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Court of Appeal to decide if advertising, promotion expenses can be deducted from rental income

Millions of tax dollars hang in the balance as mall operators await a decision by the Court of Appeal on whether spending on advertising and promotion (A&P) can be deducted from rental income.

Landlords saw their hopes dashed last month, when the High Court ruled that A&P expenses beyond those paid to them by tenants cannot be deducted from rent when determining the annual value of a shopping centre, which in turn determines the amount of property tax a landlord has to pay.

The case - which centres on a dispute between Parco Bugis Junction owner BCH Retail Investment and the Inland Revenue Authority of Singapore (Iras) - will now go to the Court of Appeal, after BCH’s lawyer Wong Partnership filed an application last week.

At stake in the case is the taxable portion of $2 million - the amount BCH spent on A&P of Parco Bugis Junction in 2003.

But industry players say the total taxable amount for all landlords could run to tens of millions, because a court ruling in BCH’s favour would open the door for other landlords to deduct A&P expenditure when valuing their properties.

‘If they (the landlords) could include A&P expenditure as part of their expenses, then they can get deductions from it,’ said a shopping centre landlord.

CB Richard Ellis’ executive director of valuation Li Hiaw Ho said some shopping centre managers match the amount they get in A&P contributions from their tenants, and in some cases spend even more than their tenants. Shopping centre operators saved on tax after a court ruled in 2002 that A&P contributions paid by tenants could be excluded from gross rent figures. In that case, BCH, represented by David De Souza and Jeanette Lee, obtained a ruling that meant A&P contributions by tenants, which amounted to $592,000, would not be subject to tax.

With property tax at 10 per cent, any savings add up to a tidy sum for big landlords, such as BCH’s parent company CapitaLand.

Market watchers say that to take advantage of the 2002 court ruling, mall operators have structured new lease agreements so A&P contributions by tenants are set out separately from basic rents.

Knight Frank says that since the ruling, many shopping centres have deducted A&P contributions by tenants from their annual property valuations.

Where there is no separate A&P provision in lease agreements with tenants, landlords are moving to include one as leases are renewed. A landlord that operates well-known malls told BT: ‘We are working towards amending the leases to allow us to capture the deductibility for the A&P portion. But this will take time.’

Landlords hoped that BCH’s victory in 2002 would pave the way for them to deduct as expenses a wider range of services they provide to tenants. And this year, BCH went a step further and sought a court ruling that all reasonable A&P expenses be deducted from gross rent, saying an additional $2 million should be deducted from gross rent for Parco Bugis Junction when determining its annual value.

But the High Court was not persuaded. Justice Tan Lee Meng said last month that additional A&P expenses were never regarded by the tax authorities as a part of gross rent.

Justice Tan said that going by BCH’s argument, landlords could easily adjust the annual values of their properties by increasing their A&P expenses.

This would mean that annual values would no longer represent hypothetical rents, he reasoned. And as a result, the annual value of a property could not be determined by reference to rents at comparable properties because annual values would depend on how much owners spent on A&P.

Source : Business Times - 30 Aug 2006