Depreciation expenses must be included in gross rent: Appeal Court
The Straits Times
February 6, 2013
SEVERAL million dollars that the taxman stood to lose will remain in his clutches after a recent landmark Court of Appeal ruling.
The closely watched court dispute centred on whether building depreciation expenses could be subtracted from gross rents when computing annual values for the purpose of assessing property tax.
The annual value of a property is its market rent per year.
Higher gross rents for a building mean that it will have a larger annual value, which in turn means that its landlord has to pay more in property taxes.
Landlords usually include depreciation expenses - costs related to the deterioration of fixtures such as lifts - as a hidden item in the gross rents tenants pay.
The Court of Appeal ruled on Jan 17 that depreciation expenses must be included in gross rents when computing annual values, overruling a decades-old High Court case.
This ruling has saved the Inland Revenue Authority of Singapore (Iras) more than $21 million in estimated potential tax revenue loss, Iras said.
The figure is based on the amount of property tax collected from landlords of 74,000 retail units, offices and factories in multi-unit developments.
Depreciation expenses are separate from service charges, which tenants pay as part of the gross rent for services such as cleaning and security provided by the landlord.
Iras has all along included depreciation expenses as part of gross rents when computing annual values, and excluded service charges.
But HSBC Institutional Trust Services, a trustee of CapitaMall Trust that owns Bugis Junction, disagreed with that policy.
The depreciation expenses for Bugis Junction were calculated at 20 cents per sq ft per month for 2004 and 2005, the years in contention in the court case.
This amount covered the depreciation of lifts, escalators, air- conditioning and fire safety systems. It made up 0.4 per cent to 4 per cent of the estimated rents at Bugis Junction in 2004 and 2005, which ranged from $5 to $52 psf per month, depending on unit size and location.
Iras said some other major building owners had also challenged its depreciation expense policy and as a result it had been facing close to 4,000 cases prior to the Court of Appeal's ruling.
Each case covers one individual unit in a building, and not the whole building. If the landlord of the unit raises objections over two years, Iras counts that as two cases.
If the Court of Appeal had ruled in HSBC's favour, Iras would have lost $2 million in tax revenue from those cases, it said.
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