SHOULD the operator of serviced apartments be considered a landlord or a businessman supplying services such as lodgings, laundry and security?
The High Court answered this last week when it was decided that the operator should be treated as a landlord, who makes money from renting the apartments.
The decision has great implications for the bottom lines of those in the business, as this has been seen as a grey area in the past, said property consultant Ku Swee Yong.
It means that, unlike hotels for instance, serviced apartment operators cannot treat their revenue as recurrent business income but as property investment income.
This, in turn, means they cannot carry forward losses incurred as expenses from one year to the next for tax purposes.
Serviced apartments at times register deficits following maintenance and refurbishing expenses, and these make a difference if carried over into the next year.
For example, a $100,000 loss for one year if carried into the next year to be deducted from a $1million income that year means that the owner would pay the tax rate on $900,000.
Justice Andrew Ang, in an appeal brought by the taxman against an operator, made it clear this should not apply and reversed an earlier ruling by the Income Tax Board of Review in December last year.
He took the approach that the serviced apartment owner is a landlord in a rental relationship with the tenant.
The services are provided as adjuncts to this relationship.
The judge said a ‘paradigm example’ would be where the firm rents out the property and provides additional services and facilities to make it more attractive.
The firm, which cannot be named as this is a tax dispute case, had argued its holding of the property was ‘merely incidental’ to its business of providing services. But Justice Ang held its claim was ‘akin to the suggestion that the tail wags the dog’.
The taxman had contended that serviced apartment owners and operators were in the business of letting property, and in a ‘business of the making of investments’ under Section 10E of the Income Tax Act.
Section 10E states that a business which makes investments, including the ‘letting of immovable property’, cannot claim deductions on expenses and capital allowances beyond the actual income for the year.
The tax implication is that any loss sustained for one year will not be allowed to be carried into the following year, unlike an ordinary trade or business where losses are generally allowed to be carried forward.
The firm had won an earlier round of appeal to the Income Tax Board of Review in December last year for its assessment returns for three years from 1999 to 2001.
But the High Court reversed this and restored the existing practice.
The latest ruling is expected to enable the taxman to recoup more than $1million from the operator, who owns and manages a shopping mall integrated with a serviced apartment block comprising 161 units.
The firm is appealing against the High Court ruling.
The matter had been seen as a test case for the industry.
Mr Ku said: ‘There is a need to define serviced apartments and perhaps rebrand them as apartments with services.’
Responding to queries from The Straits Times, the Inland Revenue Authority of Singapore (Iras) said that it will follow the High Court decision unless it is overruled by the Court of Appeal.
The Iras said: ‘If there is an appeal by the taxpayer to the Court of Appeal, and the matter is decided by the Court of Appeal, Iras will follow the Court of Appeal decision, and apply that ruling to cases whose facts are similar.’
As serviced apartments are immovable properties, a company which is carrying on the business of letting serviced apartments is clearly in the business of letting immovable properties, the authority’s spokesman added.
Iras’ approach in assessing the taxable income of a company carrying on the business of letting serviced apartments is set out in an e-Tax guide, which can be found on its website.
Source : Straits Times – 17 Dec 2008
