Taxation – profits tax – property purchased and held as capital asset – whether, when redevelopment decision taken and application for land exchange made, taxpayers changed intention for holding property from capital to trading purpose or whether had simply enhanced capital asset for disposal
Ts were both charitable bodies. Since the 1930s, they owned land (the “Old Lots”) which was occupied by an orphanage. In the 1980s, Ts seriously considered relocating the orphanage and redeveloping the Old Lots. In the early part of 1990, Ts commissioned architects to apply for planning permission to redevelop the Old Lots. In July 1990, the Town Planning Board approved a redevelopment plan. In December 1990, Ts applied to the Government for a land exchange to permit the building of a residential development. In May 1993, the Government approved the land exchange subject to payment of a premium of $704 million. In August 1993, after considering proposals from various property developers, Ts accepted a tender from a developer (“CK”) to establish a joint venture to redevelop the Old Lots. In November 1993, Ts surrendered the Old Lots to the Government in exchange for a new grant of land (the “New Lot”). In December 1993, Ts entered into a joint venture agreement with CK to develop the New Lot for private residential purposes. Between 1998 (when the development had been completed) to 2006, Ts sold the units allocated to them from the development for a profit of $1,119 million. The Assessor raised profits tax assessments on Ts on the basis that, although they initially acquired the Old Lots as a capital asset, their intention changed to one of trading by September 1989 or alternatively at the latest December 1990. The Board of Review (the “Board”) upheld the assessments. The Judge dismissed Ts’ appeal by way of case stated against the Board’s decision. Ts appealed.
Held, allowing the appeal and remitting the matter to the Board, that:
- Activities relating to the enhancement of the value of property for the purpose of sale did not necessarily point towards a change of intention to one of trading when the property was initially held for investment and later disposed of.
- The question whether the Board had erred in law by finding that a change of intention occurred in 1989 or 1990 required an examination of the facts found by the Board which led to its conclusion. However, the limited scope of intervention in an appeal on a point of law by way of case stated was such that the appellate court would only assume an error of law when the “true and only reasonable conclusion” contradicted the determination appealed against.
- When the original use of the Old Lots as an orphanage was exhausted and Ts wished to dispose of the property, the realisation would not mean that they had embarked upon a trade of property development when originally the property was not acquired for the purpose of trading. This was so notwithstanding the work done by Ts, such as appointing professional advisers to work on the redevelopment, applying for planning permission and applying for land exchange. Such activity was simply part of the process of realising the land in order to maximise the profit on disposal.
- An error of law had been made by the Board when it held that there was a change of intention by 1989 or in 1990 when all Ts did was to engage in a process of realising the Old Lots. During that time, Ts had not become a property developer engaged in the trade of selling flats.
- Since, on appeal, Ts did not persist with the argument that they had never changed their intention, the matter must be remitted to the Board to consider whether the relevant change of intention occurred in August 1993 or December 1993 or alternatively on some other date or dates (apart from September 1989 or December 1990).
- (Obiter) Notwithstanding comments to the contrary in Hong Kong case law, circumstances might require documents not attached to the stated case in a revenue law appeal to be produced for elucidation at the appeal hearing. However, since it was sufficient to dispose of the appeal simply by reference to the facts found by the Board, it was not necessary to reach a final view on this matter.