Payments for Loss Transfers Under the Group Relief System — the GST Angle

This article discusses the newly introduced group relief system.

Group Relief System

Under the group relief system introduced from Year of Assessment 2003, the losses of a company may be transferred from one company (‘transferor company’) to another (‘claimant company’) under s 37C of the Income Tax Act, if the companies are ‘members of the same group’. The claimant company will then be able to utilise the transferred-in losses to offset against its taxable profits. In consideration of the transfer of the tax loss, the transferor company may receive ‘subvention payments’ from the claimant company. In the Inland Revenue Authority of Singapore (‘IRAS’) Circular of 23 October 2002, it was stated at para 60 that for income tax purposes, the transferor company would not be taxed on the payment received and the claimant company would not be entitled to claim a tax deduction in respect of the payment. The issue is whether such payments are subject to Goods and Services Tax (‘GST’).

Charging Provision in GST Act

Whether GST is chargeable will depend on whether there is a ‘supply’ made ‘in the course or furtherance of the business’ in respect of the ‘subvention payments’.¹ It has to be first determined whether there is a ‘supply’. If there is one, it then has to be determined if the supply is made ‘in the course or furtherance of the business’. If it is, GST is chargeable on the supply (which is not an exempt supply), if it is made by a taxable person.

‘Supply’

The word ‘supply’ is defined in s 10(2)(a) of the GST Act to include ‘all forms of supply, but not anything done otherwise than for a consideration’ and in s 10(2)(b) it is provided that ‘anything which is not a supply of goods but is done for a consideration (including if so done, the granting, assignment or surrender of any right) is a supply of services’.

In the case of ‘subvention payments’ for the transfer of tax losses, there is an exchange between the two companies, in that there is the giving up of the tax loss (which the transferor company may otherwise use in future) for the payment made by the claimant company. There is consideration passing from the claimant company to the transferor company for the transfer of losses. Consequently, there is a supply within the meaning of s 10(2) of the GST Act. The transfer of the tax loss in consideration for the payment made by the claimant company to the transferor company would constitute a ‘supply of services’ within the meaning of s 10(2)(b) of the GST Act.

‘In the Course or Furtherance of Business’

The next question is whether the supply is made ‘in the course or furtherance of business’ such that GST is chargeable on the supply. If we are to trace the history of the phrase ‘in the course or furtherance of business’ in the UK Value Added Tax Act, it will be noted that the words ‘or furtherance’ were subsequently inserted into the charging provision in 1977, to enlarge the scope of that provision. Indeed in the case of Stirling v Customs and Excise Commissioners,² the VAT Tribunal held that the purpose of adding the words ‘or furtherance’ was ‘to ensure the inclusion to the tax of fringe activities carried on separately from the main business, or transactions which are related in some way to the main business but are different in character from the general run of the business, as where a retailer sells a delivery van’.

The word ‘furtherance’ was also construed in Case N43³ where the New Zealand Taxation Review Authority stated: ⁴

An act done for the purpose or object of furthering the taxable activity, or achieving its goal, can be to help, achieve or advance, and thus a ‘furtherance’ of a taxable activity. Although it may not necessarily always be in the course of the taxable activity.

In a similar vein, the sale of pictures (which constituted capital assets) by the trustees in The Trustees of the Mellestain Trust v Customs & Excise Commissioners,⁵ was held to be a supply in the furtherance of the business. In that case, the VAT Tribunal stated:⁶

... where a taxable person exploits an asset of his business in a way that uses that asset in a different manner to that in which it is used for the business, the proceeds of the exploitation will, nevertheless, be liable to tax, the supply being made in the furtherance of the business ... The Oxford English Dictionary gives the meaning of the word ‘furtherance’ as ‘The fact or state of being helped forward, the action of helping forward; advancement, aid’ ... In our view the sale of the pictures by the trustees was done for the purpose of assisting the business that they intended ultimately to carry on. In our judgment the trustees did make the supply ‘in furtherance of a business’. ⁷

In the case of a transfer of losses under the group relief system, the tax loss has a value to the transferor company, as it may be carried forward and used to offset against its future profits. With the advent of the group relief system, the tax loss now even has a value which can be transferred to another company which is a ‘member of the same group’. The tax loss is in a sense an asset of the transferor company. The ‘asset’ can be exploited by its carrying forward to offset against future losses or it can be exploited by transferring it to the claimant company for payment. Even if the asset is exploited in a different manner which was not originally contemplated, its supply will still amount to a supply in furtherance of the business.

A somewhat similar case is that of Hibell v CIR⁸ where a fisherman who was registered under the New Zealand GST Act, was allocated an individual transferable fishing quota under the Fisheries Act. Being unable to use the quota, he sold it for NZ$85,000. The New Zealand High Court held that the supply was in the course or furtherance of the fisherman’s taxable activity and it stated:⁹

(Counsel) next considered whether or not the supply was in the course or furtherance of the objector’s taxable activity, acknowledging that the more common supply which the objector made was the sale of fish. Counsel referred me to a decision of the Taxation Review Authority Case K55¹⁰ where the sale of a motor vehicle in the course of a taxpayer’s farming activity was held to be ‘in the course or furtherance’ of a taxable activity. It seems to me that the sale of unwanted quota by a fisherman in the circumstances of the present case must be in the course or furtherance of his taxable activity.

Similarly, in the case of the group relief system where the transferor company transfers tax losses that it does not want or could not utilise itself under the provisions of the Income Tax Act, the transfer would be made in the course or furtherance of its business. It has also to be noted that even ‘anything done in connection with the termination or intended termination of a business is treated as being done in the course or furtherance of that business’. ¹¹

UK Treatment

In the UK, however, the stand adopted by HM Customs and Excise (C & E) for a transfer of tax loss under its group relief system for consideration, is that there is no taxable supply. Specifically, the following is stated at para 44.3(b) of the book ‘Tolley’s Value Added Tax’: ¹²

If Company A incurs a tax loss and surrenders it to Company B under ICTA 1988 s 402 with a payment or credit to current account for the surrender of the tax loss, again C & E do not see any taxable supply of goods or services.

No explanation can be found for the abovementioned treatment and it would seem that it is more of an administrative stand and that the transfer would technically amount to a supply in the course or furtherance of business.

GST (Excluded Transactions) (Amendment) Order 2003

In Singapore, the declaration that a transfer of a tax loss pursuant to s 37C of the Income Tax Act is a non-supply has been put on a statutory footing. The GST (Excluded Transactions) (Amendment) Order 2003 (S 265/2003) which came into operation on 1 January 2003 has deemed such a transfer for consideration as neither a supply of goods nor a supply of services. What this means is that in line with the income tax treatment of subvention payments, no output tax is chargeable in the case of the transfer of any tax loss for consideration.

Leung Yew Kwong
IRAS
E-mail: yewkwong@iras.gov.sg

Endnotes