Ruling On Rental Income Cheers Serviced Apartment Operators

Source : The Business Times, January 2, 2008

But IRAS files appeal with High Court against tax review board’s ruling.

In a landmark decision, the Income Tax Board of Review has ruled that a serviced apartment operator’s rental income should be treated as normal recurrent business income, and not as income from property investments.

This means that serviced apartment operators can claim deductions on expenses and capital allowances beyond the actual income for the year.

The Dec 14 ruling came after the company, believed to be part of the Frasers Centrepoint group, appealed against an earlier ruling of the Inland Revenue Authority of Singapore (IRAS). The latest ruling will have significant implications for not just serviced apartment operators, but also for the operators of the future integrated resorts.

Earlier, IRAS had contended that serviced apartment owners and operators were merely in a business of letting property, and in a ‘business of making investment’ under Section 10E of the Income Tax Act.

Section 10E says 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 losses sustained for one year will not be allowed to be carried into the following year, as is the case for an ordinary trade or business where losses are generally allowed to be carried forward.

The Board rejected IRAS’ contention that the serviced apartments and the retail mall businesses are businesses of making investments under Section 10E.

Unlike serviced apartment, hotels in Singapore are allowed to carry forward losses.

Industry insiders say the ‘Section 10E’ treatment has troubled the industry for a long time.

As the range and sophistication of services have increased over the years with top-end serviced apartments offering a myriad of products and services, this unequal treatment has become increasingly untenable, they say.

Not surprisingly, many see this as a test case for the industry.

The Board of Review’s decision will also no doubt be welcomed by serviced apartment operators, who argue that it is the correct approach in looking at serviced apartments as a ‘multi-factorial’ one.

The appellants’ counsel, tax lawyer Ong Sim Ho, successfully argued that whether a business was one of making investment had to be determined in the light of all the surrounding facts, including evidence of the intention of the enterprise in embarking on the venture.

He said that where the letting of property was a mere but necessary platform from which business operations are carried out, Section 10E should not be applicable if those business operations constituted the real business of the taxpayer. He urged the Board to consider the wide range of hospitality services provided to the apartment guests.

The Board agreed that the serviced apartment- cum-shopping mall business should be looked at as an integrated whole.

The decision is likely to cause a re-examination of the approach to taxation of serviced apartments generally.

The IRAS has filed an appeal against the decision to the High Court.