The Income Tax Board of Review disallowed a tax deduction for interest expense from shareholder bonds issued by the taxpayer. The bonds were a restructured form of capital from equity interests previously held by the shareholders.
The case is: GBK v The Comptroller of Income Tax  SGITBR 3
The taxpayer—a Singapore company that owns and operates a mall— assigned its rights to the rental income from the mall to a special purpose vehicle, as security for a loan.
From November to December 2004, after the securitisation transaction, the taxpayer converted its capital restructure from being substantially equity-based to one that is substantially debt-based by:
The taxpayer claimed that the interest expense payable on the shareholder bonds represented interest payable on capital employed in acquiring the income. The tax authority, however, disallowed the deduction of the interest expenses incurred on the shareholder bonds because the interest expense did not fall within the scope of Section 14(1)(a). The tax authority also found no direct link between the interest expense and rental income as the latter had been assigned to the special purpose vehicle and the mall had been mortgaged as security for the loan. There was also no evidence that the proceeds from the shareholder bonds were used by the taxpayer to acquire rental income.
Tax professionals have noted that this case clarifies the following issues:
Applicability of “direct link”
What constitutes “substituted financing”
Read a March 2017 report [PDF 513 KB] prepared by the KPMG member firm in Singapore
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