On 29 August 2018, the Court of Appeal (delivered by Tay Yong Kwang JA) has affirmed the Comptroller’s decision to deny interest deduction to taxpayer paid on a bond issued to its shareholders in the course of a capital reduction.
The deduction was originally disallowed by the Comptroller of Income Tax (CIT), a decision which was also previously upheld by both the Income Tax Board of Review and the High Court.
This appeal concerns with the issue of the deductibility of interest paid on bonds issued by a taxpayer to its shareholders conduct a securitisation exercise followed by a capital restructuring exercise which was effected in two steps: (a) a capital reduction exercise and (b) a bond issue to the Shareholders. This capital restructuring exercise in effect converted the Shareholders’ equity in the Taxpayer into a debt investment.
The issue was whether the Shareholder Bonds constitute “capital employed in acquiring the income” of the Taxpayer such that the interest paid on them is deductible under s 14(1)(a) of the Income Tax Act.
The Court has found that the Shareholder Bonds did not constitute capital employed in acquiring the income of the Taxpayer, concluding that the interest expense incurred on them was not deductible under s 14(1)(a) of the Income Tax Act.
The Court of Appeal dismissed the Taxpayer’s appeal and held that the interest expense was not deductible and has ordered disbursements totalling $20,000 inclusive of disbursements to be awarded in favour of the CIT.
Source: Supreme Court of Singapore, 31 August 2018