In yesterday’s Today, it was reported that Raffles Town Club (RTC) has lost its arguments in the Court of Appeal on the following:-
- failed to obtain tax deductions for the costs involved in leasing its land and in constructing the clubhouse on the ground that $108 million cost of acquiring the land from the State and the $91.4 million incurred in building the clubhouse were capital in nature and therefore
not eligible for tax deduction;
- secondly, it failed to have its membership fees taxed over 30 years, the life span of the club (this is an interesting attempt in defining the timing of revenue recognition and consequently, timing of taxability);
- thirdly, it failed to secure relief for YA2001 from the tax department for the $53.28 million in damages it had to pay members after it lost the 2005 class action suit filed by several thousand members who claimed the club had falsely led them to believe they were part of an exclusive establishment and;
- lastly, it failed to secure tax deductibility for the $2.34 million that RTC paid for geomancy fees.
Consequently, RTC is liable to pay tax for the Years of Assessment 1998-2003 on the full amount of $526.14 million it collected from its 19,000-odd members who had paid $28,000 each to join.
I have quoted verbatim the learning points from Justice Phang’s concluding remarks:-
- “Where ordinary accounting principles run counter to the principles of tax law, they must yield to the latter for the purposes of computing gains and profits for tax.”
- “Accounting and tax have different objectives in mind. Financial accounting is intended to provide information regarding firm performance to the market place while taxable income is prescribed by the government to meet budgetary needs … Regardless of how persuasive accounting evidence is, the prerogative still lies with the court to decide whether a particular item should be regarded as income that has accrued for the purposes of liability to tax.”
- He pointed out that while accounting treatment focuses on the balance sheet, “taxation requirements are centred on the profit and loss accounts, so that the distinctions between revenue and capital, which are vital for tax purposes, may be lost in the accounting treatment”.
- Concluding, he said: “I am also of the view that the present case turns on how well-established tax principles and tax law would apply rather than on the correct treatment of the items brought to tax.”