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

Judgment Cited authorities 16 Cited in Precedent Map Related
Vincent
Judgment Date04 February 2016
Year2016
Citation(2016) 19 HKCFAR 54
Judgement NumberFACV16/2015
Subject MatterFinal Appeal (Civil)
CourtCourt of Final Appeal (Hong Kong)
FACV16/2015 COMMISSIONER OF INLAND REVENUE v. CHURCH BODY OF THE HONG KONG SHENG KUNG HUI AND ANOTHER

FACV No 16 of 2015

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO 16 OF 2015 (CIVIL)

(ON APPEAL FROM CACV NO 41 OF 2010)

_____________________

BETWEEN

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

_____________________

Before : Mr Justice Ribeiro PJ, Mr Justice Tang PJ Mr Justice Fok PJ, Mr Justice Chan NPJ and Mr Justice Gummow NPJ
Date of hearing: 8 January 2016
Date of Judgment: 4 February 2016

_________________________

J U D G M E N T

_________________________

Mr Justice Ribeiro PJ:

1. I agree with the judgements of Mr Justice Tang and Mr Justice Fok PJJ and with the additional observations of Mr Justice Chan NPJ.

Mr Justice Tang PJ:

Introduction

2. Section 14 of the Inland Revenue Ordinance, Cap 112, provides that profits tax shall be chargeable — on every person carrying a trade in Hong Kong in respect of his assessable profits. Trade is defined in s 2 as including “every trade and manufacture, and every adventure and concern in the nature of trade”.

3. The respondents in this appeal by the Commissioner of Inland Revenue (“the Commissioner”) are the Church Body of the Hong Kong Sheng Kung Hui and the Hong Kong Sheng Kung Hui Foundation. They are respectively the incorporation of the Anglican Church in Hong Kong (“the Church Body”) and the incorporation of the Anglican Bishop of Hong Kong (“the Foundation”). I will refer to them collectively as HKSKH.

4. The Church Body and the Foundation had since the 1930s been the respective owner of a large estate in Tai Po (“the Old Lots”)[1] which comprised agricultural land and restricted building land[2] on which was built the well-known St Christopher’s Home, an orphanage which was established in 1935. In time, with the urbanization of the New Territories and the ease of travel, the Old Lots became highly desirable for residential development. It was said to be an agreed fact that since the 1970s the taxpayers had planned to develop the Old Lots[3] but I believe it is more accurate to say that HKSKH began exploring the possibility of developing the Old Lots in the 1970s. The earlier plans all involved a measure of institutional use. However, since at least September 1989, the plans only involved a residential development.[4] The Commissioner accepted that at the time of the acquisition of the Old Lots, the intention was to hold them indefinitely,[5] and that the Old Lots were capital assets.

5. Before the Old Lots could be used for a substantial residential development two hurdles had to be overcome. First, permission was needed under s 16 of the Town Planning Ordinance Cap 131, without which large scale development of the Old Lots could not take place. Moreover, any permission granted would control the intensity or type of the permitted development.[6] Secondly, the lease restrictions have to be relaxed by the government as landlord[7] which normally requires the payment of a premium, said to be calculated on the difference in value between the Old Lots with their original lease restrictions and the New Lot with the new and relaxed restrictions. The procedure is commonly known as a surrender and regrant.[8] In December 1990, the taxpayers employed a firm of architects to apply to the District Lands Office, Tai Po (“DLO/TP”) for a surrender and regrant. The basic terms were communicated to the architect in August 1991 and the premium was assessed in October 1992 at $838,260,000. The draft special conditions for the new grant were also supplied for comment. In May 1993, the premium was reduced to $704,240,000. The Old Lots were surrendered to Government on 17 November 1993 in return for the New Lot.[9] On 2 July 1993, a number of property developers were invited to tender offers to either purchase the New Lot[10] (“Option A”) or to enter into a joint venture agreement to develop the New Lot (“Option B”). On 23 July 1993, Cheung Kong (Holdings) Limited (“Cheung Kong”)[11] submitted their tender on both options. And on 12 August 1993, the taxpayers accepted Option B, the joint venture offer.[12] And on 3 December 1993, HKSKH entered into a joint venture agreement with Cheung Kong. Pursuant to the joint venture agreement,[13] HKSKH eventually became entitled to 129 units and 94 car parking spaces (the units) in the development.[14] Some of these properties have been sold and the proceeds divided between the Church Body and the Foundation in the agreed proportion. The Church Body and the Foundation were assessed for profits tax for the years of assessment 1998/99 to 2004/05 inclusive. The profits tax payable by the Church Body was assessed at $75,881,426, and for the Foundation, $108,912,965.[15]

6. On appeal to the Board of Review the taxpayers contended that there was no change of intention at all, alternatively, that the change of intention only occurred in 1993, when it accepted Cheung Kong’s tender on 12 August or 3 December when it entered into the joint venture agreement.[16] The date of any change of intention is important because the amount of profits tax payable would vary according to the value at the time of change of intention.[17] However, liability to pay profits tax could only arise upon a sale[18] in the course of trade and the earliest date for a sale was 12 August 1993 if, as seems likely, HKSKH had committed itself to a sale and a joint venture. Since HKSKH had accepted Option B, which entailed a joint venture agreement, it might be thought that it had entered into a venture in the nature of trade.[19] The Commissioner contended on the other hand that HKSKH had changed their intention and embarked on trade or business in:[20]

(a) February 1984 at the earliest;

(b) January 1987;

(c) December 1987; or

(d) September 1989 at the latest.

7. The Board of Review held that the Church Body and the Foundation had changed their intention by September 1989 at the latest, alternatively, December 1990.[21] Before the Board, the parties agreed that as at 28 September 1989, the value of the Old Lots was $192.5 million.[22] We were told that the amount of tax at stake in this appeal is around $185 million.[23]

8. After HKSKH’s appeal was dismissed by Reyes J on 27 January 2010, HKSKH appealed to the Court of Appeal. In the Court of Appeal, Mr Denis Chang SC appearing for HKSKH relied on a line of cases[24] from which he submitted one could deduce what he called the “enhancement for realisation principle”. The Court of Appeal[25] held that the true and only conclusion was that there was no change of intention from capital holding to trading/business by September 1989 or in December 1990 and remitted the matter to the Board to consider whether the change of intention occurred in August 1993 or December 1993 or alternatively some other date or dates (other than September 1989 or December 1990). Cheung JA who delivered the only reasoned judgment (with which Yuen JA and Au J agreed) said the Board erred in holding:

“… that there was a change of intention in 1989 or 1990 when, on the facts found by the Board, all that the taxpayers had done was to have engaged in the process of realizing the Old Lots.”[26]

The Certified Questions

9. On the Commissioner’s application for leave to appeal to this court, the appeal committee[27] granted leave to appeal on the following questions:

(1) Does any “enhancement for realisation principle” arise from the authorities cited in paragraph 9 of the Judgment of the Court of Appeal, and if so, what is its scope? (See: §§9, 10 and 12.6 of the Judgment).

(2) In determining whether a taxpayer has changed his intention regarding an asset from holding it for investment to holding it for trading, is the Board of Review required to refer to and apply the “enhancement for realisation principle” (as understood by the Court of Appeal or otherwise), and if the Board fails to do so, does this justify the appellate court’s interference with the Board’s finding of fact? (See: §§10, 12.2 to 12.19 of the Judgment).

(3) Does a finding of fact on change of intention based solely on “enhancement activities” necessarily amount to an error of law made by the Board of Review? (See: §10.7 of the Judgment).

The Evidence

10. The Church Body became the owner of Lot No 429 in DD 34 in the 1930s and the Foundation, Lot No 432 RP in DD 34 in the 1930s. Lot No 1302 RP in DD 36 was donated to the Foundation in 1957. The site area of the Old Lots was 182,798.469 sq m. St Christopher’s home, the orphanage, was built on the Old Lots. In addition, the Foundation also owned Taxlord Lot T-77 in DD 34 which was adjacent to the Old Lots. The Old Lots were surrendered in return for the New Lot on 17 November 1993. Prior to the surrender, HKSKH invited tenders from developers to purchase outright (Option A) or to enter into a joint venture with the developer to develop the New Lot (Option B). On 12 August 1993, HKSKH accepted Cheung Kong’s tender on Option B and entered into a joint venture agreement dated 3 December 1993.[28] Upon the completion of the development the units were assigned to HKSKH, the tax assessments, the subject of this appeal, arose out of the subsequent sale of some of the units.

11. According to the agreed facts, HKSKH had planned to develop the Old Lots since the 1970s. The details are set out in para 15 of the Board’s Decision (“the Decision”). As early as July 1978, the development of the Old Lots involved a high class private residential development and a Diocesan Retirement village, a special school and additional...

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