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Church Body Of The Hong Kong Sheng Kung Hui And Another v Commissioner Of Inland Revenue

Judgment Cited authorities 18 Cited in Precedent Map Related
Vincent
Judgment Date11 September 2014
Subject MatterCivil Appeal
Judgement NumberCACV41/2010
CourtCourt of Appeal (Hong Kong)
CACV41/2010 CHURCH BODY OF THE HONG KONG SHENG KUNG HUI AND ANOTHER v. COMMISSIONER OF INLAND REVENUE

CACV 41/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 41 OF 2010

(ON APPEAL FROM HCIA NOS. 2 & 3 OF 2009)

________________________

BETWEEN

CHURCH BODY OF THE HONG KONG SHENG KUNG HUI
 1st Appellant
HONG KONG SHENG KUNG HUI FOUNDATION
 2nd Appellant
and
COMMISSIONER OF INLAND REVENUE Respondent

________________________

Before : Hon Cheung, Yuen JJA and Au J in Court

Dates of Hearing : 24-25 October 2013

Date of Judgment : 11 September 2014

________________________

J U D G M E N T

________________________

Hon Cheung JA :

I. The appeal

1. This is an appeal by the Church Body of the Hong Kong Sheng Kung Hui (‘The Church Body’) and Hong Kong Sheng Kung Hui Foundation (‘The Foundation’) (‘the taxpayers’) against the judgment of Reyes J who dismissed their appeal by way of case stated against the decisions of the Board of Review (‘the Board’). The Board affirmed the assessment by the assessors that the respective gains of the taxpayers from the sales of units and car parking spaces in their Deerhill Bay project in the years of assessment 1998/99 ‒ 2004/05 are liable to profits tax.

II. The facts

2.1 The facts are summarised by the Judge which I will adopt with supplements from the decision of the Board. The Church Body is the incorporation of the Anglican Church in Hong Kong. The Foundation is the incorporation of the Anglican Bishop of Hong Kong. Both the Church Body and the Foundation are charitable bodies.

2.2 The Church Body and the Foundation owned certain land (‘the Old Lots’) in Tai Po, New Territories. Part of the Old Lots was occupied by an orphanage known as the St Christopher’s Home (‘the Home’). The Old Lots had belonged to the Church Body and the Foundation since the 1930s. The Church Body and the Foundation had planned since the 1970s to develop the Old Lots.

2.3 Although there had been discussions in the 1970s to use the land adjacent to the Home as a retirement village for the clergy, that plan was put on hold in the 1980s and never revived.

2.4 In the 1980s there had also been talk about refurbishing the Home. But the Home was so old that renovation was unlikely to prolong its life for more than 5 years. Eventually, from September 1989 at the latest, the re-provisioning of the Home was treated as a separate project from the development of the Old Lots. In September 1989, the proposal being seriously considered in relation to the Home was to re-locate the children’s section of the Home to an adjacent site, the babies’ section to Yuen Long, and the rest of the Home to another location in Tai Po owned by the Foundation.

2.5 In the early 1990s, architects commissioned by the Church Body and the Foundation submitted various plans to the Government for the purpose of obtaining town planning permission for a substantial residential development in the Old Lots. A set of plans were approved by the Town Planning Board in July 1990.

2.6 In December 1990 architects applied on behalf of the Church Body and the Foundation to the Districts Land Office Tai Po for a land exchange of the Old Lots to permit the building of the residential development as approved.

2.7 In May 1993 a premium of some $704 million was agreed between Government, the Church Body and the Foundation.

2.8 In July 1993 the Church Body and the Foundation invited various developers to submit tender offers for two options. Option A was for the outright purchase of the Old Lots at a consideration inclusive of the $704 million premium. Option B entailed the establishment of a joint venture with the Church Body and Foundation for the redevelopment of the Old Lots.

2.9 In August 1993 the Church Body and the Foundation accepted a tender from Cheung Kong (Holdings) Limited (‘Cheung Kong’) for Option B.

2.10 In November 1993 the Church Body and the Foundation surrendered the Old Lots to the Government in exchange for a new grant of the land (‘the New Lot’). The Church Body and the Foundation owned the New Lot as tenants-in-common in the ratio of 44:56.

2.11 In December 1993 the Church Body and the Foundation entered into a joint venture agreement with Cheung Kong and one of its subsidiaries (collectively, the Developers) for the development of the New Lot as a private residential area.

2.12 In March 1998 the Church Body, the Foundation and the Developers agreed that 129 residential units and 94 car parking spaces in the development would be allocated to the Church Body and the Foundation.

2.13 In August 1998 the Government issued an occupation permit for the development (which had been named ‘Deerhill Bay’). Deerhill Bay comprised 22 houses, five blocks of low-rise buildings and five blocks of high-rise buildings. It had 381 residential units in all.

2.14 Between 1998 and 2006, the Church Body and the Foundation sold their residential units and car-parking spaces at Deerhill Bay. From the sales, the Church Body derived a profit of some $452 million, while the Foundation made a profit of some $667 million.

2.15 The Church Body’s tax liability is $75,881,426. The Foundation’s tax liability is $108,912,965.

2.16 The parties agreed, and the Board found as facts, that the values of the Old Lots, and the subsequently re-granted New Lot, were as follows :

Valuation date Land value ($)
28 September 1989 192.5 million
1 May 1990 222.48 million
12 August 1993 1.11 billion (exclusive of premium)
3 December 1993 2.3 billion (premium paid)

III. The Board’s decision

3.1 The Board held that, although the Church Body and Foundation had initially acquired the Old Lots as a capital asset, their initial intention changed to one of using the Old Lots (or parts thereof) for the purpose of trading or business. According to the Board, that change of intention had occurred by September 1989 or, alternatively, December 1990 at the latest. The reasonings of the Board are as follows :

‘ 70. Mr Li Fook Hing was appointed a co-chairman of the Tai Po Kau Joint Development Committee in May 1989, after the re-provisioning of the Home had been separated from the development of the Old Lots and the retirement village project had been frozen for a long time. It is clear from the evidence of Mr. Li [Fook Hing] that he approached the matter on commercial principles, with the laudable object of raising as much income as possible for [the Church] and its charitable activities. [The Church and the Foundation] actively marketed the disposal of the Old Lots by approaching leading developers in Hong Kong for offers and tenders. They sought and subsequently obtained town planning permission. [They] have performed activities in relation to the Old Lots in an organised and coherent way with a view to maximising the income from their development. They sought and subsequently obtained a new grant by surrendering the Old Lots, thereby substituting the Olds Lots by the new Lot. They have chosen to carry on a separate adventure or enterprise of a lucrative commercial and trade character, different and distinct from their charitable work.’

3.2 The Board also rejected the taxpayers’ argument that the income is exempted from taxation under section 88 of the Inland Revenue Ordinance (Cap.112) (‘IRO’).

The two questions

4.1 The two questions certified by the Board for the Judge to answer are :

(1) Whether, on the facts found by the Board, and on the true construction of the IRO, the true and only reasonable conclusion is that there was no change of intention from capital holding to trading/business, whether by September 1989 or December 1990 or at all.

(2) If the Answer to Question (1) is in the negative, whether, on the facts found by the Board, and on the true construction of the IRO, it was open to the Board to conclude that the proviso to IRO section 88 does not apply.

IV. Question 1

The taxpayers’ position before the Board

5. The primary position of the taxpayers before the Board was that there was no change of intention in respect of the purpose of holding the Old Lots. It had always been held for investment purpose and not for trade. As an alternative, any change of intention only occurred in 1993 either when it accepted Option B of the Cheung Kong’s offer on 12 August 1993 or when it entered into the Joint Venture on 3 December 1993.

The taxpayers’ position before Reyes J

6.1 Before the Judge, the taxpayers took two points. First, the Old Lots were trust property and the taxpayers, as charities, were not empowered to venture their trust property in any sort of trade or business. Hence, there was no change of intention.

6.2 Second, September 1989 or December 1990 was the wrong date for a change of intention, simply because the Church Body and the Foundation were not irrevocably bound to develop the Old Lots at that point in time. It was not until 1993 when the two bodies entered into a joint venture with Cheung Kong was the die irrevocably cast and the Rubicon crossed. After the deal with Cheung Kong was struck, the Church Body and the Foundation were contractually bound to go through with the development of the Old Lots. But before then, the Church Body and the Foundation could have put a stop to any development plans. Everything before 1993 was thus merely exploratory and tentative. Nothing became fixed as a matter of intention until 1993.

Reyes J’s decision

7.1 The Judge rejected both points.

7.2 The first point is not maintained in this appeal and hence it is not necessary to deal with the Judge’s reasons.

7.3 As to the second point, the Judge held that :

‘ 38. Mr. Neoh’s suggestion may be one way to read the facts. But it is by no means the only reasonable...

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