A. Introduction
In this client alert, we analyse the recent decision of GIQ v Comptroller of Income Tax [2025] SGITBR 1 (GIQ), concerning a taxpayer in the debt collection business which purchased certain non-performing loans from the bank. The Income Tax Board of Review (ITBR) decided that gains arising from debt recoveries made by the taxpayer and the repurchase of such loans by the bank were taxable under Section 10(1)(a) of the Income Tax Act 1947 (ITA). This case illustrates fundamental principles on the income-capital distinction in the context of a taxpayer in the debt factoring business, specifically, whether such receivables were in the nature of trading stock or investments.
B. Background
The dispute surrounded the taxation of the appellant taxpayer's gains from the purchase, recovery, and sale of a portfolio of non-performing loans. The taxpayer was in the business of debt recovery and collection and the circumstances surrounding the taxation were as follows:
- The taxpayer purchased a portfolio of unsecured non-performing
loans, notionally valued at S$233 million, for a consideration of
S$12.12 million from the bank. The taxpayer managed to recover
S$4.37 million worth of the loans (the Net
Recoveries), which was assessed as taxable.
- The taxpayer then re-sold the portfolio to the bank for S$24.18 million. S$12.05 million was assessed as taxable by the Comptroller, representing the difference between the sale and purchase price of the portfolio (the Net Gain).
The appellant challenged the Comptroller's assessment to tax on the basis that both the Net Recoveries and Net Gain were capital in nature and hence not subject to tax. Notably, the appellant argued that its principal revenue income was service fees from debt collection and that the proceeds did not form any part of its principal business activity of debt collection. The appellant also drew the ITBR's attention to how there was no third-party trading of the portfolio, and how the eventual repurchase by the bank was unsolicited and outside the appellant's control. The appellant also argued that the loan portfolio was part of its profit-making apparatus.
C. Decision of the Board
The ITBR decided in favour of the Comptroller.
The ITBR held that for gains or profits to be trading in nature under Section 10(1)(a), the proceeds would have to be made in operation of a business carrying out a scheme for profit-making and cannot be merely an enhancement of value from the realisation of an asset. If the asset in question is part of a business as its stock in trade and realised in the course of trading operations, the gains that arose would be income. On the other hand, if the asset is held as an investment, the gains from realising the asset would not be taxable.
On the facts, the ITBR held that the loan portfolio constituted the appellant's stock in trade, on the basis that it carried on the business of converting such debts into its income through debt recovery. The ITBR analogised this to a bank whose stock in trade is money and securities readily convertible to money. The ITBR also highlighted the appellant's own accounting treatment of the loan portfolio as an important factor. The taxpayer had described its principal activities to include the recovery of debts arising from the purchase of a portfolio of unsecured loans, and also recorded such recoveries as an income item in its income statement.
With respect to the Net Gain, the ITBR observed that another
part of the appellant's business, apart from the recovery of
debts, was the sale of such debts. Accordingly, the Net Gain arose
pursuant to the appellant's profit-making scheme.
Alternatively, the ITBR held that since the debt recoveries were
revenue in nature, it followed that the compensation for unrealised
debt recoveries were also revenue in nature. Further, the
repurchase by the bank represented the realisation of the trading
stock at an earlier stage. Both the Net Recoveries and Net Gain
were therefore subject to tax.
In addition, the ITBR observed that the Net Recoveries and Net Gain
would be taxable under Section 10(1)(g), the catch-all provision
for gains of an income nature. The ITBR affirmed IB v
Comptroller of Income Tax [2004] SGITBR 10 which held that
Section 10(1)(g) can apply to profits which did not arise from the
taxpayer's ordinary trade or business where the taxpayer had a
profit-making intention, and the means of realising the profit need
not be precisely determined at the outset. In the present case,
there was contemporaneous evidence that the appellant had intended
to profit from the acquisition of the loan portfolio.
D. Our observations
This decision is consistent with the body of case law on the
income-capital distinction and lays down clear principles on when
an asset would be regarded as stock in trade of the taxpayer as
opposed to being held for investment, which would inform whether
the gains from the realisation of such asset is trading and hence
income in nature. In such a determination, a holistic consideration
of the taxpayer's business model is important. The decision
further recognises that there may be various ways in which a
company can realise gains from its trading assets, which would not
affect the nature of those gains as income provided there is a
trading or profit-making intention.
This decision also illustrates the relevance of accounting
treatment in the determination of the taxpayer's intention in
holding the assets. While not conclusive of the tax treatment, the
accounting treatment is one factor to be considered in the totality
of evidence to determine the taxpayer's intention, which is
ultimately a question of fact. Taxpayers should pay close attention
to the classification of assets in their accounts and ensure that
their accounting treatment is consistent with the nature of the
transaction as well as their intention in holding the asset.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
