A. Executive Summary

In this client alert, we analyse the recent Income Tax Board of Review (Board) decision of GIP v The Comptroller of Income Tax [2024] SGITBR 2 (GIP) which addresses the application of section 33 of the Income Tax Act 1947 (ITA), which is the general anti-avoidance provision (GAAR) in Singapore. This case concerns a doctor who incorporated a company to enter into a partnership for the operation of a clinic. Applying the AQQ framework, the Board held that the arrangement fell afoul of section 33 and thus assessed the company’s income to tax in the hands of the taxpayer. From this decision, we make the following key observations:

• From the Board’s perspective, section 33(1) of the ITA does not require the Comptroller to particularise the arrangement when invoking the provision. This gives the Comptroller an overly broad latitude, thereby raising natural justice concerns given that as a result, the taxpayer may be unaware of the specifics of the case they must answer.
• From the Board’s perspective, the propriety of the arrangement should not be taken into account at the objective inquiry stage of section 33(1) of the ITA. On the factual matrix of GIP, the incorporation of a company to carry on business – a standard practice among medical practitioners – was not accepted as a legitimate non-tax reason. The ruling thus appears to diverge from Parliament’s intent for section 33 to address only blatant or contrived arrangements and may have taxation implications on taxpayers’ choice of legal business structures in future.

B. Background

The taxpayer was a registered medical practitioner who incorporated a company to enter into a partnership to operate a clinic (Taxpayer). The key events are as follows:

• The Taxpayer was an employee of a leading medical service provider. In June 2011, the Taxpayer expressed his interest to partner the wholly-owned subsidiary of his employer to establish a new clinic, whereby he would take up 50% of the partnership. The Taxpayer and the subsidiary subsequently entered into a partnership deed with the Taxpayer to carry on the business of operating the clinic at the premises.
• In January 2012, approximately 6 months after the commencement of business and before the business reported any profits, the Taxpayer informed management of his intention to utilise a corporate vehicle to replace himself in the partnership. Shortly after, he incorporated a company (Company) with himself as the sole shareholder and director. The Company then entered into a partnership agreement with the other partner of the business. Following this, the Taxpayer withdrew as a partner and the Company was registered as the new partner in April 2012.
• The Company then filed its income tax returns based on its share of income received from the partnership. The Taxpayer received a monthly salary of S$7,000 as well as dividends from the Company.

The Comptroller asserted that the income received by the Company was revenue generated by the Taxpayer’s personal efforts (i.e., medical and consultation services rendered by him to the clinic). Accordingly, the Comptroller invoked section 33(1) of the ITA to disregard the Company and assessed the full income to tax in the Taxpayer’s hands. The additional taxes imposed amounted to approximately S$128,000.

C. AQQ Framework for the application of section 33

The leading Court of Appeal decision of Comptroller of Income Tax v AQQ [2014] 2 SLR 847 establishes the basic framework to determine if an arrangement falls within section 33, which can be summarized as follows (AQQ Framework):

Step 1 (Identify the arrangement)

Firstly, the arrangement that is being impugned must be identified, where “arrangement” means the overarching scheme, agreement or transaction and includes the component steps that carry into effect an arrangement.

Step 2 (Objective inquiry)

The inquiry moves to whether the objectively ascertained effect of the arrangement in question was to achieve any of the threshold limbs in section 33(1), namely, to:

1. alter the incidence of any tax;
2. relieve any person from any liability to pay tax; or
3. reduce or avoid any liability imposed.

Here, the court applies an objective test known as the “predication principle”. This is concerned with the characterisation of the objective ends of the arrangement, that is, whether it may be predicated from the observable acts by which the arrangement is implemented that it was implemented in that way so as to achieve the ends stated in any of the limbs in section 33(1).¹

Step 3 (Statutory exception)

If any of the threshold limbs is triggered, the next step is to consider whether the arrangement falls within the statutory exception in section 33(7) of the ITA. This is a subjective test of the taxpayer’s intentions involving two cumulative limbs:

1. the arrangement must have been carried out for bona fide commercial reasons, and
2. it must not have had one of its main purposes the avoidance or reduction of tax

Step 4 (Scheme and purpose approach)

If the statutory exception does not apply, the last step is to ascertain whether the tax advantage obtained arose from the use of a specific provision in the ITA that was within the intended scope of that statutory provision as contemplated by Parliament, both as a matter of legal form and economic reality within the context of the entire arrangement. If so, the arrangement will not be caught by section 33.

D. Decision of the Board

The Board in GIP upheld the Comptroller’s assessments.

Firstly, the Board upheld the Comptroller’s identification of the arrangement, which was wider than the Taxpayer’s and had four component steps, namely:

1. The Taxpayer incorporated the Company with himself as the sole shareholder and director;
2. The Company substituted the Taxpayer as the partner in the business;
3. As a result of component steps (a) and (b), the revenue arising from the Taxpayer’s medical services was received by the Company instead of the Taxpayer; and
4. The Taxpayer (as the sole director) also caused the Company to pay himself an artificially low annual salary and substantial tax-exempt dividends.

Next, the Board found that the objectively ascertained effect of the arrangement was to reduce the Taxpayer’s income tax liability. The Board observed that the modus operandi of the business did not change, as the Taxpayer continued to be the only anchor doctor and the Company was not involved in any other business save for the partnership. By virtue of the arrangement, the income from the sole revenue generator (i.e., the provision of medical services by the Taxpayer) was payable to the Company instead of the Taxpayer.

The Board found that the Taxpayer could not avail himself of the statutory exception for the following reasons:

1. There was a lack of contemporaneous evidence to suggest that the Taxpayer intended to incorporate a company from the beginning to enjoy limited liability, thus the Board rejected the Taxpayer’s argument that the arrangement was for bona fide commercial reasons; and
2. The Board took the view that tax avoidance was one of the main purposes of the arrangement given that there were substantial tax savings to be obtained through the incorporation of the Company and this was in the Taxpayer’s contemplation.

Lastly, the Board rejected the Taxpayer’s argument that the savings enjoyed by the Taxpayer under statutory tax exemption schemes was within the “scheme and purpose” of those provisions as those schemes were “aimed at the pursuit of business ideas and business growth” and there was insufficient evidence of the Taxpayer’s entrepreneurial efforts to grow the business.

E. Key takeaways from the Board’s decision

We observe the following key takeaways from the Board’s decision:

In relation to Step 1 (Identify the arrangement), the Board held that section 33(1) does not impose any statutory duty on the Comptroller to particularise the arrangement on which he relies to invoke section 33(1) at the material time. In our view, this implies that the Comptroller has considerable latitude to particularise the arrangement not only belatedly but also broadly. Further, during the initial audit of this case, the Comptroller simply stated his position as follows: “As the income earned was through (the taxpayer’s) personal efforts, the full income should be assessed to tax in the hands of (the taxpayer).” There was no mention that the Comptroller was invoking the anti-avoidance provision to assess higher taxes until much later after the Comptroller retreated from the personal exertion principle. We are of the view that this raises natural justice considerations since the Taxpayer may be prejudiced if the Comptroller did not tell him (and so the Taxpayer would not be aware) of the case he has to answer when the Comptroller decided to invoke section 33.

Further, the Board was of the view that the Taxpayer’s salary was artificially low, despite the Taxpayer producing objective government statistics showing that his salary was actually substantially higher than the national average for doctors of his seniority at the time. The Board dismissed the value of the survey and its data purely on the ground that “the roles and duties of the survey respondents… were not stated”. However, the Board did not state what it considered to be an appropriate salary. Instead, the Board appears to agree with IRAS that given that the Taxpayer was the sole fee earner, all the earnings of the Company should be attributable to the Taxpayer. This is notwithstanding that such a finding is essentially an endorsement of the personal exertion principle already rejected in GCL v Comptroller of Income Tax [2020] SGITBR 1 and contradicts the trite commercial difference between an employee and a business owner: an employee will be paid a fixed remuneration, regardless of whether the business is making a profit or loss and will not ordinarily be entitled to share in, much less be fully entitled to, the company’s profits.

In relation to Step 2 (Objective inquiry), the Board rejected the Taxpayer’s argument that the propriety of the arrangement should be taken into account when applying the predication principle, reasoning that such a rationalization would “nullify” the subjective inquiry at Step 3.² With respect, we are of the view that the propriety of the arrangement should be a necessary consideration at this stage because of the parliamentary intention behind section 33, which is to ensure that only artificial transactions are caught by section 33. Indeed, at the Second Reading of the Income Tax (Amendment) Bill (No. 22 of 1987) which introduced the current iteration of section 33, then Minister for Finance Dr. Richard Hu expressly explained that the aim of section 33 was “to reduce blatant or contrived tax avoidance arrangements and is not intended to affect normal commercial transactions".³ In other words, Parliament intended section 33 to only target artificial transactions, and no more. An example of an artificial transaction is the round-tripping financing arrangements to reduce tax on dividend income per the factual matrix in AQQ. In this regard, we respectfully point out that there is nothing objectively artificial about incorporating a company to carry on business: the use of a company as a business vehicle has been a common practice amongst medical practitioners in Singapore since time immemorial, even at a time when corporate tax rates were higher than personal effective tax rates with such a business structure still adopted because of a need for separate legal personality and limited liability. The longstanding practice, particularly its use even in times of unfavourable tax effects goes to show that there are legitimate commercial and non-tax reasons why doctors use companies in establishing their medical practices. Unfortunately, the Board in GIP did not give significant weight to this factor. In a separate case, a doctor had used a company for a long time, even when tax rates for companies were higher than for individuals but after the tax rate for individuals rose above that of companies, IRAS then invoked section 33 to assess that doctor to higher taxes! As a result of GIP, that doctor may be bound to pay tax at the higher rate even though the arrangement could not have been for tax purposes in the first place.

In sum, the Board’s decision, if followed in future cases, will potentially have wide implications for the application of the AQQ Framework. Most significantly, it departs from Parliament’s intention to restrict section 33 “to blatant or contrived tax avoidance arrangements” and in that regard, for it to be applied conservatively and not aggressively. While an individual who wants to carry on a business has a choice on the legal vehicle he or she wishes to adopt with the decision motivated by non-tax reasons, the business owner will have to be careful moving forward in ensuring that these non-tax reasons are carefully documented with supporting evidence before embarking on the business venture. Otherwise, considering the GAAR jurisprudence in Singapore post-AQQ,⁴ and the recent decision of GIP, the business owner in their capacity as taxpayers will face hurdles in defending their arrangements under section 33.

Please feel free to reach out to any of our key contacts should you have any questions or concerns.

1. AQQ at [46]↩
2. GIP at [85]↩
3. Singapore Parliamentary Debates, Official Report (13 January 1988), vol 50 at col 358↩
4. Singapore cases on section 33 which have applied the AQQ Framework are: (1) GBF v CIT [2016] SGITBR 1, (2) Wee Teng Yau v CIT [2020] SGHC 236, and (3) GIP v CIT [2024] SGITBR 2. In all these cases, the income of the partnership / company (where applicable) was attributed to the taxpayer’s personal income.↩