Capital gains – is it really not taxable?
Gains from the sale of a property, shares and financial instruments in Singapore are generally not taxable. Profits or losses derived from the buying and selling of shares or other financial instruments are viewed as personal investments, likewise for payouts from insurance policies as they are capital receipts.
Generally, the gains derived from the sale of a property in Singapore are not taxable as it is a capital gain, the interesting twist is gains from “trading in properties” may be taxable.
It is important to understand what constitutes trading in property. The key distinguishing factor between trading and non-trading is the intent of the person in the purchase and sale of the property, which in most cases is implied or deemed from the facts of the transaction. Whether a person is deemed to be carrying on a trade will depend on individual circumstances. Some indicators that may be useful to determine whether you are trading in properties are as follows:
- Frequency of transactions (buying and selling of properties);
- This includes the number and the duration of holding of each property. Although the number is not an important factor, usually if a person is buying or selling 3 or more properties does presumptuously need to prove otherwise that trading intent is not the main motive. Interestingly, the magic number of 3 appears in the recent case of deeming trading in properties discussed below.
- Reasons for acquiring and selling of property;
- This is perhaps the most crucial factor in establishing whether or not the transaction is to be deemed trading. Circumstances which resulted in the purchase or sale for purposes with direct nexus to the residential occupation or its related activities tend to shift the focus of the deeming of trading element. These factors usually relate to uncontrollable events ie when an enbloc sale resulted in the eventual sale of property or when the purchased property for unforeseen reasons is unsuitable for the occupation of the taxpayer. However, each transaction is unique and it has to be seen in the light of the whole transaction, the “forest” vs “tree” element that we will discuss in the latest case of IRAS vs a wealthy couple with “3” GCB.
- Financial means to hold the property for long term; and
- Where a property is bought without the ability to financially hold that long term or without any ability to even secure any reasonable period of funding generally denotes a short-term holding intention and a profit motive.
- Holding period
- The longer the holding period, the stronger is the facts supporting the ability to financially afford the property for long-term and also the intent that it is acquired with a long-term investment motive. It is not unreasonable for any person to monetise an investment for good money with the intent for long term investment after holding it for such reasonable duration.
In 4 April 2018, a wealthy couple (whose names were redacted in court papers) who made $16 million from buying and selling three good class bungalows (GCBs) within six years had failed in their court appeal to have the profits declared as capital gains.
3 GCBs within 2km of each other, were bought in total one after another. The first one was bought in 2005 and sold nine months later for a profit of $0.6m, another was bought 4 years later in 2009 and sold nine months later for a profit of $14m. The third was bought in the same year and sold 3 months later for a profit of $2m. The total profit generated from the 3 purchase and sale transactions over 6 years with a holding period of less than 1 year for each, generated $16m gains. A very successful investment indeed for 6 years.
The key judgement delivered had established the fact that the “Forest” of the case is that the original home at West Coast has remained to be held and occupied by the couple throughout substantial part of the duration in question. The other houses bought and sold were never occupied by the couple and were just “trees” and irrelevant to the main deemed motive of trading.
The findings gleaned from this case, provided an interesting glimpse of what constitutes “deeming trading”. In most cases, it is hard to describe what is a forest or trees amongst the forest, but you are sure to tell one from another when you see it.