Court of Appeal · Decided 26 February 2014

Comptroller of Income Tax v AQQ and another appeal

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[2014] SGCA 15Case no. Civil Appeals No 7 and 8 of 2013

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Sundaresh Menon CJ (delivering the judgment of the court):
[1] These are two cross appeals against the decision of the High Court judge (“the Judge”) in AQQ v Comptroller of Income Tax [2013] 1 SLR 1361 (“the Judgment”), where he held that a financing arrangement that was entered into in conjunction with a corporate restructuring scheme amounted to tax avoidance within the meaning of s 33(1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”). However, the Judge also held that the Comptroller of Income Tax (“the Comptroller”) had not acted reasonably and fairly in exercising his powers under s 33(1) to counteract the tax advantage that had thereby been obtained. Civil Appeal No 7 of 2013 (“CA 7/2013”) is the Comptroller’s appeal against the Judge’s holding that he had not acted reasonably and fairly in exercising his powers under s 33(1); Civil Appeal No 8 of 2013 (“CA 8/2013”) is the taxpayer’s appeal against the Judge’s holding that the financing arrangement amounted to a tax avoidance arrangement within the meaning of s 33(1) of the Act.
Background facts
[2] The background facts are set out in considerable detail in the Judgment and we adopt them for the purpose of these appeals. We only highlight some material facts that are germane to the legal issues before us.
[3] The taxpayer is AQQ, a Singapore incorporated company that is a wholly owned subsidiary of [B] Bhd (“B Group”), a company listed on Bursa Malaysia. Prior to 2003, B Group held its interests in various companies, namely, [C] Sdn Bhd (“C”), [D] (Singapore) Pte Ltd (“D”), [E] (Singapore) Pte Ltd (“E”), [F] Enterprise Pte Ltd (“F”) and [G] Shipping Pte Ltd (“G”), in the following manner:
The Corporate Restructuring
[4] In 2002, changes were announced to the Singapore tax regime. These included the introduction of group tax relief and a move from the imputation system under s 44 of the Income Tax Act (Cap 134, 2001 Rev Ed) to a single tier corporate tax system with effect from 1 January 2003: see the then Deputy Prime Minister Mr Lee Hsien Loong’s Annual Budget Statement, Singapore Parliamentary Debates, Official Report (3 May 2002) vol 74 at cols 698–701.
[5] Sometime in or about April 2003, the Board of Directors of B Group approved a proposed group restructuring of its Singapore operations (“the Corporate Restructuring”). The Corporate Restructuring involved the following steps:
(a) the incorporation of AQQ with a paid up share capital of two ordinary shares of $1 each;
(b) the acquisition of the shares of AQQ by B Group on 31 July 2003;
(c) the disposal and transfer of C’s 50% interest in E, F and G to AQQ for cash consideration of $75m on 18 August 2003;
(d) the disposal and transfer of D’s 50% interest in E, F and G to AQQ for cash consideration of $75m on 18 August 2003; and,
(e) The disposal and transfer of B’s Group’s 100% interest in D to AQQ for cash consideration of $75m on 18 August 2003.
[6] The result of the Corporate Restructuring was a streamlined corporate structure with D, E, F and G (“the Subsidiaries”) organised according to the various business lines of the group, namely, cement, readymix concrete, shipping and trading, under the umbrella of a single holding company (ie, AQQ):
The Financing Arrangement
[8] The following transactions were subsequently effected on the same day:
(a) N Bank Singapore detached the interest component (“the Interest Coupons”) from the Fixed Rate Notes and sold $205m of the principal component of the Fixed Rate Notes (“the Principal Notes”) to [N] Bank (Mauritius) Limited (“N Bank Mauritius”) for cash consideration of $205m. N Bank Singapore agreed to pay N Bank Mauritius a sum equivalent to interest of 8.845%, or 0.005% less than what it was to receive from AQQ under the Interest Coupons, conditional upon N Bank Singapore receiving such payment from AQQ (“the Conditional Return”).
(b) N Bank Singapore agreed to deliver the remaining $20m of Principal Notes to N Bank Mauritius at a later date for cash consideration of $20m.
(c) N Bank Mauritius sold to C the $205m of Principal Notes which it purchased from N Bank Singapore, also for cash consideration of $205m. N Bank Mauritius agreed to pay C a sum equivalent to interest of 8.840%, or 0.005% less than what it was to receive from N Bank Singapore (see sub-paragraph (a) above), conditional upon N Bank Singapore receiving payment from AQQ under the Conditional Return.
(d) N Bank Mauritius agreed to deliver the remaining $20m of the Principal Notes (that it would receive from N Bank Singapore) to C at a later date for cash consideration of $20m.
(e) B Group granted an interest free intercompany loan of $75m to C.
(f) AQQ transferred $150m to E – the designated collection agent for the B Group and C – as payment for its acquisition of (i) the B Group’s 100% interest in D and (ii) C’s 50% interests in E, F, and G.
(g) AQQ transferred $75m to D as payment for its acquisition of D’s 50% interests in E, F, and G.
(h) E (on behalf of C) transferred $150m to N Bank Mauritius as payment for the Principal Notes.
(i) D granted an interest free intercompany loan of $75m to C using the proceeds that it had received from AQQ for the sale of its 50% interests in E, F and G.
(j) D (on behalf of C) transferred $55m (ie, a portion of the intercompany loan referred to in the preceding sub-paragraph) to N Bank Mauritius as payment for the Principal Notes.
(k) D (on behalf of C) placed $20m (ie, the balance of the intercompany loan referred to in sub-paragraph (i)) in an investment deposit with N Bank Singapore.
[9] The flow of funds is diagrammatically represented below:
[10] On or around 18 November 2003, a second set of transactions took place:
(a) D withdrew its $20m investment deposit with N Bank Singapore and transferred $20m to E, as collection agent for C (ie, the balance of the intercompany loan that D had granted to C).
(b) N Bank Singapore delivered the balance of the $20m of Principal Notes to N Bank Mauritius for cash consideration of $20m.
(c) N Bank Mauritius delivered the balance of the $20m of Principal Notes to C for cash consideration of $20m from E (on behalf of C).
[11] The financing structure detailed above is hereafter referred to as the Financing Arrangement. The end result of these arrangements was that AQQ obtained $225m from N Bank and the entirety of this sum was effectively returned to N Bank on the same day, albeit following a circuitous route.
The section 44 accounts
[12] The corporate taxation regime prior to 2003 under ss 44 and 46 of the Act as it then stood was known as the imputation scheme. Under this scheme, corporate profits would be taxed first at the corporate level. A sum equivalent to the amount of tax paid would then be credited to an account maintained by the company known as “the s 44 account”. When dividends were issued, the company could issue dividends with a tax credit attached reflecting the sum of tax that had previously been paid by the company on its profits. The tax credited to the shareholder in this manner would then be debited from the s 44 account balance. The overall effect of this scheme was that the dividend income would only be subject to tax once, but such that although it was paid up front by the company, it would ultimately be taxed at the marginal tax rate of the shareholder. Where there was a difference between the marginal rates applicable to the company’s profits and the shareholder’s income, the shareholder would be entitled to receive a net tax refund if the tax credits attached to the dividends exceeded the tax imposed on the shareholder in respect of those dividends.
[13] After the move to a single tier corporate taxation regime was announced, companies with unutilised balances in their s 44 accounts were given a five year transitional period from 1 January 2003 to 31 December 2007 to remain on the imputation system before transitioning to the single tier corporate taxation regime. This was provided for under s 44A of the Act. The s 44 accounts were thereafter renamed the s 44A accounts, but for clarity, we refer in this judgment to these accounts without differentiation as “the s 44 accounts”.
[14] As at 31 December 2002, the residual balances in the s 44 accounts and the accumulated profits of the Subsidiaries were:
The tax assessments
[15] AQQ paid interest of 8.85% per annum on the Interest Coupons to N Bank Singapore on a biannual basis, totalling $79,650,000 from 2004 to 2007. There was no allegation that these interest payments had not in fact been made. But as will be apparent from the transactions described at [8] and [10] above, as a result of the Interest Coupons being detached and the Principal Notes being sold on by N Bank Singapore to N Bank Mauritius and then to C, N Bank Singapore and N Bank Mauritius in fact each retained a spread of only 0.005% or a sum of $3982.50. The rest of the interest payments were paid on to C.
[16] AQQ submitted the following tax returns for the years of assessment (“YA”) 2004 to 2007 reflecting the dividend income it received from the Subsidiaries as well as the interest payments it made to N Bank Singapore:
(a) for YA 2004, dividend income of $12,329,315 less interest expenses of $7,419,452;
(b) for YA 2005, dividend income of $30,952,630 less interest expenses of $19,852,015;
(c) for YA 2006, dividend income of $19,970,000 less interest expenses of $19,912,500; and
(d) for YA 2007, dividend income of $19,922,000 less interest expenses of $19,912,500.
[17] Under the imputation scheme, a shareholder of a company would be entitled to s 44 tax credits that were equivalent to the 22% (for YA 2004) or 20% (for YA 2005 to 2007) tax that had been paid by the company on its profits. Based on the tax returns above, AQQ would have been entitled to a total of $16,881,375 in tax credits for the dividends issued by the Subsidiaries pursuant to ss 44A and 46 of the Act. AQQ’s total chargeable income – less the claimed interest expenses of $67,096,467 and other statutory and administrative expenses – was $16,036,060. The total tax payable by AQQ on the dividend income from the Subsidiaries at the corporate taxation rates would be $3,305,253.84. On the basis of the available tax credits, AQQ contended that it was entitled to a total tax refund of $13,576,121.16 (that is, $16,881,375 less $3,305,253.84) on the dividends. A table of AQQ’s tax returns and the claimed tax refunds is annexed to this judgment at Annex A.
[18] The Comptroller issued Notices of Assessment for YA 2004, 2005 and 2006 (“the Original Assessments”) respectively which took into account the dividend income and interest expenses above (see [16]). The total sum of s 44 tax credits that AQQ was entitled to for these three years in respect of the dividends was $12,896,975, while the total amount of income tax due from AQQ for the corresponding period was $3,307,158.16. Tax refunds amounting to $9,589,816.84 were made to AQQ.
[19] Subsequently, in July 2007, the Comptroller conducted an audit of AQQ. Following this, the Comptroller decided to invoke s 33 of the Act to disregard the tax effects of all the transactions undertaken. The Comptroller issued Notices of Additional Assessments dated 7 April 2008 to AQQ for YA 2004 to 2006 (“the Additional Assessments”), which assessed AQQ to an overall tax liability of $9,592,577.76.. This sum was calculated by disregarding all the dividend income and interest expenses, and assessing AQQ to tax only on its income from other sources less statutory and administrative expenses. This amounted to a sum of $2,760.92 for this period. The overall tax liability was derived from the sum total of this liability and the tax refunds that had previously been made to AQQ under the Original Assessments as follows:
[20] Similarly, the Comptroller invoked s 33 to disregard all dividend income and interest expenses in the returns that AQQ had filed for YA 2007. On that basis, AQQ’s net income for YA 2007 was $57,829.00 and its tax liability for that year was assessed at $11,565.80.
[21] AQQ objected to the Additional Assessments and the Notice of Assessment for YA 2007, which the Comptroller declined to revise. AQQ filed an appeal to the Income Tax Board of Review (“the Board”).
[22] The Board upheld the assessment of the Comptroller. It found that the Financing Arrangement had the purpose or effect of tax avoidance within the meaning of s 33(1) of the Act, and that it had been structured in a contrived and artificial manner in order to obtain tax refunds through the utilisation of s 44 tax credits. The Board also found that on an objective view, there was no commercial justification for the Financing Arrangement, and that neither s 14 (which entitled a taxpayer to claim a deduction on interest expenses) nor the s 44 imputation system had been intended to be used in the manner that AQQ had. The contention that the Additional Assessments were ultra vires and void under s 74(1) of the Act was also rejected.
[23] AQQ then filed an appeal to the High Court pursuant to s 81(2) of the Act.
The decision below
[24] The Judge examined the structure of s 33 (see [33] below) and concluded that under s 33(1), the court first had to satisfy itself that the arrangement had the purpose or effect listed in any one of the three limbs in s 33(1). It was only if the arrangement was caught by s 33(1) that the court would proceed to consider whether the statutory exception contained in s 33(3)(b) applied (at [64] of the Judgment). The Board had erred by probing into whether the arrangement was contrived and artificial – as part of the inquiry under s 33(1) – without first considering whether one of the three limbs of that section had been implicated (at [65] of the Judgment).
[25] The Judge then considered the meaning of the phrase “purpose or effect” in s 33(1), and concluded that under the “predication principle” applied in the Australian and New Zealand case law, the purpose or effect of the arrangement had to be determined objectively, without reference to the motives of the parties (at [72] and [76] of the Judgment). Applying this test, the Judge held that the Comptroller had correctly determined that the Financing Arrangement was caught by s 33(1)(c) as the arrangement had the effect of reducing the amount of chargeable income through deductions of interest expenses arising from the Financing Arrangement (at [86] of the Judgment), and further, also had the effect of avoiding another liability that C would otherwise have been subject to, ie, the liability to bear withholding tax for the interest payments that it had in substance received from AQQ (at [90]–[91] of the Judgment).
[26] Next, the Judge construed the statutory exception in s 33(3)(b) as importing a subjective test for both limbs – it had to be shown that the arrangement was carried out for bona fide commercial reasons and did not have as one of its main purposes the avoidance or reduction of tax (at [105] of the Judgment). After considering the evidence, the Judge found that although the Board had interpreted s 33(3)(b) as imposing an objective test, it had nevertheless been justified in reaching the conclusion that the Financing Arrangement did not fall within the statutory exception in s 33(3)(b). In particular, the Judge found that the commercial reasons advanced by counsel on behalf of AQQ related only to the Corporate Restructuring and not to the Financing Arrangement (at [111] of the Judgment) and that the oral evidence given by the Chief Financial Officer of the B Group indicated in no uncertain terms that the main objective of the Financing Arrangement was to extract tax credits (at [115] and [119] of the Judgment). The Judge also considered that there were many other questionable features of the Financing Arrangement that could have led to the reasonable conclusion that the arrangement was not carried out for bona fide commercial reasons and had as one of its main purposes the reduction or avoidance of tax (at [125] of the Judgment).
[27] With respect to AQQ’s contention that the operation of s 33 could be overridden by giving effect to the specific provisions of the Act, the Judge observed that this argument was essentially premised on the proper relationship between s 33 and other specific provisions of the Act that conferred tax benefits (at [144] of the Judgment). The Australian courts had dealt with this issue by developing the “choice principle”; the New Zealand courts had developed the “scheme and purpose approach” to resolve this conundrum. After a survey of the relevant jurisprudence (at [146]–[154] of the Judgment), the Judge expressed a preference as between the two for the New Zealand approach but concluded that neither approach should apply in Singapore (at [155]–[156] of the Judgment). The statutory exception in s 33(3)(b) sufficed to strike the proper balance and it was consistent with Parliament’s intention that neither approach should be adopted (at [157]–[158] of the Judgment).
[28] Although the requirements for the Comptroller to invoke s 33 were satisfied, the Judge nevertheless proceeded to hold that the Comptroller had not exercised his powers under s 33(1) fairly and reasonably by choosing to disregard both the dividend income and interest expenses under the Additional Assessments and the Notice of Assessment for YA 2007. The power under s 33(1) only enabled the Comptroller to disregard the impugned arrangement and the Comptroller’s real objection was to the artificial generation of interest expenses (at [165]–[166] of the Judgment). Accordingly, the proper approach ought to have been to disregard only the interest payments attributable to that portion of the loans amounting to $150m that were not in substance real loans to AQQ (at [168]–[170] of the Judgment). The Comptroller should not have disregarded the interest payments attributable to the $75m loan (on monies which belonged to C) that C in substance had extended to AQQ by buying the Fixed Rate Notes from AQQ and receiving the corresponding interest payments from AQQ through the chain of conditional payment arrangements between N Bank Singapore, N Bank Mauritius and C (at [170] of the Judgment). The Judge also observed that the Comptroller ought to have required AQQ to account to it for the withholding tax on the interest for the $75m that eventually flowed to C (at [172] of the Judgment).
[29] Finally, the Judge also held that the Comptroller did not in any event have power to issue the Additional Assessments under s 74(1) of the Act as the power to issue Additional Assessments under s 74(1) only applied if the taxpayer had been assessed at an amount less than that which ought to have been charged (at [178]–[179] of the Judgment). The Additional Assessments had been issued to recover the shortfall in the amount previously assessed but here, the Additional Assessments had in fact assessed tax at an amount less than the Original Assessments (at [178] of the Judgment).
[30] The final result was therefore a purely symbolic victory for the Comptroller and in substance a victory for AQQ. Although the Judge found that the Financing Arrangement was a tax avoidance arrangement within the meaning of s 33, the Comptroller was not able to recover the tax refunds that had been paid as he had failed to exercise his powers under s 33(1) appropriately to counteract the tax advantage.
Issues before this court
[31] Each party appealed against all those findings of the Judge that went against it. CA 7/2013 raises procedural issues relating to the exercise of the Comptroller’s powers under s 33(1) to counteract the tax advantage obtained by the taxpayer and the power under s 74(1) to issue additional assessments that attempt to claw back tax refunds to which AQQ was found not to be entitled to after the arrangement was found to be a tax avoidance arrangement. CA 8/2013 concerns the substantive issue of whether s 33 was properly engaged in this case.
[32] There are five broad issues arising in these appeals and by reference to which this judgment is organised:
(a) whether any of the threshold limbs in s 33(1) was satisfied on the facts of this case;
(b) whether AQQ could rely on the exception in s 33(3)(b);
(c) if s 33(1) was prima facie engaged, whether AQQ could nevertheless rely on any specific provisions of the Act to preclude the operation of s 33;
(d) whether the Comptroller had exercised his powers under s 33(1) fairly and reasonably to counteract the tax advantage obtained; and
(e) whether the Comptroller had acted ultra vires s 74(1) by issuing the Additional Assessments.
Issue I: Were the threshold limbs of s 33(1) of the Act satisfied?
Legislative history of s 33
[33] The key provision in issue is s 33 of Act, which is drafted in seemingly straightforward terms:
[34] The present s 33 was enacted in 1988 by the Income Tax (Amendment) Bill (No 22 of 1987) (“the Bill”) and was intended to represent a substantial departure from the previous s 33 (“the old s 33”) of the Income Tax Act (Cap 134, 1985 Rev Ed), which stated as follows:
[35] The old s 33 re-enacted s 29 of the Income Tax Ordinance 1947 (Ordinance 39 of 1947) (“the 1947 Ordinance”), which was based on s 22B of the Model Colonial Territories Income Tax Ordinance 1922 (“the 1922 Model Ordinance”) (see the Report of the Inter-Departmental Committee on Income Tax in the Colonies not Possessing Responsible Government (Cmd 1788, December 1922) at Appendix I). Many British colonies had, at some point in time, a similar general tax-avoidance provision (see, for example, s 61 of the Hong Kong Inland Revenue Ordinance (Cap 112) (HK) (“the Hong Kong Ordinance”), which has been supplemented by a broader general anti-avoidance provision in s 61A).
[36] During the Second Reading for the Bill, the then Minister for Finance, Dr Richard Hu Tsu Tau (“Dr Hu”), explained that it was necessary to amend s 33 in order to meet the need for a more effective general anti-avoidance provision to deal with increasingly sophisticated tax avoidance schemes (see Singapore Parliamentary Debates, Official Report (13 January 1988) vol 50 at cols 358–359):
[37] Responding to concerns raised by other Members of the House that the scope of s 33 was too uncertain and potentially over inclusive, Dr Hu also clarified that the judicial interpretations of similarly worded general anti-avoidance provisions in other jurisdictions could be relied on for the purpose of construing s 33 (see Singapore Parliamentary Debates, Official Report (13 January 1988) vol 50 at cols 365–366):
[38] A comparison of s 33 with anti-avoidance provisions in other jurisdictions suggests that s 33 was inspired by s 260 of the Commonwealth of Australia Income Tax Assessment Act 1936 (Cth) (Aust) (“the Australian Act”) – which was replaced by Part IVA of the Australian Act for all arrangements entered into after 27 May 1981 – and also by s 99 of the New Zealand Income Tax Act 1976 (NZ) (“the 1976 New Zealand Act”), re-enacted in materially similar form in BG 1 and GA 1 of the New Zealand Income Tax Act 2007 (NZ) (“the 2007 New Zealand Act”): see generally, Tan Wee Liang, “Tax Avoidance and Section 33 of the Income Tax Act” (1989) 31 Mal LR 78 (“Tan Wee Liang”) and John H Telfer, “General Anti-Tax Avoidance Provisions: The Singapore Position and Australasian Comparisons” (1990) 32 Mal LR 20. The statutory exception in s 33(2) also bears more than a passing resemblance to s 28 of the United Kingdom Finance Act 1960 (c 44) (UK) (“the Finance Act 1960”).
[39] As noted above, it had been envisaged at the outset by Parliament that s 33 would not be construed literally, and that the courts could derive guidance from judicial considerations of similarly worded provisions in other jurisdictions. The construction of s 33 has not, however, been considered locally in the more than 20 years since its enactment, and this is the first time it has arisen before this court.
The interpretation of s 33(1)
[40] The Comptroller’s powers to disregard or vary an arrangement under s 33(1) are triggered where the purpose or effect of the arrangement is to:
(a) alter the incidence of tax;
(b) relieve a liability to pay tax; or,
(c) reduce or avoid any liability imposed or would have otherwise been imposed.
[41] The Comptroller contended before the Judge that both the Corporate Restructuring and Financing Arrangement satisfied all three limbs and maintained the same position before us. The Judge found that limb (c) was satisfied, but reserved his view on the applicability of limbs (a) and (b).
An arrangement
[42] Under s 33(2), the word arrangement “means any scheme, trust, grant, covenant, agreement, disposition, transaction and includes all steps by which it is carried into effect” [emphasis added]. Both parties took issue with the Judge’s demarcation between the Corporate Restructuring and Financing Arrangement, which led him to treat them as discrete arrangements both for the purposes of considering (i) the applicability of the statutory exception in s 33(3)(b) and (ii) how the Comptroller’s powers under s 33(1) should have been exercised to counteract the tax advantage.
[43] The definition of an arrangement in s 33(2) is in similar terms to that found in s 99(1) of the 1976 New Zealand Act. It is a composite term that means the overarching scheme, agreement or transaction and includes the component steps that carry into an effect an arrangement. Thus, a tax avoidance arrangement may constitute a combination of steps that may be individually unobjectionable: see the decision of the Supreme Court of New Zealand in Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2009] 2 NZLR 289 (“Ben Nevis”) at [105], addressing the definition of “arrangement” in YA 1 of the 2007 New Zealand Act. In the Privy Council decision of Peterson v Commissioner of Inland Revenue [2006] 3 NZLR 433 (“Peterson”), Lord Millett, delivering the judgment for the majority of the Board, observed at [33]:
[44] The Comptroller had chosen – before the Board, the High Court and indeed before us – to particularise the impugned arrangement as the composite scheme that comprised both the Corporate Restructuring and Financing Arrangement. It was on this basis that the Comptroller sought to apply the purpose and effect test in s 33(1). In our judgment he was entitled to do this and we accept that the composite scheme falls within the definition of “arrangement” in s 33(2). Our ensuing analysis will proceed on this broad premise, with references to the term “Financing Arrangement” used generally where the tax avoidance element can be found in the relevant component steps.
Purpose or effect
[45] AQQ and the Comptroller both agreed with the interpretation that the Judge attached to the phrase “purpose or effect” (at [71]–[76] of the Judgment). Applying the “predication principle” that emerges from Lord Denning’s judgment in Lauri Joseph Newton and others v Commissioner of Taxation of the Commonwealth of Australia [1958] 1 AC 450 (“Newton”), the words are to be construed conjunctively so as to refer to the objectively ascertained effect of the arrangement in question. In Newton, Lord Denning explained the like phrase found in s 260 of the Income Tax and Social Services Contribution Assessment Act 1936-1951 (Cth) (Aust) then in force in the following terms (at 465–466):
[46] Read as a whole, the “predication principle” is thus concerned with the characterisation of the objective ends of an arrangement, that is, whether it may be predicated from the observable acts by which an arrangement is implemented that it was implemented in that way so as to achieve the ends stated in any of the limbs in s 33(1).
[47] As articulated by Lord Denning, an arrangement would not be predicated as a tax avoidance arrangement if the arrangement is capable of explanation “by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax” (see Newton at 466). In Owen Thomas Mangin v Inland Revenue Commissioner [1971] 1 AC 739 (“Mangin”), which involved s 108 of the Land and Income Tax Act 1954 (NZ) (“the 1954 New Zealand Act”), the predecessor to s 99 of the 1976 New Zealand Act, the majority of the Privy Council referred to the passage of Lord Denning’s judgment cited above (at [45]) and stated (at 751D–G) that:
[48] The exclusion of certain types of arrangements from the ambit of s 33(1), such as ordinary business or family dealings that do not have as their sole or principal purpose the avoidance of liability to tax, appears to have been one of the principles emerging from the judicial interpretations that Dr Hu referred to during the Parliamentary debates (cited above at [37]) which was codified in modified form in s 33(3)(b): see Tan Wee Liang at p 96. We consider this statutory exception in greater detail below.
To reduce or avoid any liability imposed or would have otherwise been imposed
[49] Counsel for AQQ, Mr Davinder Singh SC (“Mr Singh”) submitted that none of the threshold limbs under s 33(1) was satisfied because there was no relevant tax liability imposed by the Act that was or would have been avoided or reduced by the Corporate Restructuring; as tax for the dividends had been deducted at source, AQQ was never, at any point, liable to pay tax on the dividend income. The scheme was merely designed to extract tax credits. Mr Singh relied on two decisions of the High Court of Australia namely, Rowdell Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1963) 111 CLR 106 (“Rowdell”) and Patcorp Investments Limited v The Commissioner of Taxation of the Commonwealth of Australia (1976) 140 CLR 247 (“Patcorp”) in support of the proposition that s 33 was engaged only where the relevant tax liability had arisen or would have arisen prior to the arrangement sought to be impugned. Framed in terms of statutory interpretation, Mr Singh’s argument was that the phrase “liability imposed” refers to any amount that is actually payable by way of tax after setting off any applicable tax credits from the assessed sum of tax. Counsel for the Comptroller, Mr Liu Hern Kuan (“Mr Liu”), submitted that a tax liability under s 10(1)(d) of the Act had been imposed when the dividend income was paid to AQQ, and that the arrangement entered into had reduced or avoided a liability that otherwise would have been imposed had the interest expenses not been incurred.
[50] While Mr Singh’s argument – that one cannot speak of avoidance without liability – has a superficial intuitive appeal, we do not accept its fundamental premise which turns on the legal nature and characterisation of the tax position that avails in relation to dividends that are paid to a shareholder after tax on those dividends has been paid by the company and an equivalent sum of tax credits is attached to the issued dividends.
[51] We first observe that s 33(1)(c) includes both tax liability that has been imposed and liability which “would otherwise have been imposed”. The insertion of the latter phrase has the effect of pre-empting the argument raised in Newton that the word “liability” only referred to a pre-existing liability that had actually accrued: see Tan Wee Liang at 93. In Newton, Lord Denning said at 464:
[52] The words “would otherwise have been imposed” [emphasis added] postulate a hypothetical liability that was about to fall on the taxpayer which the interpolation of the arrangement had the purpose or effect of reducing or avoiding: see Tang Siau Yan, “Tax Avoidance” in ch 45 of The Law and Practice of Singapore Income Tax (Pok Soy Yoong et al ed) (2nd Ed, LexisNexis, 2013) at para 45.88.
[53] In our judgment, it is evident that there was a relevant tax liability that would have been imposed on AQQ had the Financing Arrangement not been entered into. Mr Singh’s argument elides the factual setting in relation to the payments of tax that had been made with the quite separate matter of the legal position of the taxpayer. This argument rests, in effect, upon the court reading into s 33(1)(c) the word “net” before the phrase “liability imposed” and the words “and payable” immediately thereafter.
[54] The plain meaning of the words “any liability imposed by this Act” [emphasis added] refers to legal liability to tax, that is, a liability that results from the application of any specific provision or combination of provisions of the Act. Mr Singh’s argument, on the other hand, presupposes that s 33 of the Act is concerned only with the question of whether as a matter of fact, tax that was or would be factually payable by AQQ over and above any set-off arising from the s 44 tax credits had been reduced or avoided. There is no basis, from the words of the statute, to conclude that this was the intended scope of s 33. As a matter of policy and logic, we accept the general proposition that only an existing legal liability that has or would have accrued but for the arrangement can be said to have been avoided. However, it does not follow that a taxpayer who may not, as a matter of fact, have an obligation to make any further payment of tax because a payment in advance has already been made on that portion of chargeable income, cannot be said to have avoided or reduced his legal liability to tax. The former is a matter of fact and accounting; the latter is a matter of legal liability.
[55] We are satisfied that neither Rowdell nor Patcorp is of any assistance to AQQ in the light of this analysis. Both Rowdell and Patcorp involved companies that were in the business of dealing in stocks, shares and securities. These companies purchased shares in other private companies which had ceased to trade but had undistributed profits. Dividends were declared out of the profits of these private companies and their shares were either (i) bought at a price lower than the net asset value of the private companies before they were stripped of profits and resold thereafter (as in Rowdell) or (ii) subsequently sold at a price lower than the original purchase price by pre-arrangement (as in Patcorp). The first mentioned companies then claimed to be entitled to certain rebates or exemptions under various specific provisions of the Australian Act. In Rowdell, the Commissioner of Taxation sought to invoke s 260 of the Australian Act to characterise the dividends received by the companies not as dividends but as profits, which did not qualify for various exceptions and rebates provided for under ss 44(2), 46 and 107 of the Australian Act. The court unanimously held that s 260 did not apply, and Kitto J observed that (at 125):
[56] Patcorp involved a similar fact situation in which the companies sought to rely on ss 46 and 51 of the Australian Act to claim rebates for the dividends and to deduct losses on resale respectively. The majority of the High Court (Gibbs, Stephen and Jacobs JJ, McTiernan J expressing no opinion) held that s 260 was of no application. Gibbs J cited with approval the passage of Kitto J in Rowdell that we have quoted in the previous paragraph and his reasoning in this regard merits citing at some length (at 299-300):
[57] There are hints in this passage of the choice principle (which we turn to below), but for present purposes, it is sufficient to note that Gibbs J was of the view that it could not be said that the purpose or effect of the arrangement in that case was to avoid tax just because the arrangement had been entered into precisely in order to take advantage of the rebates conferred by s 46 of the Australian Act. This reasoning does not support a general proposition of law that there is no relevant tax liability that can be avoided or reduced under a general anti-avoidance provision because a taxpayer would as a matter of fact not have to pay tax on dividend income following the set-off of a tax credit. Both these cases in fact stand for the narrow proposition that on the facts presented, the purchasers of shares (the dividends of which carried certain rebates) could not be said to have entered into a transaction to purchase shares for the purpose or effect of reducing their tax liability in circumstances where their tax liability only arose as a result of that very purchase and where they were entitled to the rebates under specific provisions of the Australian Act. The real point of the decisions was that there was no tax liability that was otherwise avoided by virtue of the arrangements; indeed, any tax liability only arose because of those arrangements.
[58] The facts of Rowdell or Patcorp are also distinguishable from those in the present appeals. The Comptroller is not arguing that AQQ is not entitled to the benefit of the s 44 tax credits; rather, his position is that the separate generation of interest expenses to obtain deductions from otherwise chargeable income is impermissible under s 33. Both cases would only be of assistance to AQQ to the extent that it could be said that there would have been no liability for tax on the dividend income whether or not the Financing Arrangement had taken place. But this is plainly not the case.
[59] Mr Singh also put his case another way, contending that it was an impossibility to avoid a liability that did not ultimately exist once the set-off of the tax credits was taken into account. Under s 10(1)(d) of the Act, income tax is payable in respect of “dividends, interests or discounts”. Mr Singh contended that when s 10(1)(d) is read together with ss 44, 44A and 46 in relation to a shareholder, the overall effect is that there would be no liability to pay tax by operation of law. The tax would be deemed to have been paid by the company on behalf of the shareholder under the imputation system. Section 46 of the Act, as it then stood, stated as follows:
[60] We accept that the effect of the operation of s 46 would be that no further payment of money might be required to be made over and above the set-off of s 44 tax credits (representing tax that had already been deducted at source from the dividend income). But this is because the tax liability of the taxpayer would have been met by this set-off against the s 44 tax credits. As a matter of legal liability, we agree with the Judge’s conclusion (at [86] of the Judgment) that the dividends received by AQQ clearly constituted income chargeable to tax under s 10(1)(d). It is implicit in s 46(1) that the dividend income is still regarded as “chargeable income” for the purposes of assessing the amount of tax liability. Section 46(1) states that the set-off for the purpose of collection will take place only when the income from which the tax has been deducted “is included in the chargeable income” [emphasis added] of any person. It follows that what is ultimately at issue in s 46(1) is the tax payable by the shareholder on the dividend income that it stands to receive. This only arises after dividend income is included in the shareholder’s chargeable income and tax is charged on that income.
[61] The fact that an advance deduction in respect of the shareholder’s anticipated tax liability would already have been made at the corporate level does not displace this. Tax at the prevailing rate is levied on the entirety of the shareholder’s chargeable income, but as a matter of collection, this is then subject to set-off against the sum of s 44 tax credits relating to the dividend income. A legal liability to tax crystallises at the time that the shareholder receives dividend income that constitutes chargeable income, even if as a matter of fact, payment of tax in respect of this liability is then subsequently set off under s 46. The question is whether AQQ was trying to avoid this liability; and as a matter of law, there was nothing conceptually impossible with this.
Whether the purpose of effect of the arrangement was to reduce or avoid liability that was imposed or would have been imposed under the Act
[62] Following from our analysis above, we agree with the Judge’s finding that s 33(1)(c) was satisfied on the facts. We have found that the words “liability imposed” in s 33(1) refer to legal liability to tax under any provision of the Act, and not whether there is in fact an obligation to pay more tax after the liability has been set off by a corresponding tax credit.
[63] Mr Liu submitted that the Comptroller’s position was that the generation of interest expenses under the Financing Arrangement had reduced AQQ’s tax liability for the dividend income. Section 14(1)(a)(i) allows, for the purpose of ascertaining the income of any person chargeable with tax under the Act, the deduction of all outgoings and expenses incurred, including sums payable by way of interest. We agree with the Comptroller, and find that on an objective evaluation of the totality of the Corporate Restructuring and Financing Agreement, AQQ’s deduction of interest expenses under s 14(1)(a)(i) of the Act to reduce the total amount of chargeable income under s 10(1)(d) had the objective purpose or effect of reducing a liability which would otherwise have been imposed by the Act, ie, the tax chargeable on the full sum of dividend income. In the words of Lord Denning in Newton, it is possible to “predicate” from the overt mechanism of the Financing Arrangement that it was implemented in that particular manner so as to reduce AQQ’s liability for tax on the dividend income.
[64] Mr Singh argued that s 33 was not intended to apply to a scheme that had the object of extracting tax credits in the s 44 accounts of the Subsidiaries as opposed to reducing a specific tax liability. But the effect of the generation of interest expenses was to reduce AQQ’s tax liability in relation to the dividends it received from the Subsidiaries. By causing the tax payable on the dividend income to be reduced, this in turn resulted in a refund being made to AQQ after setting-off the s 44 tax credits; this was indeed the entire object of the arrangement. The fact that AQQ was entitled, as a shareholder receiving dividends from the Subsidiaries, to draw on the credits reflected in the s 44 account balances during the five-year transitional period is not the issue. The real question we are concerned with is the propriety of the incurrence of the interest expenses and whether those expenses had reduced the tax liability of AQQ imposed under s 10(1)(d) of the Act. As we think that the interest expenses were not properly incurred and did have the effect of reducing AQQ’s tax liability, s 33(1)(c) is clearly engaged.
[65] We also note the Judge’s finding (at [88]–[91] of the Judgment) that withholding tax on the part of C, a non-resident company, had been reduced or avoided as a result of the Financing Arrangement that involved the interposition of N Bank Singapore and N Bank Mauritius. The Judge thought that AQQ would have been obliged, under s 45(1) of the Act, to withhold a percentage of the interest payable to C at the prevailing rate of tax and pay to the Comptroller the amount deducted. This argument was not advanced by either party before the Board or the High Court. Before us, Mr Liu also conceded that the Comptroller was not proceeding against C and was not entitled under s 33(1) to counteract the tax advantage obtained by C by acting against AQQ. It is not necessary for us in the circumstances, to say anything more on this.
[66] In summary, we find that the arrangement fell within the ambit of s 33(1)(c). It is therefore not necessary for us to further consider ss 33(1)(a) or 33(1)(b).
Issue II: Was AQQ entitled to avail itself of the exception under s 33(3)(b) of the Act?
[67] Section 33(1) does not apply to an arrangement that falls within the ambit of s 33(3)(b). Section 33(3)(b) (referred to by the Judge as a “statutory exception”) contains two cumulative limbs. To fall under this exception, the arrangement:
(a) must have been carried out for bona fide commercial reasons; and
(b) must not have had as one of its main purposes the avoidance or reduction of tax.
[68] Before us, both parties accepted that the Judge correctly construed the statutory exception as importing two subjective elements (at [105] of the Judgment) and they only diverged on the application of s 33(3)(b) to the facts. However, in the light of its importance, we add our views on the scope of this provision.
The interpretation of s 33(3)(b)
[69] The Judge compared s 33(3)(b) with s 28 of the Finance Act 1960, and relied on Lord Pearce’s interpretation of s 28(1) in Inland Revenue Commissioners v Brebner [1967] 2 AC 18 (“Brebner”). The relevant portions of s 28(1) state:
Lord Pearce held in Brebner (at 27C–D) that the word “object” in s 28(1) referred to “a subjective matter of intention”.
[70] Although the word “object” rather than “purpose” was used in s 28(1) of the Finance Act 1960, the Judge concluded that s 33(3)(b) of the Act should be likewise interpreted as requiring an inquiry into the subjective reasons of the taxpayer for carrying out the arrangement and the subjective intentions of the taxpayer in determining whether the arrangement had as one of its main purposes the avoidance or reduction of tax (at [105] of the Judgment).
[71] We agree with the Judge that the phrase “bona fide commercial reasons” necessitates a subjective inquiry. The concept of bona fides or good faith is subjective, and the word “reasons” in common parlance concern motives or justifications, which are again infused with a subjective quality. However, we also note that to construe the word “purpose” as referring to the taxpayer’s subjective intentions in s 33(3)(b) might at first blush seem to contradict the objective sense given to the words “purpose or effect” under s 33(1): see Tan Wee Liang at 96. Read in its context, the exception in s 33(3)(b) applies to any arrangement that does not have “as one of its main purposes the avoidance or reduction of tax” [emphasis added]. Seen in this way, the purpose may be referable to the arrangement, ie, its external purpose as objectively discerned, and not to the taxpayer, ie, his subjective motivations for instituting the arrangement.
[72] The New Zealand courts have adopted an objective reading of similar words in s 99(2)(b) of the New Zealand Act, which states that an arrangement shall be void as against the Commissioner of Inland Revenue in the following circumstances:
Thus, in Challenge Corporation Ltd v Commissioner of Inland Revenue [1986] 2 NZLR 513 (“Challenge (CA)”), Woodhouse P stated (at 533) that whether or not a tax saving purpose was incidental was to be decided objectively by reference to the arrangement and not subjectively in terms of motive.
[73] Section 99(2)(b) of the New Zealand Act makes reference to “purpose or effect”, instead of “purpose” in isolation, and the need for consistency with the Newton objective approach would appear more compelling than might be the case with s 33(3)(b). Further, the enactment of s 99 of the 1976 New Zealand Act to replace s 108 of the 1954 New Zealand Act was for the intended purpose of reading down the apparently broad width of Newton as a result of which an arrangement would be excluded from the scope of the anti-avoidance provision if the arrangement could additionally be explained by non-tax related purposes: see Ben Nevis at [81] (though s 99 as drafted also indirectly retained an exception for merely incidental tax effects). In contrast, s 33(3)(b) of the Act is expressed as an exception to the general definition of tax avoidance arrangements that engage s 33(1), and was included in s 33 as one of the “safeguards … to be found in the judicial interpretations of legislations having similar wordings” (see [37] above).
[74] In our judgment, the Judge’s reading of “purpose” – as being concerned with the taxpayer’s subjective intentions of the end to be achieved in carrying out the transaction – is more consistent with the overall tenor and intention underlying s 33(3)(b), which seeks to narrow the prima facie overly inclusive scope of s 33(1) that could conceivably catch any arrangement that has an objectively ascertainable purpose of reducing or avoiding tax. The first limb of s 33(3)(b) is therefore concerned with the taxpayer’s subjective commercial motives for entering into a transaction, and the second limb is concerned with the subjective consequences that the taxpayer wishes to obtain. Similarly structured transactions may thus be taxed differently depending on whether the taxpayer had set out to create a result whereby his tax liability was avoided or reduced. This is to be seen in the context of the fact that s 33(3)(b) only comes into play where the taxpayer is found to have derived a tax advantage on the basis of one or more of the limbs of s 33(1). In that situation, the question then becomes whether the taxpayer is able to take himself out of the operation of s 33(1) by showing that even if objectively it is predicated that he had acted in order to obtain a tax advantage, subjectively, this was not what he had set out to do and that he was acting with bona fide commercial reasons.
The application of s 33(3)(b)
[75] We turn to consider the Judge’s application of s 33(3)(b) to the facts.
[76] Mr Singh submitted that the Judge’s conclusion that AQQ could not demonstrate any bona fide commercial reason for the arrangement was due to the Judge’s erroneous approach in considering the Financing Arrangement in isolation from the Corporate Restructuring. Mr Singh also contended that the Judge erred in his appreciation of particular aspects of the arrangement and further argued that the Judge ought not to have inferred, from the fact that the Financing Arrangement was entered into with the aim of carrying out the Corporate Restructuring in a tax efficient manner, that its main purpose was therefore the avoidance or reduction of tax.
[77] Mr Liu on the other hand argued that even if the Corporate Restructuring and Financing Arrangement were viewed together, the entirety of the arrangement had not been carried out for bona fide commercial reasons as the Corporate Restructuring involved the purchase of the Subsidiaries by AQQ at inflated prices to enable D in particular – which had the largest s 44 balance but only $40,000 in accumulated profits (see above at [14]) – to generate large amounts of undistributed profits for distribution as dividends. Mr Liu also took the position that the Financing Arrangement was commercially unjustifiable and involved a circuitous flow of funds with no real loan being made in substance by N Bank Singapore to AQQ. In relation to the Judge’s finding that tax avoidance or reduction had been one of the main purposes of the Financing Arrangement, Mr Liu submitted that the Judge had carefully considered all aspects of the arrangement and had placed appropriate emphasis on discerning the relevant subjective intentions of AQQ from the available evidence.
[78] Both the Comptroller and AQQ agreed that the arrangement should be analysed as a composite scheme. As the Comptroller has chosen to characterise the relevant arrangement as comprising both the Corporate Restructuring and Financing Arrangement, we similarly do not consider that it is realistic or helpful to adopt a narrower analytical framework that divorces the Corporate Restructuring from the modes and methods of financing obtained to carry out the scheme.
[79] The Comptroller did not impugn the acknowledged commercial reasons and business considerations of the B Group in planning the Corporate Restructuring. The Chief Financial Officer of the B Group (“the Chief Financial Officer”) gave evidence before the Board that the original structure of the B Group in Singapore was cumbersome and unwieldy and that the Corporate Restructuring was intended to create a simplified structure such that each subsidiary would be organised along separate lines of business. He further averred that the original structure of the Singapore operations did not entitle the B Group to participate in the group tax relief scheme that came into effect on 1 January 2003 (see [4] above) as 50% of the shareholding in the Subsidiaries was then held by C, a company incorporated in Malaysia. There was therefore a need to restructure the shareholdings of the Subsidiaries under a single holding company (ie, AQQ) in order to qualify for group tax relief. The Corporate Restructuring was also part of a larger ongoing process of reorganising the entire corporate structure of the B Group. None of this was disputed, and the Judge acknowledged that there was nothing in itself wrong with the restructuring (at [111] of the Judgment). The Judge nevertheless considered that the bona fide commercial reasons for the Corporate Restructuring should not be conflated with those for the Financing Arrangement, and concluded that there were no such independent bona fide commercial reasons for the Financing Arrangement. In particular, the Judge found that AQQ had grossly overpaid for its interests in the Subsidiaries (at [129] of the Judgment) and questioned how the 8.85% interest rate for the Fixed Rate Notes had been arrived at (at [134] of the Judgment).
[80] The bona fide commercial reasons for a particular step in the arrangement should ordinarily be construed within the context of the entire economic and commercial reality of the arrangement. The Financing Arrangement followed from the Corporate Restructuring as part of an integrated and concerted arrangement, and on a broad pragmatic view of the facts, it might not have been possible for us, on the evidence that was on the record, to come to a conclusion as to whether the purchase price of the Subsidiaries was inflated or whether the interest rate payable on the Fixed Rate Notes was a commercial rate, and to ascertain whether there were bona fide commercial reasons for the entire arrangement under the first limb of s 33(3)(b). But in the final analysis this is not material in this case.
[81] That is because in relation to the second limb of s 33(3)(b), we were satisfied that the Corporate Restructuring and Financing Arrangement were not commercial transactions under which any tax avoidance or reduction was merely incidental by reference to AQQ’s real object. To the contrary, it is clear to us that AQQ’s express intention was to obtain a tax benefit in the form of a reduction of its tax liability so as to secure the release of the tax credits in the s 44 accounts of the Subsidiaries. In our judgment, both the Corporate Restructuring and Financing Arrangement were conceived as a single integrated whole; and while we might be willing to accept that there were genuine bona fide commercial reasons for the arrangement, we are satisfied that the Judge correctly concluded that one of the main subjective purposes, or ends to be achieved by the arrangement, was to reduce AQQ’s liability to tax for the dividend income it received from the Subsidiaries.
[82] We do not accept Mr Singh’s argument that the Judge had failed to apply the subjective test in his assessment of the evidence before him. Subjective intentions of course might not always be readily apparent, and the Board or Judge may ascertain this by reference to evidence or testimony of the taxpayer’s actual contemporaneous state of mind and assess the veracity of this by drawing the requisite inferences from the surrounding objective evidence or features of the arrangement. It is clear that it was at the forefront of the Judge’s mind that the Board’s assessment of the facts had been made from an objective perspective (at [108] of the Judgment), and the Judge took this into account when evaluating the evidence before the Board. We therefore do not see any reason to find that the Judge erred in finding that one of the main subjective purposes of the arrangement was to reduce or avoid a liability to tax.
[83] We note that the Chief Financial Officer had admitted during cross-examination before the Board in fairly unequivocal terms that apart from the objectives of simplifying the corporate structure and claiming group tax relief, the B Group’s decision to implement the Corporate Restructuring through the Financing Arrangement was influenced by the additional object of recovering the “tax assets” in the Subsidiaries. Contrary to Mr Singh’s submission that the Judge had taken this evidence out of context, we are satisfied that the portions of the Chief Financial Officer’s testimony cited in the Judgment at [114] and [117] were an accurate reflection of the Chief Financial Officer’s consistent position in respect of the tax related objectives of the arrangement, and evinced the B Group’s subjective purpose and object of recovering the tax assets by deducting the interest expenses incurred on the Fixed Rate Notes against the dividend income received by AQQ.
[84] In our view, the recovery of tax assets may well have been just one of the key objectives, but it was nevertheless a main purpose in that it involved a conscious and elaborate plan to procure a particular and defined method of reducing AQQ’s tax liability rather than being an incidental tax advantage that accrued as an ancillary benefit. The critical chronology that Mr Singh directed our attention towards – that the Financing Arrangement was only subsequently decided upon when the method of implementing the Corporate Restructuring was discussed and considered with N Bank Singapore – does not change the analysis or undermine the Board’s or Judge’s interpretation in relation to what the Chief Financial Officer had expressly stated in his oral testimony. There is nothing in s 33(3)(b) that suggests that a subsequent objective to obtain a net tax refund by reducing chargeable income does not constitute a main purpose when it was in fact a critical and free-standing objective in deciding on the mode of financing for the Corporate Restructuring.
[85] We also do not agree with Mr Singh that the Judge could not fairly discern the B Group’s or AQQ’s intentions from the discussion paper prepared by N Bank Singapore titled “[B Group] – Fixed Rate Notes Financing Structure” (“the Discussion Paper”). The Financing Arrangement that was eventually put in place replicated the proposal in the Discussion Paper, and it does not advance AQQ’s case much further to argue that N Bank Singapore’s perspectives on the “tax savings” cannot be imputed to AQQ or the B Group as they were not involved in the preparation of the Discussion Paper. The Chief Financial Officer testified that N Bank Singapore had prepared the Discussion Paper following a discussion on the B Group’s proposed restructuring plans, and the Chief Financial Officer also stated that he was aware of the tax implications, including the fact that AQQ would be claiming interest deductions on the dividend income received from the Subsidiaries and that the tax liability on the dividends would be reduced accordingly.
[86] Read together with the Chief Financial Officer’s candid admissions that one objective was to recover tax assets, we consider that the only logical inference was that the B Group adopted the proposal in the Discussion Paper in full, and did so in order to achieve the possible tax savings identified in the Discussion Paper. This is not an impermissible imputation of N Bank Singapore’s subjective intentions to the B Group, but merely an inference, as a matter of common sense, of what must have been the B Group’s and thus AQQ’s subjective purpose in proceeding with the Financing Arrangement.
[87] This is not to say that the B Group or AQQ was not entitled to carry out what was a commercially justifiable Corporate Restructuring by choosing a tax efficient method. This was a point that Mr Singh pressed upon us repeatedly, and we have no difficulty in accepting this in principle. However, what Mr Singh could not explain to us was how the Corporate Restructuring and Financing Arrangement, viewed as a whole, could be explained otherwise than as a contrived and concerted scheme to reduce AQQ’s liability to tax on the dividends. We cannot accept Mr Singh’s characterisation of the involvement of N Bank Singapore and N Bank Mauritius in the Financing Arrangement as merely being in the capacities of facilitators or intermediaries or his suggestion that the $225m paid for the purchase of the Fixed Rate Notes by N Bank Singapore was a “bridging loan”.
[88] Even before the Financing Arrangement was carried out, the B Group had made a public announcement that the issuance of the Fixed Rate Notes was not intended to affect the B Group’s consolidated borrowing position, and the Chief Financial Officer stated that it was not a mere coincidence that the B Group was able to purchase the Fixed Rate Notes on the same day because the B Group “had the money to buy back [their] own bonds from internal funds within the [B Group] as there were no suitable investment opportunities in cement and related industries at that time”. There was therefore in reality no injection of funds from N Bank Singapore as it was planned right from the start that no real loan, or even a short-term bridging one, would be extended to AQQ by an external party.
[89] As the Board correctly pointed out, there was no evidence of discussion within the B Group or AQQ itself as to the issuance of the Fixed Rate Notes or the re-purchase of these notes by C. Although interest at the rate of 8.85% per annum was legally payable to N Bank Singapore under the Interest Coupons, the chain of transactions was structured such that almost the full value of the interest payments would eventually be transferred to C, a company owned by the same B Group. The Fixed Rate Notes were sold on twice on the same day, with N Bank Singapore and N Bank Mauritius bearing at most only a negligible commercial risk for their purchases of the Fixed Rate Notes (as opposed to the higher risks that are commonly involved with bridging loans). The round tripping of AQQ’s full purchase price of the Subsidiaries in a single day and the artificial interposition of the two external entities crosses the line between tax efficiency and tax avoidance in the absence of any cogent explanation for why it was necessary for AQQ to choose this all too complicated method of transferring funds from one subsidiary of the B Group to another through the conduit of two entities of N Bank located in two different countries.
[90] The Board and the Judge were justified in reaching the conclusion that one of the main purposes of the arrangement was that of incurring interest expenses on the Fixed Rate Notes that were to be deducted from the chargeable dividend income, and we see no reason to disturb this finding. We thus affirm the Judge’s conclusion that AQQ’s subjective purpose and object of the arrangement was to reduce or avoid liability that would otherwise have accrued on the dividend income. For this reason AQQ was unable to avail itself of the exception under s 33(3)(b).
Issue III: Was AQQ entitled to rely on the specific provisions of the Act to preclude the application of s 33?
The interaction between s 33 and other specific provisions of the Act
[91] The Judge also considered whether the operation of s 33 could be overridden by certain specific provisions of the Act, ie, ss 10(1)(d), 14(1)(a), 44, 44A and 46, that were enacted for the purpose of conferring on the taxpayer the benefit of particular tax advantages. After reviewing the judicially crafted choice principle in Australia and the scheme and purpose approach in New Zealand that have both sought to resolve the tension between the specific provisions of a taxing statute and a general anti-avoidance provision, the Judge concluded that it was not necessary for the Singapore courts to select between either approach in developing its jurisprudence on s 33 of the Act (at [155] of the Judgment). The Judge observed that the same role was performed in Singapore by the statutory exception under s 33(3)(b), and that it was consistent with Parliament’s intention that neither approach should be adopted (at [156]–[157] of the Judgment).
[92] Mr Singh contended that the choice principle should be applicable in Singapore, and that AQQ should be entitled to obtain the benefits of ss 14, 44, 44A and 46 even if s 33 was engaged on the facts. Mr Liu agreed with the Judge that the judicially developed principles in Australia and New Zealand did not apply in the face of an express statutory exception in s 33(3)(b), but submitted in the alternative that if the court considered it necessary to determine this question, the New Zealand scheme and purpose approach should be preferred.
[93] We disagree with the basic premise of the Judge’s reasoning that it is not necessary to have regard to or to attempt to resolve the tension between specific provisions in the Act and a general anti-avoidance provision. As noted above, the Judge was of the view that the statutory exception in s 33(3)(b) represented what the legislature deemed to be the correct balance between broadening the scope of transactions that could be impugned by the Comptroller under s 33(1), while protecting taxpayers from legislative overreach. By implication, this meant that Parliament could not have intended for either the Australian or New Zealand approach to apply because the structure and wording of s 33 was considered to be materially different from the equivalent provisions that applied in Australia and New Zealand (at [156]–[158] of the Judgment).
[94] We do not think that the statutory exception was intended to be the sole safeguard against the potentially over inclusive reach that would follow from a literal interpretation of the threshold limbs of s 33(1). Section 33(3)(b) appears to have been a statutory codification of an attenuated form of the Newton predication test as it later developed in Europa Oil (NZ) Ltd v Commissioner of Inland Revenue [1976] 1 WLR 464, where Lord Diplock held (at 475) that s 99 did not “strike down transactions which [did] not have as their main purpose or one of their main purposes tax avoidance”. But this does not deal with the conceptual conundrum that presents itself when an overarching general anti-avoidance provision in a taxing statute seems to pull in the opposite direction from other provisions that appear to exist for the taxpayer’s benefit: how is the general anti-avoidance provision to be construed in a manner that is compatible with the other specific provisions of the statute that appear, on their face, to define the taxpayer’s obligations and liabilities and entitle a taxpayer to structure his affairs accordingly in order to reduce his tax liability?
[95] Moreover, it appears to us that recourse to the Australian and New Zealand jurisprudence to develop adequate safeguards through purposive judicial interpretations was expressly contemplated by Parliament: see Dr Hu’s speech above at [37]. Dr Hu also appeared to have anticipated the tension that could potentially arise when a taxpayer is granted tax exemptions and concessions under specific incentive schemes, and in relation to this, Dr Hu stated that s 33 was not intended to affect the operation of such tax benefits. This assurance was not, however, expressly addressed in s 33. The foreign jurisprudence that attempts to chart the boundaries of what constitutes the permissible use of other taxing provisions thus merits serious consideration.
The Australian choice principle
[96] The Australian choice principle has its roots in Lord Tomlinson’s famous dictum in The Commissioners of Inland Revenue v The Duke of Westminster [1936] AC 1 at 19 that “[e]very man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be”. In W P Keighery Proprietary Limited v Federal Commission of Taxation (1957) 100 CLR 66 (“Keighery”), where the choice principle was enunciated for the first time, Dixon CJ, Kitto and Taylor JJ set out the following principle in their joint judgment at 92:
[97] The choice principle was subsequently expanded in a trio of High Court of Australia cases, Mullens v Federal Commissioner of Taxation (1976) 135 CLR 290 (“Mullens”), Slutzkin v Federal Commissioner of Taxation (1977) 140 CLR 314 (“Slutzkin”) and Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330 (“Cridland”). The high watermark is represented by the unanimous judgment in Cridland, where Mason J said at 339:
[98] In other words, if the taxpayer structured his transaction by choosing a particular legal form to conform to a provision of the Australian Act, s 260 could not apply even if the transaction had been structured in that way precisely to obtain the benefit of that provision. Effect had to be given to “the legal form and consequence of the taxpayer’s transaction” (per Barwick CJ in Slutzkin at 319; also see Mullens at 298). The result of this liberal application of the choice principle was to dilute s 260 and the Newton predication principle to a significant degree.
[99] The final case in which s 260 was comprehensively considered is Federal Commissioner of Taxation of the Commonwealth of Australia v Gulland (1985) 160 CLR 55, where the application of the choice principle was described as giving effect to the principle of statutory construction expressed in the maxim generalia specialibus non derogant (per Gibbs CJ at 67; Brennan J at 77–78). Section 260 of the Australian Act had to be read as a general provision that could not negate the operation of specific provisions of the Australian Act; at the same time, s 260 was also not to be relegated to irrelevance. Therefore, Brennan J considered (at 81) that:

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Comptroller of Income Tax v AQQ and another appeal

Laws this judgment relies on

Grounds of decision

Background facts

The Corporate Restructuring

The Financing Arrangement

The section 44 accounts

The tax assessments

The decision below

Issues before this court

Issue I: Were the threshold limbs of s 33(1) of the Act satisfied?

Legislative history of s 33

The interpretation of s 33(1)

An arrangement

Purpose or effect

To reduce or avoid any liability imposed or would have otherwise been imposed

Issue II: Was AQQ entitled to avail itself of the exception under s 33(3)(b) of the Act?

The interpretation of s 33(3)(b)

The application of s 33(3)(b)

Issue III: Was AQQ entitled to rely on the specific provisions of the Act to preclude the application of s 33?

The interaction between s 33 and other specific provisions of the Act

The Australian choice principle