Following the IRAS haul on medical professional this year (http://cksglobalconsultants.com.sg/iras-advisory-to-medical-professionals-running-private-practice-through-companies/ Nov 2020), we have seen the first case of challenge by tax payer to IRAS on s33(1) that went to High Court on 4 November 2020 in WTY v Comptroller of Income Tax.
The facts of the case are as follows:
Dr W, a dentist was was employed by a dental clinic (“ACOC”) from January 2011 to May 2012. On 1 May 2012, Dr W incorporated a company known as (“SPL”), of which he was the sole director and shareholder. He continued to provide the same dental services throughout the years (2011 to 2015), to ACOC’s patients pre May 2012 and post May 2012, to SPL. The receipts he received pre May 2012 was taxed as salary under personal income tax (as sole proprietor). Post May 2012, the receipts was received by his company (SPL) and passed on to him in 3 forms: salary, director’s fees and tax exempt dividends. The first 2 receipts components ($336,000 as director’s remuneration) were taxed as his personal income tax while the last component ($765,205), was not taxed, being tax exempt dividends in his hands as the sole shareholder.
IRAS invoked s33(1) and treated the fees received by SPL from ACOC as Dr W’s income and levied tax accordingly. The understanding from the above tax verdict is clear. In order to be exempted from s 33(1), the arrangement must be for bona fide commercial reasons and must not have as one of its main purposes the avoidance of tax.
As discussed in our earlier article on the mechanics of s33(1), it is imperative that prima facie, if it is clear that a tax advantage is evident that a medical professional derives from a company structure vs a personal structure, then the bona fide reason must be substantially and robustly demonstrated in the 4 areas: Business Model, Business Operations, Risk Management and Transfer Pricing. There must be clear and written documentation with consistent behaviour to demonstrate that bona fide commercial motive is the MAIN and DORMANT motive to subservient the tax advantage as an ancillary or one of its other purposes.
Corporatisation of medical professional does not in itself constitute tax avoidance under s33 in the latest decision of GCL v Comptroller of Income Tax .