Chief Assessor v HSBC Institutional Trust Services (Singapore) Ltd

Belinda Ang Saw Ean J:

[1] This Originating Summons No 422 of 2011 (“OS 422/2011”) is the Chief Assessor’s appeal against the decision of the Valuation Review Board (“the Board”) made on 24 May 2011 (“the Decision”).

[2] There is no dispute as to the relevant facts underlying the valuations in dispute. The Respondent, HSBC Institutional Trust Services (“the Landlord”), is the trustee of CapitalMall Trust which owns the shopping centre known as Bugis Junction.

[3] Bugis Junction has 180 units which are normally leased to tenants carrying on various types of businesses at the shopping centre.

[4] In the computation of the annual value of the various tenanted units (collectively “the Premises”) for the valuation years of 2004 and 2005, the Chief Assessor did not exclude a portion in the gross rent for depreciation arising from wear and tear of escalators, lifts, air-conditioning and fire safety systems installed in Bugis Junction (hereinafter referred to collectively as “the asset items” or individually as “the asset item”).

[6] Ms Tan Gee Hong (“Ms Tan”), the property manager, testified before the Board. She explained in her affidavit that the tenants paid the Landlord a monthly gross rent that included a sum of $0.20 per square foot calculated on the basis of a 7.5% annual depreciation for air-conditioning plant, lifts and escalators, and 20% for the fire safety system. It was Ms Tan’s evidence that the Landlord had contracted to let out the Premises located in a building with central air conditioning, escalators, lifts, and a fire safety system, and that the asset items were required to provide the services agreed to by the Landlord, and for that reason the claim for depreciation was an expense that related to services rather than rent or letting. She confirmed that this monthly sum of $0.20 per square foot was an integral part of gross rent but its purpose was not itemised in the tenancy agreements; that it was for depreciation in relation to the asset items; that the monthly service charge of $1.50 per square foot was to cover operating expenses and not depreciation of the asset items. It was argued on behalf of the Landlord that the Premises would yield higher rental as compared to a shopping mall without similar installations like central air-conditioning, lifts, escalators and fire safety systems.

[7] Ms Tan’s evidence was not seriously challenged by the Chief Assessor who did not call any witness.

[8] The Board referred to BCH Retail Investment Pte Ltd v Chief Assessor [2007] 2 SLR(R) 580 (“BCH( No 2)”) for the principle that any component of gross rent that was for services and not related to rent must be excluded from the gross rent for purposes of calculating annual value. With that principle in mind, the Board accepted the Landlord’s reasoning and stated (at [14]):

[10] Applying Chartered Bank to the factual matrix of this particular case, the Board agreed (at [18]):

[12] OS 422/2011 is brought pursuant to s 35 of the Property Tax Act (Cap 254, 2005 Rev Ed) (“the PTA”). It was agreed between the parties that the question of law for this appeal is whether, as a matter of principle, a component in the gross rent for depreciation of the asset items (ie, escalators and lifts, air conditioning and fire safety systems) should be excluded from gross rent in the computation of annual value. This question requires a determination of what the annual value of the Premises is according to the definition of “annual value” in s 2(1) of the PTA, which focuses on the element of rent or letting. Some additional questions will necessarily flow from this definition read with s 2(2), as well as the charging provision in s 6(1) of the PTA, and they will be identified and discussed later in this Judgment.

[13] It is appropriate at this juncture to set out the relevant statutory provisions. The charging provision of the PTA is s 6(1) which provides:

[14] Section 2(1) defines “annual value” as follows:

[15] Section 2(2) reads as follows:

[16] The Chief Assessor submits that the Board erred in allowing the exclusion of a portion of the gross rent for depreciation in the computation of annual value. First, the Chief Assessor argues that the Board had focussed on the wrong question, viz, whether the Landlord required the asset items to provide services to the tenants. It was an error that distracted it from what the Chief Assessor considers to be the correct approach pronounced by the Court of Appeal in BCH (No 2), viz, whether the portion of the gross rent for depreciation is related to rent or letting. Second, the Board was wrong to have ruled as irrelevant its own findings that the asset items were permanent features and, hence, an integral part of the building. Third, Chartered Bank provides little guidance on whether, as a matter of principle, the depreciation of the asset items ought to be excluded from gross rent in arriving at the annual value of the Premises for the valuation years 2004 and 2005. There was no ratio decidendi in that case to give it binding authority to resolve the problem in the present case.

[18] Finally, the Landlord accepts that the asset items are in the nature of plant and machinery, but disagrees that they formed “integral parts of the building”. According to the Landlord, the Board rightly decided (at [17]):

[19] The Chief Assessor in computing the annual value of the Premises started with the gross rent received by the Landlord. No point was taken that depreciation was never included in gross rent to begin with. The Chief Assessor did not challenge Ms Tan’s evidence that although the annual depreciation of the asset items was not itemised separately in the tenancy agreements, the gross rent, however, was negotiated and formulated with depreciation of the asset items in mind. The main arguments that were canvassed before the Board were repeated in this appeal.

[20] The question of law in this appeal is whether, as a matter of principle, the depreciation component in the gross rent should be excluded from gross rent in the computation of annual value of the property. In assessing annual value the touchstone is whether a component in the gross rent is related to rent or letting (“the touchstone question”). This is in turn determined by whether the machinery or equipment to which a component in the gross rent is directed is part of the property that is assessable to tax (“the threshold question”). It is, therefore, necessary to first determine the threshold question to ascertain whether the asset items in the present case are fixtures in or on immoveable property so as to be potentially assessable to tax together with the immoveable property under s 6(1) of the PTA. If the answer is in the affirmative, the next step is to look at the touchstone question. At this stage, the question of law in this appeal will be considered.

[24] With these observations in mind, I now turn to examine the Board’s Decision.

[25] The Board erred in several respects. Firstly, the Board did not consider whether the asset items were potentially assessable to tax together with the subject building under s 6(1) of the PTA. Under our local property tax regime, tax is payable on immoveable properties such as houses, buildings, lands and tenements. In other words, it is the immoveable property that is taxed. Thus, a building is assessable together with fixtures that are on or in the building unless the fixtures are manufacturing or industrial machinery exempted under s 2(2) of the PTA. The Board found that the asset items were fixtures and, hence, part of the building, but nevertheless ruled that its findings were irrelevant and had no application in law to this case. With respect, the Board’s reasoning in the context of this particular case is misconceived. It detracted from settled jurisprudence in land law on the distinction between chattels and fixtures. Consequently, it cast aside the statutory imposition of tax on fixtures in or on immoveable property in the determining what constitutes “building” for property tax assessment (see generally Andrew Phang JA in Pan-United Marine Ltd v Chief Assessor [2008] 3 SLR(R) 569 (“Pan-United”) at [104] and Phang JA’s passing comment at [43] that a “building” would by its nature and definition constitute part of the land), or if outside the definition of “building”, the asset items could still be affixed to land so as to become part of the land and, thus be potentially assessable to tax (see Chief Assessor and another v First DCS Pte Ltd [2008] 2 SLR(R) 724 at [46] (“First DCS (CA)”). By skipping this important step of the analysis, the Board arrived at the wrong conclusion in answer to the question of law before the Board.

[26] For the sake of completeness, I should add that there may be occasions where on the facts it is possible to skip the threshold question to go straight into assessment of annual value (but not so in this case based on the present facts). To illustrate, in BCH (No 2), the Court of Appeal sanctioned the use of the gross rent as a starting-point to see if there are components not related to rent or letting. The dispute on advertising and promotional (“A&P”) contributions and its resolution is unconnected to the threshold question described in [20] above. Similarly, in BCH Retail Investment Pte Ltd v Chief Assessor [2002] 2 SLR(R) 973 (“BCH (No 1)”), the dispute related to the tenants’ A&P contributions. In BCH (No 2), Andrew Phang JA said (at [26]):

[27] Secondly, and this follows from the first error, the Board’s focus on services led it to decide that its finding that the asset items were fixtures and an integral part of the building that comprises Bugis Junction was irrelevant to the issue before it. Contrary to the Board’s views, as fixtures to the building the asset items are relevant to the question of including them in the assessment of the building’s annual value. As the asset items are assessable to tax together with the building, in assessing annual value it cannot be said that depreciation of the asset items has nothing to do with letting of the Premises. This, in turn, means that the depreciation component in the gross rent is related to rent or letting.

[30] In this part of the judgment, I will consider the threshold question: “Are the asset items an integral part of the subject building, such that the building together with the asset items is assessable to tax under s 6(1)?” There is no doubt that property tax is a tax on immoveable property, and any plant and machinery in or on such property is assessable to tax if the plant and machinery is affixed so as to become part of the immoveable property. The significance of the existence of fixtures in a building is potentially the enhancement in value that is added to the annual value of the building. Conversely, if the plant and machinery is not affixed to the building, the question of including it in the assessment of the building’s annual value does not even arise. Hence, the difference between fixtures and chattels is important in relation to the calculation of the annual value for property tax purposes. Section 2(2) of the PTA is relevant in that not all fixtures are taken into account in determining the annual value. Certain types of machinery, especially trade machinery, are excluded from computation of the annual value of the subject premises.

[31] The decision of First DCS Pte Ltd v Chief Assessor and another [2007] 3 SLR(R) 326 (“First DCS”) is instructive. Andrew Ang J explained s 2(2) of the PTA at [27] & [28]:

[32] I pause here to mention that Ang J’s distinction between two separate classes of machinery in s 2(2) was accepted by the Court of Appeal in First DCS (CA). VK Rajah JA (delivering the decision of the court), agreeing with Ang J on fixtures on or in immoveable property, said (at [46]):

[33] I now turn to Ang J’s confirmation that escalators, lifts and air-conditioning units would fall under the second category of non-manufacturing or processing or industrial machinery. The significance and effect of this confirmation is that this second category of non-exempted machinery is in fact fixtures in or on the immoveable property and are, thus, included in the assessment of the building’s annual value. This leaves the fire safety system in the present case. I should imagine this also falls under the same category of non-exempted machinery as escalators, lifts and air-conditioning units. Fire safety systems comprise different parts: indicator panels, alarms, sprinklers, heat sensors, hose reels, systems of piping forming part of the fire safety equipment of the building. As the Board found on the facts in evidence, the asset items were fixtures and they formed integral parts of the building. Therefore, the asset items for property tax purposes are part of immoveable property and, hence, are to be included in the assessment of the immoveable property’s annual value.

[34] Ang J also considered the factors to be considered when determining whether an item is a fixture or a chattel for property tax purposes (at [44]):

[35] In the later case of Pan-United, the Court of Appeal had occasion to discuss the fixture test and the enhancement test. In that case, the appellate court did not apply either of the tests as the structure in question was found to be within the meaning of “building” in the PTA and, therefore, taxable. It is pertinent to note that once the structure in question was determined to be a building the inquiry comes to an end. Consequently, the Court of Appeal made no authoritative decision as to which of the tests should be applied to ascertain if the plant and machinery was affixed to land for the purposes of tax under the PTA. However, the appellate court’s obiter remarks at [43] to [53] are instructive on the application of each test.

[36] As a starting point, the appellate court cited the English decision of Holland v Hodgson [1872] LR 7 CP 328 as authority that the two considerations for determining whether objects are fixtures or chattels are: (a) the degree of annexation; and (b) the object of annexation. In regard to the object of annexation, the observations made by the English High Court in the decision of Hamp v Bygrave (1983) 266 EG 720 at 724 were approved:

[37] Phang JA (delivering the Judgment of the Court of Appeal) also approved of the summary of the fixture test in Kevin Gray & Susan Francis Gray, Elements of Land Law (Oxford University Press, 4 Ed, 2005), where it was opined that the “contemporary borderline between fixtures and chattels may now be more case-specific and more context-dependent than was once believed.” Thus, “relatively few guidelines remain in the modern law which are capable of unambiguous application to particular facts.” Purpose, and not degree, of annexation is now the primary consideration and “[i]nferences drawn from the physical mode of annexation may well be overridden by more subtle considerations relating to the objectively understood motivation underlying the annexation in question.”

[38] It is clear that according to the fixture test as described, the asset items in question are undoubtedly part of land, being annexed to the building that comprises Bugis Junction. The photographs of the escalators, lifts, air conditioning and fire safety systems adduced as evidence in this case show that these have been built-in to or affixed to the building. Accordingly, they therefore satisfy the first consideration stated in Holland v Hodgson. In regard to the object of annexation, there are no facts in evidence to rebut the prima facie inference to be drawn from the fact that the asset items have been annexed to the building. I note that there was not a great deal of difference between the parties on the question of whether the asset items were fixtures or chattels. On the present facts, neither common law exceptions mentioned at [34] above applies. Given the nature of and the manner in which the escalators, lifts, air conditioning and fire safety systems are usually utilised, their function or purpose is to be served by annexation to the building, where they will remain in place for a substantial period of time. It is quite clear that escalators, lifts, air conditioning and fire safety systems are incapable of utility on a free standing basis and cannot be enjoyed as mere chattels. Air conditioners with vents, ducts and piping form a cooling system that functions together to cool the building in question. Escalators and lifts are mainly or usually used for shoppers and visitors. In the case of the fire safety system, it consists of several components. For example, the indicator boards, piping, alarms, heat sensors, hose reels, and sprinklers. All these components function together to form the system. Each component also performs its own discrete function independent of the others, but taken as a whole, they are affixed to the building to serve as protection from fire and are intended to remain in place for a substantial period of time. As the Board found on the facts in evidence, the asset items were fixtures and they formed integral parts of the building.

[39] The alternative test is the enhancement test. The Court of Appeal noted in Pan-United (at [48]):

[40] Phang JA cited the judgment of Lord Denning MR in Field Place Caravan Park as a succinct statement of the enhancement test (at [49]):

[41] Lord Denning did not mention the requirement that the value of the land be enhanced. However, that requirement was present in the judgment of Lord Kilmuir which he cited. The observations relating to the fixture test apply equally here. The items have been annexed to the building with a significant degree of permanence. They are enjoyed with the building, and indeed significantly influence the enjoyment and use of the building, rather than being enjoyed as mere chattels. The principle requirement of the enhancement test is that the thing concerned must enhance the value of the land. In context “value” here should be understood to refer to how much a property is worth in the lay sense. For example, a building with the asset items installed would be worth more than one that is not is self-evident. The same point is evident using the analogy of a sale of the property with fixtures. In a sale of property, the transfer of the real estate would include the fixtures and the transfer instrument to be assessed for duty would include the transferor’s title to or interest in the fixtures.

[42] In my judgment, either test should reach the conclusion that the asset items are affixed to land so as to become part of the land and, thus, be assessable to tax together with the building concerned under s 6(1).

[43] Given the Board’s finding that the asset items are fixtures that form part of the building comprising the shopping centre known as Bugis Junction, the asset items are, in my view, assessable to tax together with immoveable property under s 6(1) of the PTA. Put another way, as fixtures the asset items enhance the value of the building, and they are, thus, included in the assessment of the building’s annual value. It follows that the portion of the gross rent for depreciation of the asset items in question has to do with the letting of the Premises, which, in turn, means that the depreciation component in the gross rent is related to rent or letting of the Premises. Therefore, the depreciation component in the gross rent has to be included in the computation of annual value in the valuation years of 2004 and 2005.

[44] Given the analysis in [43] above, how is Chartered Bank to be explained?

[46] I have already explained in [29] above why the Landlord’s contention that Chartered Bank has been made binding authority by BCH (No 2) is misplaced. While Chartered Bank was mentioned in BCH (No 2), depreciation was not an issue before the Court of Appeal. Reference to Chartered Bank was to show that previous cases, of which Chartered Bank was one, were consistent with its holding that the concept and language of exclusion rather than deduction be used for expenses not related to rent or letting.

[49] The validity of the distinction made in [48] can withstand scrutiny in light of BCH (No 2). In assessing annual value the touchstone is whether a component in the gross rent is related to rent or letting. This is in turn determined by whether the machinery or equipment to which a component in the gross rent is directed is part of the property or not. In relation to services identified as (a) to (e) and the profits on services, item (f), the expenses were clearly for services and had nothing to do with the subject property. If the conclusion is that the equipment, ie, item (g), formed part of land (admittedly it is a stretch to consider “fire extinguishers” part of the property), the expense ought to be related to rent or letting of the property and included in annual value (see also [27] & [43] above).

[51] I start with the function of the qualifying words. The tax base in relation to the category of properties under s 2(1) of the PTA is the annual value, which includes an amount which the landlord charges the tenant to cover his responsibility for repairs and other annual outgoings as described by the qualifying words. This is clear from the various statements of principle made by the Court of Appeal in Tan Hee Liang (CA). In that case, Andrew Phang JA (delivering the judgment of the court) reiterated (a) that the “very premise underlying the ascertainment of annual value, viz, the relation to the rent or letting of the subject property, which in turn approximates the real value of the property” (at [40]), and (b) that the function of the qualifying words in the definition of “annual value” is that the annual value would include the element of the landlord’s expenses for repair, insurance, maintenance or upkeep and all taxes except Goods and Services Tax (at [43]). Phang JA said (at [44]):

[52] Two consequences flow from the meaning ascribed to the qualifying words: (a) the landlord’s actual expenses have to be expended in the year of valuation and (b) the expenses must relate to repairs, insurance, maintenance or upkeep of the subject property.

[54] In my judgment, a notional expense is outside the ambit of the qualifying words in the statutory definition of annual value. The sum of $0.20 per square feet per month in the gross rent is a payment related to rent or letting of the Premises for the reasons set out in [43], and is, therefore, included in the computation of annual value for the valuation years of 2004 and 2005.