I. Introduction

On 26 August 2022, the Income Tax Board of Review (the Board) published its decision in GEY v. Comptroller of Income Tax [2022] SGITBR 1. The decision shed light on the application of factors which determine whether an asset falls within the definition of plant, which would enable the company to claim capital allowances on the asset under Section 19A of the Singapore Income Tax Act (the Act). Claiming capital allowances would allow a company to depreciate its assets for tax purposes. This is an exception to the general rule that capital expenditure cannot be deducted from business income for tax purposes. If an asset is categorized as plant, it will qualify for capital allowances, enabling depreciation of the asset. However, subject to limited exceptions, if an asset is a building or structure, it cannot be depreciated for tax purposes.

In brief, the facts of the case were that GEY constructed a new cement silo (the Silo) in 2013 and sought to claim accelerated capital allowances for the Silo’s construction expenditure under Section 19A of the Act.

II. Outcome

To ascertain whether an asset falls under the definition of plant or building or structure, the Board adopted the legal principles provided in the case of ZF v Comptroller of Income Tax [2010] SGCA 48 (ZF).

First, there must be a basic distinction between plant and buildings. In ZF, the Singapore Court of Appeal observed that the Act draws a clear distinction between plant and buildings. Although the cost of plant and machinery cannot be considered expenditure that is deductible from income, allowances are granted for the loss of depreciation suffered by companies which use machinery or plant in the course of their business.

Second, plant consists in apparatus that is utilised for carrying on the trade of business concerned. The Board highlighted that Singapore does not adopt a broad approach where assets could be classified as both plant and buildings. Instead, the Act draws a clear distinction between plant and buildings. Hence, the taxpayer needs to demonstrate that the asset should more appropriately be classified as plant than buildings.

Third, a building consists of a permanent structure or part of a permanent structure that houses the trade or business. In the present case, the Silo was constructed in the form of a large concrete structure, made with permanent materials, and had built-in structures that served as housing for specific equipment. This clearly reflected the Silo’s permanent nature, indicating that it was more of a building than plant.

Lastly, four factors were helpful in determining whether an asset was categorized as plant or a building:

1. The exact operational role which the assets play in the taxpayer’s business – the Board noted that GEY was in the business of importation and distribution of cement, and storage and shelter was an important operational function of the business. An asset which performs the role of storage and shelter is more likely to be a building than plant;
2. The physical nature and characteristics of the asset – the Board considered the design of the Silo;
3. Whether the asset is intended only to be temporarily located – the Board concluded that since the Silo was built alongside the existing three silos and the Silo required the approval of the Building and Construction Authority, the Silo was not intended to be temporarily located. Conversely, in the case of ZF, where a company was in the business of providing temporary accommodation and a lease for the site was in place, the structure would have been intended to be temporarily located; and
4. Where it appears that the asset is inextricably connected with a building, it is regarded as part of the building, for income tax purposes.

Crucially, the Board observed that GEY had claimed and continues to claim Industrial Building Allowance (IBA) on its old silos. In Singapore, IBA is only allowed when an asset is a building or structure. Therefore, the old silos were classified as buildings and continue to enjoy depreciation under IBA. Unfortunately, the Silo could not enjoy IBA, as IBA had been phased out when the Silo was constructed. Given that GEY had admitted that its old silos were essentially similar to the Silo, and an asset cannot be simultaneously both a building and plant, an inconsistency arises. GEY argued that the Silo should be categorized as plant when the old silos, which are similar to the Silo, were still being treated as buildings for IBA. This contradiction undermined GEY’s argument. Hence, the Board favoured the tax treatment of the old silos and treated the Silo as a building instead.

By considering the various criteria and legal principles, the Board classified the Silo as a structure, not plant, which could not claim accelerated capital allowances under Section 19A of the Act.

III. Conclusion

In seeking to obtain capital allowances in respect of capital expenditure incurred for plant or machinery, companies should note that buildings or structures are excluded from such allowances. In borderline situations where an asset may potentially be classified either as plant or a building, further legal analysis may be recommended. Companies should also consider the consistency of their tax positions.

The Income Tax Board of Review, which decided GEY v Comptroller of Income Tax, was chaired by Dentons Rodyk Senior Partner Edmund Leow, SC.