-11-29	Taxpayer appealed to the High Court
2017-06-05	High Court dismissed the Taxpayer’s appeal
2017-07-28	Taxpayer filed a Notice of Appeal to the Court of Appeal
2018-02-06	Judgment reserved
2018-08-29	Judgment delivered

7. Legal Issues

Deductibility of Interest Expense
- Outcome: The court held that the interest expense was not deductible under s 14(1)(a) of the Income Tax Act.
- Category: Substantive
- Sub-Issues:
  - Direct link between interest expense and income acquisition
  - Capital employed in acquiring the income
- Related Cases:
  - [2014] 4 SLR 33
  - [1995] 2 SLR(R) 866

8. Remedies Sought

Deduction of Interest Expense

9. Cause of Actions

No cause of actions

10. Practice Areas

Taxation
Tax Litigation

11. Industries

Real Estate
Finance

12. Cited Cases

Case Name	Court	Affirmed	Citation	Jurisdiction	Significance
BFC v Comptroller of Income Tax	Court of Appeal	Yes	[2014] 4 SLR 33	Singapore	Established the legal premise that interest expense would be deductible even if it was capital expenditure so long as it satisfied s 14(1)(a) of the ITA and that s 14(1)(a) is an exception to s 15(1)(c).
Zeta Estates Ltd v Commissioner of Inland Revenue	Hong Kong Court of Final Appeal	Yes	[2007] HKLRD 102	Hong Kong	The Taxpayer relied on this case in support of a “balance sheet test” instead of the direct link test. The court treated this case with caution as the relevant section of the Hong Kong Inland Revenue Ordinance was “more liberal” than s 14(1)(a) of Singapore’s ITA.
BML v Comptroller of Income Tax	High Court	Yes	[2017] SGHC 118	Singapore	The High Court judge dismissed the Taxpayer’s appeal and affirmed the applicability of the direct link test.
T Ltd v Comptroller of Income Tax	High Court	Yes	[2005] 4 SLR(R) 285	Singapore	Discussed the interaction between ss 14(1), 14(1)(a) and 15(1)(c).
T Ltd v Comptroller of Income Tax	Court of Appeal	Yes	[2006] 2 SLR(R) 618	Singapore	Discussed the interaction between ss 14(1), 14(1)(a) and 15(1)(c).
ABD Pte Ltd v Comptroller of Income Tax	High Court	Yes	[2010] 3 SLR 609	Singapore	Laid down a “composite and integrated approach” to characterizing an item of expenditure as capital or revenue in nature.
Andermatt Investments Pte Ltd v Comptroller of Income Tax	Court of Appeal	Yes	[1995] 2 SLR(R) 866	Singapore	Established the direct link test, requiring a direct link between the money borrowed and the income produced for interest to be deductible under s 14(1)(a).
JD Ltd v Comptroller of Income Tax	Court of Appeal	Yes	[2006] 1 SLR(R) 484	Singapore	Discussed the direct link test and stated that the direct link test must be assessed in relation to a particular source of income and not the taxpayer’s income generally.
ABD Pte Ltd v Comptroller of Income Tax	High Court	Yes	[2010] 3 SLR 609	Singapore	Stated that “[w]here ordinary accounting principles run counter to the principles of tax law, they must yield to the latter for the purposes of computing gains and profits for tax”.
Yeung v Federal Commissioner of Taxation	Federal Court of Australia	Yes	(1988) 88 ATC 4193	Australia	The Taxpayer cited this case in support of the test of representation. The court found that the relevant proposition to be extracted is not the test of representation but the test of retention, that is, the principle that interest paid on a loan used to preserve or retain the taxpayer’s income-earning assets is deductible.
Federal Commissioner of Taxation v Munro	High Court of Australia	Yes	(1926) 38 CLR 153	Australia	The issue was whether interest incurred on a loan that was not used to produce assessable income but was secured on an income-producing asset was deductible.
Federal Commissioner of Taxation v J D Roberts and Smith	Australian Federal Court	Yes	(1992) 92 ATC 4380	Australia	The Australian Federal Court was concerned with the deductibility of interest incurred by partners of solicitors who had taken out loans to allow a reduction of capital for existing partners of the firm.
Hayden v Federal Commissioner of Taxation	Federal Court	Yes	(1996) 96 ATC 4797	Australia	The issue was whether interest on borrowing secured over an income-producing asset used to purchase a private asset was deductible.
Zhao Hui Fang v Commissioner of Stamp Duties	High Court	Yes	[2017] 4 SLR 945	Singapore	Reiterated that “it is not generally helpful to selectively highlight dicta from foreign jurisprudence on the construction of particular terms in foreign tax statutes, even if those terms are in pari materia with local provisions … without an explication of the relevant context, history, and purpose of the foreign tax statutes and how those compare to the local regime in Singapore”.
Pacific Rendezvous Ltd v Commissioner of Inland Revenue	New Zealand Court of Appeal	Yes	[1996] 2 NZLR 567	New Zealand	In this case, the taxpayer which was in the business of operating motels took a loan for the renovation of its premises with the dual purpose of improving the sale price of the business and generating more revenue in the interim period prior to the sale.
Commissioner of Taxation of the Commonwealth of Australia v Day	High Court of Australia	Yes	[2008] 236 CLR 163	Australia	Citing this case, the Taxpayer added that the High Court of Australia had construed the term “in” to mean “in the course of” in the context of an Australian deduction provision.
Birmingham Small Arms Co Ltd v Inland Revenue Commissioners	House of Lords	Yes	[1951] 2 All ER 296	United Kingdom	In which the House of Lords opined that there was no significant difference in meaning between the words “capital employed in a trade or business” and “capital of a trade or business” in the context of provisions for the computation of the amount of capital employed in a trade or business for the purposes of excess profits tax.

13. Applicable Rules

Rule Name
No applicable rules

14. Applicable Statutes

Statute Name	Jurisdiction
Income Tax Act (Cap 134, 2014 Rev Ed) s 14(1)(a)	Singapore
Income Tax Act (Cap 134, 2014 Rev Ed) s 15(1)(c)	Singapore

15. Key Terms and Keywords

15.1 Key Terms

Shareholder Bonds
Capital Restructuring Exercise
Securitisation Exercise
Direct Link Test
Capital Employed in Acquiring the Income
Income Tax Act
Deductibility of Interest
Rental Income
Shareholder Advances
Capital Reduction Exercise

15.2 Keywords

Income Tax
Deductibility
Interest Expense
Shareholder Bonds
Capital Restructuring
Singapore
Tax Law

17. Areas of Law

Area Name	Relevance Score
Income taxation	95
Revenue Law	90
Taxation	80

16. Subjects

Taxation
Income Tax
Corporate Finance