5 S.Ac.L.J.
Taxation of Employment Benefits
219
TAXATION OF EMPLOYMENT BENEFITS
An individual’s employment income always comprises two components –
monetary remuneration (like wages, salary, bonus allowances) and fringe
benefits (perks – for example, low interest housing, car and computer loans,
use of company cars, provision of medical benefits.). Generally, it is not a
problem determining whether tax would be chargeable on the monetary
component to one’s employment income. Salary and bonuses received by
an employee would simply be the income subject to tax at the appropriate
rate. It is more difficult to determine tax on the ‘perks’ of employment.
Taxation of employment perks involves the identification of a benefit as
emanating from employment and placing a value on that benefit for tax
purposes. This article raises and discusses generally some unresolved issues
which arise in determining the taxability of employment ‘perks’ (hereinafter
referred to in this article as employment benefits or fringe benefits) in
Singapore.1
This will be done by considering first how employment benefits are taxed.
The legislative framework will be examined with a view to considering
when a benefit becomes subject to tax. Then this article will consider the
types of benefit that are taxable where the main issue is when an advantage
or a benefit will be taxable. Finally, this article consider how non-cash
benefits can be valued for tax purposes. As a preliminary issue however, we
will first consider the policy issues for taxing employment benefits.
I.
WHY TAX EMPLOYMENT BENEFITS?
There are fundamental reasons why tax should be imposed on fringe benefits.
The first reason is the concern for equity. An employer who supplies a
motor car or provides free meals to an employee will in effect allow the
employee to spend his wages on other personal expenses. If two employees
receive the same pay but one is supplied with a motor car, it would not be
right to subject both employees to the same amount of tax.2 Secondly, if
fringe benefits are not taxed, it would encourage tax planning and avoidance.
If employment perks are not subject to tax, employee remuneration packages
1.
2.
In practice there may be a preliminary issue to be considered as to whether the taxpayer is
carrying on an employment or a trade or business as an independant contractor. The writer will
not be discussing this; though there are many cases on this area which also discuss the meaning
of employment for tax purposes; see for example, Davies v. Braithwaite [1931] 2 K.B. 628, Fall
v. Hitchen [1973] Ch. 66, In Re A Taxpayer [1956] M.L.J. 256, X., Trustee of the Estate of Y.
Decd. v. C.I.T. [1969] 1 M.L.J. 157. Cases on vicarious liability in tort may also assist in
determining if there is an employment relationship. See generally, Winfield & Jolowicz on
Tort, 13ed 1989, at pp. 562 – 568.
Such an argument was accepted by the Board of Review in X. v. C.I.T. [1977] M.L.J. xi.
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(1993)
can be structured such that they are ‘loaded’ with fringe benefits to avoid
tax. Employees paid partly in money and partly in goods or other benefits
would only be taxed on money received. Employers would also most likely
be able to claim a tax deduction on the benefit provided as an expense
wholly and exclusively incurred in the production of income. All this would
in turn lead to revenue loss for the State. In principle therefore, tax should
be payable on all employment perks given or granted by the employer to the
employee in respect of employment.
However, the justifications behind taxing employment benefits must be balanced against the administrative difficulties involved. The costs of running
the tax system should not outweigh the extra revenue derived from taxing
employment benefits. There should be a fair and accurate system for taxing
benefits conferred by for example, the provision of company car, overtime
meals, entertainment allowances or low interest loans? There should be
adequate legislative and administrative machinery to compel some form of
recording and computing of the value of a benefit provided to the employee
in respect of say subsidized meals at the company restaurant.
All tax systems have to decide how far they want to go in taxing indirect
benefits from employment. It may be that in a comparatively lower tax
environment where tax savings from avoidance may not be as great as in
other countries it may be acceptable to have a general charging provision as
opposed to a comprehensive set of specific charging provisions for taxing
employment benefits. This is the case in Singapore. It is to a discussion of
the relevant statutory provisions that we now turn.
II.
THE STATUTORY PROVISIONS – HOW ARE BENEFITS
TAXED?
Employment income is chargeable to tax under Section 10(1)(b) and 10(2)(a)
of the Singapore Income Tax Act.3 These provisions in so far as they are
relevant to the discussion herein, are set out as follows:
“10(1).
Income tax shall...be payable...in respect of...
(b)
gains or profits from any employment.
...
(2).
3.
For the purposes of subsection (1)(b), “gains or profits from any
employment” means-
Cap. 134, 1992 Rev. Ed.
5 S.Ac.L.J.
221
Taxation of Employment Benefits
(a). any wages, salary, leave pay, fee, commission, gratuity, perquisite
or allowance (other than a subsistence, travelling, conveyance or
entertainment allowance which is proved to the satisfaction of the
Comptroller to have been expended for purposes other than those
in respect of which no deduction is allowed under section 15) paid
or granted in respect of the employment whether in money or
otherwise;
....”
Paragraphs (b) and (c) of Section 10(2) also include, within the definition of
“gains or profits from any employment”, the value of any food, clothing or
lodging provided by the employer and the annual value of any place of
residence provided for the employer. The main charging provision of
employment income (which includes employment benefits) is therefore found
in paragraph (a).
It is observed that for tax to be chargeable, a benefit must be ‘paid or granted
in respect of employment’, must fall within Section 10(2)(a) as one or more
of the enumerated benefits and must be correctly valued for the imposition
of tax. This article will discuss each of these requirements.
A.
BENEFIT PAID
EMPLOYMENT
OR
GRANTED
IN
RESPECT
OF
Two observations may be made from a reading of Section 10(2)(a). First,
the definition of taxable gains and profits from employment is exhaustive.
Gains and profits means (as opposed to ‘includes’) only the benefits set out
in paragraphs (a) to (c). The effect of an exhaustive definition is that gains
and profits from employment only mean the stipulated benefits in these
paragraphs. Second, only benefits ‘paid or granted in respect of employment’
will be subject to tax. This phrase provides the nexus between the employment
and the benefits given or granted to the employee. The effect is that other
forms of benefits or those not ‘paid or granted in respect of employment’
within Section 10(2)(a) will not be taxable. Since the definition is exhaustive
it is crucial in determining the taxability or otherwise of a benefit, to see if
that benefit is ‘in respect of employment’. Clearly the nexus is extremely
wide. Learned local commentators have taken the view that a benefit is
granted ‘in respect of employment’ if it is a reward for services performed
or to be performed by the employee.4 The authority cited in support of this
4.
See Pok & Hong, Singapore Taxation (2nd ed., 1989), at pp. 223-224. The learned authors
state, at p. 224 that “The fact that there is a link between the payment and the employment and
that the payment would never have been made but for the employment is insufficient to render
the payment taxable under section 10(1)(b). The test is really one of causation; the charge under
section 10(l)(b) can only be invoked if the payment is made to the recipient as a reward for or
in return for acting as or for being an employee. See also the Singapore Master Tax Guide
Manual where the learned tax editors state at paragraph 808 that “Not every payment made to
an employee is necessarily made to him as a profit arising from his employment. To be a profit
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proposition is Hochstrasser v. Mayes, 5 a decision of the English House of
Lords.
In the Hochstrasser case, the employer operated a scheme whereby if an
employee was transferred to a different part of the United Kingdom
(hereinafter referred to as ‘the U.K.’) the employee had the option of selling
his house to the company at market valuation and the employer would make
good any capital loss suffered on sale. When the taxpayer was transferred,
he could only manage to sell his house, which he bought for £1,850 for
£1,500. The employer made up the difference of £350 and the Revenue
sought to charge to tax the £350. The question was whether this was an
emolument from employment. The House of Lords held that the payment
was not taxable because it was to compensate the taxpayer for the loss
sustained in the sale of the house and not for his services. In the High
Court, Upjohn J. said that “the payment must be made in reference to the
services the employee renders by virtue of his office and it must be something
in the nature of a reward for services past, present or future.” Viscount
Simonds accepted this statement as correct but observed that the word ‘past’
may be open to question.6 Lord Radcliffe held that for the payment to be
taxable, it must, following the words of the statute, arise from the employment.
A payment arose from employment if it was “paid to him in return for acting
as or being an employee.”.7 Upjohn J.’s formulation as qualified by Viscount
Simmonds, is generally accepted in the U.K. as the test used to determine if
a benefit given by an employer will be subject to tax. For the purposes of
discussion herein this formulation will be referred to as the causation test.8
The causation test is an eminently fair test which requires that if the immediate
cause of the payment or benefit is the employment of the taxpayer, then that
benefit or payment is taxable. However, there is no Singapore case law
authority applying the causation test.9 In fact in a local case which involved
5.
6.
7.
8.
9.
arising from an employment a payment must be made in reference to the services the employee
renders by virtue of his office, and it must be something in the nature of a reward for services
past, present or future.” This is essentially Upjohn J.’s formulation in Hochstrasser v. Mayes,
see infra.
[1960] A.C. 376 (HL).
Ibid, at p. 388.
Supra, note 5 at pp. 391-392.
Since the employment must be the causa causans (i.e. the immediate cause) of the benefit and
not just the causa sine qua non (i.e. a preceding cause leading to the immediate cause) of it.
These two latin phrases were used by Jenkins L.J. in the Court of Appeal in the Hochstrasser
case; (1959) T.C. 673 at p. 696 though Lord Simon in Brumby v. Milner [1976] S.T.C. 534
deprecated the use of these “outmoded and ambiguous concepts of causation couched in Latin”
as being of little assistance.
In the Malaysian Privy Council case of H v. C.I.R. [1974] 2 M.L.J. 135, Viscount Dilhorne, in
delivering the judgement of the Court cited with approval the test in Hochstrasser v. Mayes.
However the statutory provisions concerned, sections 4 and 13(1) of the Malaysian Income Tax
Act 1967, are very different from our section 10(2)(a). While the charging provisions are
structured similarly, the definition of ‘gains and profits from employment’ is inclusive, so that
the primary criterion, that there must be a gain or profit from employment remains. Furthurmore
5 S.Ac.L.J.
Taxation of Employment Benefits
223
the taxation of redundancy payments, C.G.I.R. v. T.10 Lord Wilberforce,
delivering the judgement of the Privy Council observed, on a provision word
for word the same as Section 10(2)(a), that chargeability to tax depended on
“whether the money was paid ‘in respect of employment’”. In that case the
Privy Council could have, but did not allude to the causation test in determining whether a sum of money was a gratuity paid or granted in respect of
employment preferring instead to accept the proposition that where a sum of
money is paid under a contract of employment it is taxable even if it was
received at or after the termination of the employment.11
It is this writer’s view however that the charge to tax for employment income
is much wider than that under the causation test. The House of Lords in that
case was dealing with a provision contained in the Ninth Schedule to the
Income Tax Act 1952 which read “Tax under Schedule E shall be annually
charged on every person having or exercising an office or employment...in
respect of all salaries, fees, wages, perquisites or profits whatsoever
therefrom...”. The benefits under the English Act must arise from (as
opposed to being ‘in respect of) the employment. It appears that this is not
a question of semantics and that there is a narrow distinction between the
two phrases. Both Australian and Canadian courts have held, in the context
of the taxation of employment income, that the phrase ‘in respect of is
extremely wide and that U.K. cases based on a different charging provision
which did not include the phrase, ‘in respect of are not relevant. For a
payment to arise from an employment, it must be caused by the employment;
a payment ‘in respect of employment’ need not necessarily be caused by the
employment, though it must be connected with the employment. We shall
now turn to a discussion of just two of these cases.
In Smith v. Federal Commissioner of Taxation12 the High Court of Australia
examined the connection between payment of an allowance to the taxpayer
and the taxpayer’s employment. In Smith’s case, the taxpayer received an
allowance from his employer, a bank under a scheme which provided for
payment of the allowance to any employee who qualified by completing a
prescribed course. The Australian provision, Section 26(e) of the Income
Tax Assessment Act 1936 charged to tax “...all allowances, gratuities,
compensations, benefits, bonuses and premiums allowed, given or granted to
[a taxpayer] in respect of, or for or in relation directly or indirectly to, any
employment of or services rendered...”. The Australian High Court, by a
the charging provisions in that case required that the benefits must be given ‘in respect of
having or exercising the employment’; this phrase is clearly narrower than ‘in respect of
employment’since under it one does not need to have or exercise an employment for tax to be
chargeable.
10. [1972] 2 M.L.J. 73.
11. Supra, note 10 at p. 74.
12. (1987) 74 A.L.R. 411.
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(1993)
majority of 3-2 held that the allowance was taxable.13 Wilson J. found it
unhelpful to propound any final or overriding test since ultimately it would
have to be the words of the statute that should prevail. To him it was helpful
to ask if the benefit was allowed, given or granted as a consequence of
employment or that it was a product or incident of the employment.14 Brennan
J. took the view that “if the employment (or some aspect of the employment)
is the reason or one of the reasons the allowance is paid, the allowance falls
within section 26(e).” A reason which was an insubstantial cause of the
payment was immaterial as long as it was one reason for the benefit to be
conferred.15 Toohey J. adopted a passage from the judgement of the Supreme
Court of Canada in Nowegijick v. R16 where Dickson J. commenting on the
phrase ‘in respect of in the context of the taxation of employment benefits,
stated,
The words ‘in respect of are, in my opinion, words of the widest
possible scope. They import such meanings as ‘in relation to’, ‘with
reference to’ or ‘in connection with’. The phrase ‘in respect of’ is
probably the widest of any expressions intended to convey some
connection between two related subject-matters.17
Section 26(e) therefore charged to tax all payments which included those
given as a reward of a taxpayer’s employment. He then held that there was
an evident connection between the taxpayer’s employment and the sum he
received; and that the payment was a consequence of the existing relation of
employer and employee. It was only as an employee that the taxpayer
qualified for the benefits payable under the scheme. In his view therefore
the payment was taxable.18 The minority preferred a narrower formulation
which was also wider than the causation test. Gaudron J. and Deane J.
dissenting, held that section 26(e) charged to tax benefits given as (a) a
recompense for the relationship of employer and employee; or (b) a
consequence of the relationship of employer and employee; or (c) a reward
13. See however, Ball v. Johnson (1971) 47 T.C. 155, a U.K. decision of the High Court which
considered the causation test and held that cash awards by a bank to its employees for passing
examinations was not taxable since it was not remuneration for services.
14. Supra, note 12 at p. 414.
15. Supra, note 12 at pp. 418-419.
16. [1983] C.T.C. 20, 83 D.T.C. 5041.
17. See also Trustees, Executors & Agency Co. Ltd. v. Reilly [1941] V.L.R. 110, a decision under
The Farmers Protection Act 1940, by Section 5 of which farmers were protected from process
or proceedings ‘in respect of a debt unless a notice had been served on the farmer in question.
At p. 111, Mann CJ. said that
‘The words “in respect of” are difficult of definition but they have the widest possible meaning
of any expression intended to convey some connection or relation in between the two subjectmatters to which the words refer.’
This statement has been approved by the English High Court in Paterson v. Chadwick [1974]
2 All E.R. 772 at p. 775. Boreham J. found the above statement to be helpful, since it provided
an explanation, rather than a definition of the words ‘in respect of”.
18. Supra, note 12 at pp. 423-425.
5 S.Ac.L.J.
Taxation of Employment Benefits
225
for services rendered. The payment in the instant case did not fall within any
one of these three categories as it was recompense or reward for completing
an approved course of study which though approved by the bank, was required
neither as a condition of the relation of employer and employee, nor as a
qualification necessary for the rendering of services in that relationship.
In R v. Savage19 the Supreme Court of Canada affirmed the passage cited
earlier on from Nowegijick’s case on the meaning of the phrase ‘in respect
of’20 and rejected English authorities based on English charging provisions
which did not contain this phrase. In Savage’s case the taxpayer was employed
by a life insurance company as a research assistant. She received a sum of
money from her employer as an award for passing three life insurance courses
which she had taken voluntarily. Speaking for the majority (Ritchie, Dickson,
Lamer and Wilson JJ.), Dickson J. after concluding that the Hochstrasser
case and Ball v. Johnson was of ‘little assistance’, rejected the test expressed
by Viscount Cave L.C. in Seymour v. Reed 21 and held, on the basis that the
English statutes did not contain the phrase, ‘in respect of that tax was not
just restricted only to benefits which represented a form of remuneration for
services rendered.
Some observations can be drawn from the above. First, while the Canadian
and Australian charging provisions are admittedly wider than our Section
10(2)(a), in view of what has been said regarding the meaning of the phrase,
‘in respect of’, it cannot be asserted with certainty that only benefits which
represent a reward for services would be taxable.22 If however one were to
apply the causation test, then only these benefits would be taxable. Smith’s
case is helpful in providing a number of different perspectives in looking at
the matter – various phrases were used in Smith’s case to describe when an
employment benefit becomes taxable. Factors to determine chargeability to
tax depended, inter alia, on whether a benefit was:
a.
A consequence of employment;
19. [1983] C.T.C. 393, 83 D.T.C. 5409.
20. Section 6(l)(a) of the Canadian Income Tax Act defines chargeable income to include benefits
‘of any kind whatever...received or enjoyed...in respect of, in the course of, or by virtue of an
office or employment.’
21. [1927] A.C. 554. At p. 559, Viscount Cave L.C. suggested that to determine whether a benefit
is taxable, the following question must be asked: “Is it in the end a personal gift or is it
remuneration? If the latter, it is subject to the tax; if the former, it is not.”
22. This would be inaccurate, even in the English Context. Lord Reid in Laidler v. Perry [1966]
A.C. 16 at p. 30 said, “I think that, although the word ‘reward’ has been used in many of the
cases, it is not apt to include all the cases which can fall within the statutory words. To give
only one instance, it is clear that a sum given to an employee in the hope or expectation that
the gift will produce good service by him in the future is taxable. But one can hardly be said
to reward a man for something which he has not yet done and may never do.” A good
illustration of this statement is the case of Shilton v. Wilmhurst [1991] S.T.C. 88 where a
payment made by a former employer to an employee on being transferred to another football
club was held to be taxable. Lord Templeman held that “an emolument which is paid as an
inducement to enter into employment and to provide future service” is taxable under section 19
of the U.K. Income and Corporation Taxes Act, 1988.
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Singapore Academy of Law Journal
b.
A product or incident of employment;
c.
A recompense for the employer – employee relationship.
(1993)
Savage’s case together with Smith’s case are, it is respectfully submitted,
clear persuasive (but not binding) authorities for the Singapore courts to
reject the causation test because of the presence of the pari materia phrase
‘in respect of the employment’ in Section 10(2)(a). It may be that connection
with employment and not causation is relevant. Secondly, if one subscribes
to the foregoing, the phrase ‘in respect of’ may be so wide as to be difficult
of definition. It may be difficult to lay down a test by which it can be
determined if a benefit is taxable. Wilson J. in Smith’s case observed;
The problem presented...is whether the facts establish the requisite
relationship between the benefit received by [the taxpayer] and his
employment. It is not sufficient to find that the [taxpayer] received the
benefit at a time when there was an employment relationship existing
between himself and the [employer]. ... It is tempting to strive to identify
criteria which will assist in the process of characterisation. But, however
helpful such criteria may be, it is unwise to expect any paraphrase to
provide a final or overriding test. Ultimately, it is the words of the
statute that must prevail.
With respect, it is unhelpful to say that the words of the statute should
prevail when the words themselves are imprecise. It may well be better to
identify some factors/indicators in deciding if a benefit is taxable as
employment income because it is given or granted in respect of employment.
While the identification of such factors/indicators can certainly be a study in
itself, this writer ventures to suggest, in addition to the criteria identified in
Smith’s case, the following:
a. Whether the benefit has been given or granted voluntarily or under
a contract or some other legal obligation.23
b. The motive/reason behind the giving or granting of the benefit.24
23. See for example, the Privy Council case of C.G.I.R. v. T. supra, note 10 where Lord Wilberforce
accepted the proposition that where a sum of money is paid under a contract of employment,
it is taxable even though it is received at or after termination of employment. It follows that
if the taxpayer’s contract of employment entitles the taxpayer to receive a certain benefit, it will
almost certainly be taxable, even under English authorities. The judgement of Jenkins L.J. in
Moorhouse v. Dooland [1955] 1 All E.R. 93 is also consistent with this view.
24. However, motive will often not be decisive and merely operates as an indicator. Brennan J. in
Smith’s case said, “...the admissibility and cogency of evidence of motive are not questions of
substantive law: they relate to the means of proving the relationship between the payment and
the employment. If the motive of the employer is communicated to the employee or is known
by him, the common understanding of the motive for the payment may be cogent evidence of
how and why it came about that the gift was made.” In any case the employer may have mixed
motives in conferring a benefit, for example, a car company selling X brand cars may give its
car salesmen a hefty discount when they purchase these cars as part of its’ marketing strategy.
5 S.Ac.L.J.
Taxation of Employment Benefits
227
c. Ordinary conceptions of the taxpaying public as to whether the benefit
is a perk of employment.25
At the end of the day, the question whether a benefit is taxable as an
employment benefit must be whether it is ‘in respect of employment’, a
phrase which this writer finds vague and greatly lacking in content. The
writer would respectfully agree with Australian and Canadian cases that this
phrase should import a formulation wider than the causation test, since under
the causation test there must be a reference to services – essentially a benefit
must be in the nature of a reward — whilst the focus in the phrase ‘in respect
of employment’ is on the fact of employment. More can be done by way
of definition. It is interesting to note that under the section 148(1) of the
Australian Fringe Benefits Tax Assessment Act 1986 the meaning of ‘in
respect of employment’ has been clarified (though not defined) very widely
for the purposes of Fringe Benefits Taxation in Australia.26 While it may not
be necessary to have the same or similar legislation in the local context some
legislative input would certainly be welcome to clarify the position. We will
now move on to a discussion of the types of benefits that are subject to
taxed.
B. WHAT BENEFITS ARE TAXED?
Tax is charged on ‘any wages, salary, leave pay, fee, commission, bonus,
gratuity, perquisite or allowance...paid or granted...in money or otherwise.’
These terms connote a benefit conferred by the employer to the employee.
As stated earlier, it follows from the exhaustive definition of ‘gains and
profits from employment’ that it is only if a benefit falls within these categories
of employment benefits that it is taxable. The meaning of the benefits as set
out in section 10(2)(a) is important.
While the meaning of ‘wages, salary, leave pay, fee, commission, bonus,
gratuity...’ are quite clear and all refer in ordinary dictionary meaning to
25. See Heaton v. Bell [1970] A.C. at p. 760 and 764 where Lords Diplock and Upjohn used an
‘officious bystander’ and ‘man in the street’ test to determine what a perquisite of employment
was. See also, infra, note 40.
26. Section 148(1) of the Fringe Benefits Tax Assessment Act 1986 states that a reference to the
provision of a benefit in respect of employment is a reference to a benefit:
a. whether or not the benefit is also provided in respect of or in relation to any other matter;
b. whether the employment will occur, is occurring or has occurred;
c. whether or not the benefit is surplus to the needs or wants of the receipient;
d. whether or not the benefit is also provided to another person;
e. whether or not the benefit is to any extent offset by any inconvenience or disadvantage;
f. whether or not the benefit is provided or used or required to be provided or used in connection
with that employment;
g. whether or not the benefit is income or in the nature of income;
h. whether or not it is provided as a reward for services rendered or to be rendered by the
employee.
This section which was probably drafted to address problems faced by U.K. and Australian
courts, has the effect of subjecting to tax literally any benefit emanating from employment!
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(1993)
benefits in money, the words, ‘perquisites’ and ‘allowance’ are not so clear.
It is to a discussion of these two terms which we now turn.
Allowance
‘Allowance’ commonly refers to a money payment which is given regularly.
An allowance should be distinguished from a reimbursement of an expense
incurred by reason of employment. An actual expense incurred by reason of
employment which is later made up by the employer is not an allowance. It
is submitted that the common meaning of the word allowance does not cover
reimbursement. In the words of Noel J. in Ransom v. M.N.R.27 the word
‘allowance’ “implies an amount paid in respect of some possible expense
without any obligation to account...[It] is an arbitrary amount usually paid
in lieu of reimbursement. It is paid to the employee to use as he wishes
without being required to account for its expenditure.” A money payment,
given to an employee towards a personal expense but without responsibility
to account would be an allowance. An obvious example would be the
provision of transport allowances for employees working in the Central
Business District. The employee may use the allowance to pay for area
licence and car parking fees, alternatively, he could pocket the allowance
and travel by M.R.T.. This is what this writer would term as a ‘pure
allowance’ situation – the money payment is given purely for the benefit of
the employee. A reimbursement however, is payment made for an actual
expense incurred by an employee by reason of his employment and is
compensatory. For example, a title search clerk incurs search fees at the
Registry of Titles and Deeds, and pays these fees out of his own pocket. On
returning to the office he draws the amount incurred from the law firm. No
one can seriously dispute that this is a reimbursement of an expense. There
is no profit or gain to the title search clerk, consequently he should not be
taxed. This is referred to as the ‘pure reimbursement’ situation – the money
is given for compensating the employee who had made a payment purely for
the benefit of the employer.
There is a third situation which falls between the pure reimbursement and
pure allowance situations. This is where the allowance is given partly for
the benefit of the employer and partly for the benefit of the employee as
well. To take the example again of the search clerk, suppose the search clerk
is required, under the terms of his employment, to station himself at the
Registry of Titles for the whole working day. As a result, he would have
to take lunch at eating places nearby, places which he may never frequent
or where, if he had a choice, he would not take lunch at. He is however
given a sum of money towards the lunch expenses. A benefit therefore has
been conferred in that his lunch is subsidised. Would this lunch allowance
be taxable?
27. [1967] C.T.C. 346, 67 D.T.C. 5235. Emphasis added.
5 S.Ac.L.J.
Taxation of Employment Benefits
229
The above analysis is brought out neatly by the facts in the case of Owen v.
Pook.28 The taxpayer was a doctor who had a medical practice in Fishguard
but also held two part time appointments in a hospital at Haverfordwest, 15
miles from Fishguard. Under the terms of his appointment with the hospital,
the taxpayer was required to be on standby duty with the hospital so that if
he was telephoned by the hospital, he was required to give instructions over
the phone or drive to the hospital to deal with emergency cases. The taxpayer
was paid a travelling allowance for the first ten miles, and met the cost of
the additional five miles himself. The question was whether the travelling
allowances were emoluments from employment or merely reimbursements
of expenses incurred.29 Following the above analysis, it could be said that
the travelling allowances were emoluments since they were given solely for
the benefit of the employee, to assist him in earning income.30 The House
of Lords however, by a 3-2 majority held that the travelling allowance was
not an emolument and hence not taxable. Lord Guest held that the payment
was merely a reimbursement for actual expenditure, unlike the case in
Fergusson v. Noble31 where a clothing allowance was payable whether it was
expended or not.32 Lord Pearce, referring to the definition of ‘Emoluments’
as including ‘salaries’, ‘fees’, ‘wages’, or ‘profits’, held that it could be
neither of these. It could not be a ‘perquisite’ as well since a mere
reimbursement of necessary disbursements could not confer some personal
benefit.33 Lord Pearson, dissenting, held that the taxpayer had a benefit visa-vis someone who did not have a travelling allowance. It would be different
if the taxpayer incurred an expense in performing the duties of his employment
as for example, in making a journey from head office to branch office and
back to head office, or buying stamps and stationery for the firm and
subsequently obtains reimbursement from his employer. In this latter situation
the employee would not have received any profit or gain.34
The majority appeared to have based their decision on the fact that the
allowance was for actual expenditure.35 However this ignores the fact that
28. [1970] A.C. 244, see also a note on this case in [1969] B.T.R. 190.
29. The second issue in this case was whether the actual cost of the journeys were deductible from
his emoluments. The House of Lords was also divided on this issue; by a different 3-2 majority
they held that the costs were so deductible.
30. Such an argument would be convincing provided the taxpayer’s employment began when he
arrived at the hospital, not when he received a call to go to the hospital.
31. (1919) 7 T.C. 176.
32. Supra, note 28 at pp. 255-256.
33. Supra, note 28 at p. 259.
34. Ibid, at p. 266.
35. See for example, Lord Guest at p. 256 who stated, “To say that Dr. Owen is to that extent
“better off is not to the point. The allowances were used to fill a hole in his emoluments by
his expenditure on travel.” Similarly, Lord Pearce at p. 259 held that the allowance was not
a ‘perquisite’ since the meaning of that word denoted something which benefits a man by going
into his own pocket.” and this was not so for the travelling allowance in the instant case. See
also Vinelott J.’s analysis of Owen’s case in Perrons v. Spackman [1981] S.T.C. 739.
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the expenditure while made in the course of, and by reason of employment,
may confer some benefit to the employee as well. The writer very respectfully
agrees with the reasoning of Lord Pearson and that the travelling allowances
were taxable emoluments. The House of Lords appeared to have ignored the
fact that some benefit was conferred on the taxpayer when the travelling
allowance was given. The above example of the title search clerk clearly
illustrates this. By reason of his employment, he is compelled to patronise
certain eating places but it is inevitable that he would have to take lunch in
any case, whether he is required to be stationed at the Registry of Titles or
not. To suggest that the lunch allowance is really a reimbursement and
therefore not taxable is not proper since some benefit has been conferred on
the clerk ‘in respect of employment’.
Taxability of the benefit in Owen’s case has been addressed by statute in the
U.K.36 and the question is not likely to arise before the U.K. courts again.
Our Act however deals with the situation differently. Allowances for expenses
incurred by the employee and deductible for tax purposes by the employee
would not be considered a gain or profit from employment and so would not
be subject to tax. The proviso in Section 10(2)(a) exempting subsistence,
travelling, conveyance, or entertainment allowances which have been expended
for purposes other than those which are expressly disallowed for deduction
purposes under Section 15 appears to address this point. Under the proviso,
allowances which are not non-deductible in the hands of the employee for
tax purposes will not be considered gains and profits from employment for
tax purposes. The general effect is that payments made by the employer
towards the expenses of an employee which are deductible for the employer
for tax purposes will not be taxed in the hands of the employee. In fact this
appears to be the position taken by Lords Wilberforce and Pearson in Owen’s
case – if an employee’s expense is an allowable deduction then the ‘allowance’
paid to an employee for that expense is not taxable.37 The rationale for
linking taxability of an allowance with deductibility is that generally, only
expenses ‘wholly and exclusively incurred in the production of income’
would be deductible. An allowance which confers a benefit to the employee
would not, from the employer’s point of view, be ‘wholly and exclusively
incurred in the production of income’ since it also confers a benefit to the
employee.38 The title search clerk in the above illustration would therefore
36. Section 153, Income & Corporation Taxes Act 1988, c.1. This Section however only applies to
employees earning more than £8,500 per annum and directors of companies.
37. See Lord Wilberforce at p. 263H and Lord Pearson at pp. 265H - 266A-C.
38. For a landmark decision on deductibility of expenses, though not in an employment context, see
Mallalieu v. Drummond [1983] S.T.C. 665.
5 S.Ac.L.J.
Taxation of Employment Benefits
231
be unable to claim that his lunch allowance is not taxable since it is not a
deductible expense in the hands of the employer under Section 15(1)(b).39
Perquisite
This word has a very wide meaning. It is the only word in Section 10(2)(a)
which allows the suggestion that ‘gains or profits from employment’ can
include a benefit in kind other than a money benefit. Lord Pearce in Owen
v. Pook said ‘The normal meaning of the word denotes something that benefits
a man by going into his own pocket...In my view, “perquisite1 has a known
meaning, namely, a personal advantage...’.40 This meaning appears to have
been accepted by the Board of Review in X’s case.41 But then, what is a
personal advantage? It’s meaning imports an element of subjectivity. The
issues involved can be illustrated by an example. Take for example, a
marketing executive of ‘X’ make of European cars. His employment contract
requires him to buy an ‘X’ car but confers on him a generous discount over
the market price when he purchases an ‘X’ car. However for marketing
reasons it also stipulates that he can only drive an ‘X’ car and no other.
Personally, he need not and therefore would not want to drive a car at all,
and even if he wanted to, he would have chosen another type of car since
‘X’ cars are all luxury cars, and the maintenance costs are higher. Has the
marketing executive received a personal advantage? If so, how is this benefit
calculated? To say that if he didn’t like the terms of the contract he could
just leave the employment is avoiding the issue and is no answer to the
problem. In this situation there are basically two problems – identifying the
‘perquisite’ for tax purposes and valuing the perquisite conferred. These
problems become acute when the perquisite is a benefit in kind which relates
to, as in the example above, part of the employee’s duties of employment
and hence there is also an advantage to the employer in conferring the
benefit to the employee. While this same sort of problem is dealt with where
an allowance is given by the proviso in Section 10(2)(a), statute does not
appear to provide a solution here.
39. Section 15(1)(b) requires that no deduction shall be allowed in respect of any disbursement or
expense not wholly and exclusively expended for the purpose of acquiring income. Since the
allowance was given for the search clerk’s lunch expenses and confers a benefit on the search
clerk, it could not be said that it was expended wholly and exclusively for the purpose of
acquiring the employer’s income. An English decision, Watkis v. Ashford Sparkes & Harward
[1985] S.T.C. 451, has held that the cost of office lunches eaten by solicitors is not deductible.
40. (1970) 45 T.C. 582 at p. 592. Other tests have been expressed. For instance, but for the
requirement that income tax is chargeable on what goes into a taxpayer’s pocket and not what
saves his pocket, Lord Upjohn in Heaton v. Bell, supra, note 25 at p. 760 would have used an
officious bystander test. Lord Diplock, on the other hand, was at p. 764, comfortable with a
‘man in the street’ test.
41. Supra, note 2 at p. xvii.
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The U.K. tax system deals with this problem obliquely by requiring that a
perquisite is taxable if it can be converted into money. This is the doctrine
of convertibility – the effect is to sieve out benefits not convertible from the
tax net. Convertibility also deals with the valuation problem which will be
discussed later. The leading case on the doctrine of convertibility is Tennant
v. Smith.42 In that case, the taxpayer was as part of his duties as a bank
agent, required to occupy a bank house in order to care for the premises and
transact any business on behalf of the bank after office hours. He was not
permitted to sublet the house. The taxpayer therefore had a benefit – the
bank provided accomodation for him. The bank however also had an
advantage in that there was someone who could transact its business after
office hours and look after the premises for it. The issue was whether this
benefit was taxable. The House of Lords held that it was not taxable. Lord
Halsbury L.C. held that such a benefit was not taxable because the Income
Tax Act 1842 referred to benefits which were ‘payable’ and this connoted
money payments.43 To attract tax, a benefit either had to be a money benefit
or one which could be turned into money. The rationale for confining tax to
money convertible benefits appears to be that there were no provisions for
valuation.44 The majority appeared to have agreed with Lord Halsbury so
this is generally taken to be the ratio of the case.45 Lord MacNaghten’s
judgement is however more interesting because it was not based on whether
the words ‘profits and gains’ included the benefit of occupying the bank
house rent-free but on the meaning of income itself. He said,
In my opinion the answer to the claim of the Crown does not depend
on any minute criticism of the language of the different schedules. The
real answer is, that the thing which the Crown now seeks to charge is
not income...The duty under Schedules D & E is payable on the ‘annual
amount’. It is a tax on what ‘comes in’ – on actual receipts...No doubt
if the appellant had to find lodgings for himself he might have to pay
for them. His income goes further because he is relieved from that
expense. But a person is chargeable for income tax...not on what saves
his pocket, but on what goes into his pocket. And the benefit which the
appellant derives from having a rent-free house provided for him by the
bank, brings in nothing which can be reckoned up as a receipt or properly
described as income.
42. [1892] A.C. 150.
43. Ibid, at p. 156.
44. See Lord Watson at p. 158 and Lord MacNaughten at p. 161. However, Lord Diplock in
Heaton v. Bell supra, note 25 at p. 765 suggested that the reason for the requirement of
convertibility was that since income tax is payable in money, the legislature could not have
intended to exact it from employees in respect of benefits in kind from which the employee
could not himself by dealing with, forgoing or disposing of the benefit raise money to pay the
tax. The writer will discuss valuation issues in the later part of this article.
45. See Lord Watson at p. 163, Lord Field at p. 164, Lord Hannen at p. 165.
5 S.Ac.L.J.
Taxation of Employment Benefits
233
His Lordship held that income is what ‘comes in’ as a receipt; consequently
provision of rent free accomodation was therefore not income. As mentioned earlier, this case has however been read as requiring a benefit to be
convertible before it can be taxed.46 From Lord MacNaughten’s point of
view, (and it is submitted that this should be the correct approach), the
question should be what constitutes income for tax purposes rather than
whether a benefit was convertible into money. Convertibility, or the lack of
it, is not a requirement for tax to be chargeable under the U.K. Income Tax
Acts. Inspite of this, the convertibility doctrine has subsequently been
followed and developed by the U.K. courts until in 1969, Lord Diplock in
Heaton v. Bell felt constrained to say that the requirement of convertibility
was a judicial gloss which was so entrenched in the tax system that it was
no longer possible for the courts to depart from the doctrine.47
The convertibility doctrine has rightly been rejected in X. v. C./.T,48 a decision
of the Singapore Income Tax Board of Review. In this case, the taxpayer
was given the benefit of a ‘leave passage’ by the employer as part of his
contractual rights. He was not permitted to obtain an amount of money in
lieu of such entitlement, nor was he entitled to sell or otherwise dispose of
that benefit. The Board of Review held that the leave passage was taxable.
In the course of giving judgement, the chairman of the Board, T.S.
Sinnathuray, said,
We are...satisfied that Tennant v. Smith and the cases that followed it,
cannot apply to section 10(1)(b) read with 10(2)(a) of the Act for the
simple reason that they are differently worded from the counterpart in
the United Kingdom. The key word in the United Kingdom Tax Acts
has been and is “emoluments”; and the judges in the United Kingdom
have held themselves bound by the word “payable” that had appeared
in the Act on which Tennant v. Smith was decided. The expressions
“gains or profits”, “paid or granted”, and “money or otherwise” that are
in the Act are not in the United Kingdom provisions.
It is submitted that another and possibly neater way of avoiding Tennant v.
Smith altogether would be to adopt a broad commonsense approach in the
construction of Section 10(2)(a) and suggest that the effect of Section 10(2)(a)
is that tax is charged on the total valuable consideration flowing from the
employer to the employee ‘in respect of employment.’ While Chairman
Sinnathuray was of the view that Section 10(2)(a) was drafted in a hotchpot
fashion with no genus in the benefits enumerated therein, this writer would
respectfully suggest that the basic, common denominator in Section 10(2)(a)
is valuable consideration in respect of employment. Since valuable
46. See Lord Diplock in Heaton v. Bell, supra, note 25 at p. 764. For an interesting critique on
the convertibility doctrine see S. Bandali, ‘The Legacy of Tennant v. Smith’ [1984] B.T.R. 333.
47. Ibid.
48. Supra, note 2.
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consideration can sound in money or in kind, and since the Section 10(2)(a)
definition is exhaustive there would on this basis have been no problem
whatsoever in suggesting that what is taxable is valuable consideration (which
is not the same as but can include income).49 On this approach, the taxpayer’s
arguments that ‘perquisite’ should be read ejusdem generis all the other
items in Section 10(2)(a) and that the convertibility doctrine is applicable in
Singapore could easily be refuted. Admittedly the words ‘valuable
consideration’ are not found in Section 10(2)(a) but it is submitted that it is
quite clearly implicit in Section 10(2)(a) that tax is charged on a benefit
which must be valuable consideration and which need not be of an income
nature at common law.
The Privy Council has recently had to rule on the meaning of ‘perquisite’ in
the Hong Kong Inland Revenue Ordinance,50 a statute very similar to our
Income Tax Act. In Glynn v. C.I.R.51 the taxpayer was assessed to Hong
Kong salaries tax on payments made by his employer towards his daughter’s
school fees. By Section 81(1) of the Hong Kong Inland Revenue Ordinance
salaries tax was chargeable in respect of income from any office or
employment. By Section 9(1) such income included ‘(a) any wages, salary,
leave pay, fee, commission, bonus, gratuity, perquisite, or allowance...’.52
The question was whether the payments were perquisites. The taxpayer
contended that a perquisite must be a money payment paid to an employee
only if it was to be taxed and in any case, the payments were not perquisites
since he never became entitled to claim payment of the school fees paid by
the employer to the school. Alternatively, he submitted that even if he had
a right to demand payment of school fees, a perquisite must be something
convertible into money to be subject to tax. Since the right to require
payment of school fees could not be sold, that right could not be taxed. The
question therefore was whether the convertibility principle applied to exclude
this ‘perquisite’ from tax. Lord Templeman delivered the judgement of the
Privy Council. He held that
[the principles of the Hong Kong Income Tax Ordinance are based on
the provisions of the U.K. Income Tax Acts, albeit with modification,
to meet the requirements of the Hong Kong economy and establishment.
49. Such an approach was applied by Lord Wrenbury in assessing income from ‘an office or
employment’ in North British Railway Co. v. Scott [1923] A.C. 37 at p. 47 where his Lordship
said,
This is a furthur valuable consideration or profit accruing to the officer by reason of his office
and is a factor in arriving at his assessable income for income tax purposes. His total “profits
and gains” are the aggregate of these sums.
This statement was quoted with approval by Hunter J.A. in the Hong Kong Court of Appeal
decision of C.I.R. v. Glynn [1989] H.K.L.R. 509 at p. 533.
50. Cap. 112, Laws of Hong Kong 1986 Ed.
51. [1990] S.T.C. 227.
52. This is similar to our Section 10(2)(a) except that the definition of income from office or
employment is inclusive and not, as in our Section 10(2)(a), exhaustive.
5 S.Ac.L.J.
Taxation of Employment Benefits
235
In particular the taxation of a perquisite involves the same problems in
Hong Kong as in the United Kingdom. Consequently the legislation
of the United Kingdom Parliament and the decisions of the United
Kingdom courts will provide some assistance in construing the
Ordinance... Salaries and perquisites, expressions which have formed
part of United Kingdom income tax law since at least 1842, must
have the same meaning in Hong Kong tax law which is based on
United Kingdom law... (emphasis added).]
Lord Templeman then discussed Tennant v. Smith and Heaton v. Bell, quoting
from Lord Diplock in Heaton’s case that ‘perquisite’ in the Hong Kong
Income Tax Ordinance still meant what it meant in the English Income Tax
Act, 1842 and held that a perquisite included money paid to a taxpayer and
money expended in discharge of a debt of the taxpayer. As such, the sums
paid by the employer to the school were perquisites of employment and were
subject to salaries tax. However, Lord Templeman added,
...if an employer contracts to provide a nursery school for the children
of all its employees and to allow each employee to use the facilities of
the school, there is no or no identifiable sum expended for the benefit
of any particular employee. If the legislature wishes to tax the benefit
of a nursery school only statute can provide for this. Money may also
be expended indirectly for the benefit of an employee without being
taxable; for example, if a contract of service does not provide for medical
expenses to be paid and the employer does not normally pay medical
expenses the employer may, for compassionate or other reasons, as a
special case, voluntarily pay the medical expenses of transporting and
treating a child of the employee. The expense if not contractual and
if lacking the elements of expectation and continuity would not be
taxable...For the present purposes it suffices that an identifiable sum of
money required to be expended by an employer, pursuant to a contract
of service for the benefit of the employee, is money paid at the request
of the employee and is either part of the employee’s salary or is a
monetary perquisite taxable as such according to the law and authorities
of the United Kingdom.
In summary, Lord Templeman therefore held that the meaning of ‘perquisite’
in the Hong Kong Ordinance is the same as that in the U.K.. On this basis,
the convertibility doctrine was applicable in Hong Kong. Also, benefits
given by an employer to employee which are not contractual, continuous or
expected would not be taxable. What is really novel however is the statement
that where there is no identifiable sum expended for the benefit of an
employee, that benefit conferred on the employee would not be taxable.
Two observations may be made at this juncture. The first is that Lord
Templeman reasserted the importance of English Income Tax principles and
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cases in interpreting the Hong Kong Ordinance. It is clear that the Hong
Kong Inland Revenue Ordinance and the Singapore Income Tax Act are
similarly drafted and based on U.K. income tax principles.53 It would follow
that Lord Templeman’s comments reproduced above that the principles of
the Hong Kong Ordinance being based on the U.K. Income Tax Acts can
equally apply to the Singapore Act. After all, Singapore, like Hong Kong,
was a colony of the U.K. when Income Tax was introduced; there would be
no reason to suppose that Income Tax principles in the Act would be based
on principles other than those of the U.K. Income Tax Acts. Consequently,
English tax decisions are relevant in the construction of our Income Tax Act
and our discussion of the taxability of employment benefits in particular.
However it would be difficult to apply the above principles in the Singapore
context for two reasons.
The first is that X. v. C.I.T. has, in the context of the taxation of perquisites,
rejected the Tennant v. Smith line of cases that a perquisite must be convertible
to cash before it can be taxable. X.’s case, however, is only a Board of
Review decision and the Income Tax Board of Review does not form part
of the court structure in Singapore. The Privy Council on the other hand, is
at the apex of our Court System. (Albeit access to it is rather limited). It is
anybody’s guess whether the High Court would follow the Privy Council or
the Board of Review (which, though occupying a similar position as a District
Court54 vis-a-vis parties to a legal action, is also arguably an administrative
tribunal). Nevertheless, Glynn’s case is illustrative of the various issues that
will arise in the taxation of perquisites in the Singapore context. Also, Lord
Templeman’s comments on the principles of Hong Kong income tax being
similar to U.K. income taxation is interesting. It would be interesting to see
what importance our Courts would place on Glynn’s case should the
convertibility doctrine be argued before the courts.
The second reason is based on principle. It is difficult to see why, accepting
that the Income Tax Act is based on English principles of income taxation,
that one should adopt Tennant’s case that income must be convertible to be
53. Lord Templeman suggested that the Hong Kong Inland Revenue Ordinance as drafted was
based on English principles of income taxation. The Singapore Act, on the other hand, had it’s
origins based on the Ceylon Income Tax Ordinance which was drafted by an officer of the U.K.
Income Tax Department. At the time the Singapore Act was passed, Singapore was a British
colony. See the official memorandum to the draft bill to impose a war tax on income, reprinted
in the Malay Mail of 6 March 1940. The Singapore Income Tax Act can be traced to this draft
bill – see A Report to their excellencies the governors of the Malayan Union and Singapore,
with recommendations, including a draft bill, and proposals for Administration and Staffing by
R.B. Heasman, dated 22 July 1947. In fact the original charging provision to employment
income in the Singapore Act and salaries tax in Hong Kong is in pari materia – compare section
10(1)(b) & 10(2)(a) of Singapore’s Income Tax Ordinance, Act No. 39 of 1947 with Sections
8(a) & 9(1)(a) of Hong Kong’s Inland Revenue Ordinance, Act No. 20 of 1947.
54. Sections 78(2), 80(5)(c), 80(12), and 81(3) of the Act all suggest that the Board of Review has
a similar position to that of a District Court vis-a-vis parties to a legal action.
5 S.Ac.L.J.
Taxation of Employment Benefits
237
part of our jurisprudence when the House of Lords in Heaton v. Bell have
themselves admitted that Tennant’s case placed a “judicial gloss” on the
meaning of the word ‘perquisite’.55 Why, it may be asked, should a judicial
gloss be perpetuated, especially into another legal system when there does
not appear to be any cogent reason for adopting it? In the case of Hong
Kong, one explanation could be that Hong Kong is presently a colony of the
U.K. and under British administration. Consequently, principles of income
tax law in Hong Kong should closely follow those of the U.K.. Indeed, there
is even a statute, the Application of English Law Ordinance 1966, which
provides, by Section 3, that “the common law and rules of equity shall be
in force in Hong Kong.” It would not be surprising therefore that the
convertibility doctrine which may be said to be a common law concept,
would apply in Hong Kong.
The above comments however lead to the second observation. Lord
Templeman appears to attempt to rationalise and develop the reasoning in
Tennant’s case, in that the case is authority for the proposition that where the
employer may provide a perquisite for an employee which does not involve
an expenditure of money or which involves an expenditure which cannot be
attributable to an employee, the perquisite received by the employee is unless
provided otherwise by statute, not taxable. The suggestion is that there must
be identifiable expenditure for tax to be chargeable on the perquisite conferred.
This statement is clearly dicta as it was not necessary for the decision. The
proposition is somewhat like a reverse of the convertibility principle – while
convertibility requires benefits to be convertible before it becomes taxable in
the hands of the employee, this proposition requires expenditure to be
identified in money terms before it becomes taxable in the hands of the
employee. However, as in the case for the requirement of convertibility, the
wording of the statute, in Hong Kong as well as in Singapore, do not bear
out the reading that there must be identifiable expenditure. Furthurmore, tax
is chargeable on generally what ‘comes in’ to the hands of.the taxpayer; the
focus is on whether the taxpayer receives something; the requirement therefore
that there should be identifiable expenditure on the part of the employer is
something really novel.
However the requirement that there be identifiable expenditure goes a long
way in assisting in the valuation of benefit conferred. It may be said that
expenditure incurred is prima facie the value of the benefit conferred to the
taxpayer and hence the value subject to tax. Expenditure which is not
identifiable would not be subject to tax. Implicitly therefore, this proposition
provides a solution to the valuation of benefits for tax purposes. It would
55. See Lord Diplock in Heaton v. Bell, supra, note 25 at p. 764. This passage is quoted in Glynn’s
case , supra, note 51 at p. 229, which is a clear indication that Lord Templeman is cognisant
of the judicial gloss of convertibility he is perpetuating.
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remove benefits which cannot be turned into money and hence cannot pass
a ‘market value’ test from the tax net. It is to a consideration of valuation
issues which we now turn.
C. VALUATION
A non-monetary benefit has to be valued for tax purposes. This would not
present a problem to benefits which sound in money like salaries, allowances
and gratuities since tax will be charged on the money value given on these
salaries, allowances and gratuities. Thus valuation will only present a problem
to ‘perquisites’ where a benefit can be granted in kind. X.’s case, while
deciding that a leave passage was taxable, did not deal with the valuation of
the leave passage for tax purposes. While this may not have been necessary
on the facts, it is submitted that, in view of the ensuing confusion on the
valuation of benefits, some guidance should have been laid down by the
Board of Review.
This is because the Act does not give any indication of how a benefit can
be valued for tax purposes. The Act merely requires that tax is chargeable
on gains and profits from employment. Apart from the situation where the
employer provides a place of residence to an employee (for which this benefit
is valued under section 10(2)(a)), there is no statutory scheme implementing
taxation of non-monetary benefits. Furthermore, “ ‘[v]alue’ is an elusive word:
it may mean market value, it may mean value in money to the owner, or it
may have other meanings like the value of the work necessary to produce it
or even sentimental value.”, said Lord Reid in Heatori’s case.56 Indeed, there
are generally three ways to compute value – cost to the employer, market
value, or value to the employee and these three ways of valuation have
within themselves different variants. For instance, cost to the employer can
refer to the actual expense incurred in conferring a particular benefit to the
employee or the additional cost to the employer of providing the benefit to
the employee which the employer is already providing to members of the
public.57 Market value can mean the price the employee would have to pay
for the benefit, or the second hand value (the value obtained when a benefit
56. Supra, note 25 at p. 745.
57. A case example is necessary to illustrate the point the writer is making here. In Pepper v. Hart
(H.L., unreported, judgement delivered 26 November 1992) the employer, a school, ran a
concessionary scheme for its members of staff under which they were entitled to have their
children educated at the school on payment of only one-fifth of the sum charged to members
of the public. Under sections 61(1) & 63 of the U.K. Finance Act 1976 tax was chargeable on
the ‘cash equivalent of the benefit.’; the difficulty was how to compute that cash equivalent of
the benefit for tax purposes. Was this the opportunity cost of four-fifths of the sum charged
to members of the public which the school lost, or the additional/marginal cost of providing a
few more places for children of staff at the school? The latter basis would result in less tax
payable, since the cash equivalent of the benefit provided would be lower. The House of Lords
held that the additional/marginal cost method of computation was appropriate.
5 S.Ac.L.J.
Taxation of Employment Benefits
239
is realised in the market) of the benefit.58 Market valuation may be difficult
if there is no market for such a benefit. Value to the employee is very
subjective – it will depend how much the employee is willing to pay for the
benefit and this will furthur depend on the employee’s living circumstances.
A micro-computer to one employee may be more useful to another, and he
may be prepared to pay a higher price than other employees for a particular
micro-computer.
In this writer’s view, valuation cannot be based on sentimental value.
Sentimental value is far too subjective. Neither can it be based on the cost
of production, nor cost to the employer. This is because one is assessing
income in the hands of the taxpayer-employee; what the employer has incurred
to confer the benefit is not relevant.59 The common law concept of income
is what ‘comes in’ to the pocket of the taxpayer and not the cost of producing
what ‘comes in’ to his pocket.
An English Court of Appeal case illustrates the point made. In Wilkins v.
Rogerson60 the employer decided to give its employees a suit made by a
tailor to the employees order. The taxpayer who was one such employee
was accordingly fitted with a suit which cost £14 15s. which the employer
paid. It was agreed that the value of the suit in the hands of the taxpayer
was just £5, since this was the price which the taxpayer could obtain if he
sold it immediately on the second hand market. The question was whether
tax was chargeable on £14 15s, which was the price paid for the suit (the
market value – the value of a new made-to-measure suit) or £5 (the second
hand value). The Court of Appeal held that tax was chargeable on £5 only.
This was what the taxpayer got from his employer – the value of the suit;
it did not matter what the employer paid for him to obtain this benefit.61
The writer reads this case as authority for the proposition that tax is chargeable
on the value of what the taxpayer has received from his employment and not
the cost of provision of the benefit. Indeed, since the common law concept
of income is what ‘comes in’ to the pocket of the taxpayer, tax is chargeable
on benefits which come to the taxpayer. The value of the benefit, according
to Wilkins’ case, is obtained by determining the price that the benefit would
58. See Butterworths U.K. Tax Guide 1991-1992 paragraph 6:43.
59. See Lord Reid in Heaton v. Bell, supra, note 25 at p. 745B, who suggested that the cost of
production may have “no relation to the present value of the thing or right to anybody.”
60. [1961] 1 Ch. 133.
61. For example, Harman L.J. at p. 146 said,
Income tax is a tax levied on income. The taxpayer has to pay on what he gets. Here
he has got a suit. He can realise it only for £5. The advantage to him is, therefore, £5.
The detriment to his employer has been considerably more, but that seems to me to be
irrelevant, and I do not see that it makes any difference that no property in this suit ever
passed to the employer.
See also Lord Evershed M.R. at p. 144 – 145 and Donovan L.J. at p. 147.
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command in a second hand market. This is necessarily an objective test but
assumes the presence of a second hand market. The problem with this
method is that there may not be an available second hand market for some
benefits, for example, the granting of non-assignable option rights to purchase
shares at a fixed price. The granting of some benefits come with restrictions
personal only to the grantee, for example, the employee who has been granted
the option must, in order to exercise the option, work in the company for the
next few years. How does one value such a benefit for tax purposes? In such
situations market value would have to be hypothetical62 and hence valuation
difficult and requiring expert evidence.
Another way of taxing a benefit is by assessing the value of the benefit to
the taxpayer. This method as alluded to earlier is subjective, but is also
consonant with the idea that income is what ‘comes in’ to the taxpayer and
was applied in Donaldson v. F.C.T.63. In this case, the taxpayer was a
manager in a land development company which established a trust fund to
implement a scheme of granting options to key employees. The taxpayer
made three loans to the trustee at interest and was entitled under certain
rights under those loans to take up shares attached to the loans by way of
convertible notes issued to the trustee. However in order to exercise these
rights he had to remain in the employment of the company. His freedom to
assign the rights were also restricted. The question was whether, inter alia,
the share rights were benefits which could be valued in money terms and
hence subject to tax under Section 26(e) of the Australian Income Tax
Assessment Act.64
Bowen C.J. held the rights were benefits which were subject to tax. He held
that the value of the benefit to the taxpayer was a matter to be determined
according to the facts of each particular case and preferably with expert
evidence. He then said,
Where what is given is freely transferable, its value may be found by
determining what a willing but not anxious purchaser might pay for it.
Where what is given is subject to restrictions, its value may be found
62. See for example, Lynall v. I.R.C. [1972] A.C. 1680, an English House of Lords decision on
estate duty which illustrates the artificiality of ‘open market value’ on the sale of shares subject
to a right of pre-emption. This right of pre-emption fixed the pre-emption price at the par value
of £1 and gave absolute discretion to the directors to refuse to register any proposed transfer
of shares. There was a possibility that the company may be publicly floated and this information
was known to the person having the right of pre-emption. This information, if made known to
the public, would cause the value of the share to increase significantly. The House of Lords
held that for the purposes of estate duty, the shares ought to be valued at £3 10s. But this is
hypothetical since any person having the right of pre-emption would also know that the company
would be floated and would exercise his rights to buy the shares at £1. This decision has the
effect of attributing a higher than expected value to the shares.
63. (1974) 4 A.T.R. 530.
64. Under Section 26(e), tax is chargeable on the ‘value to the taxpayer’ of the benefits stipulated
therein, so there was no question of the court applying the second hand market basis of valuation.
5 S.Ac.L.J.
Taxation of Employment Benefits
241
by determining what a willing but not anxious purchaser, who would if
he bought it, be subject to the same restrictions, might pay for it. Where,
as here, what is given to the employee is subject to restrictions and
conditions which he alone can fulfil, valuation is more difficult...In such
a case as the present...I consider it is appropriate in ascertaining value
to the taxpayer to determine what a prudent person in his position
would be willing to give for the rights rather than fail to obtain them.
(Cf Pastoral Finance Association Ltd. v. The Minister [1914] A.C.
1083 at 1088.)
There are therefore really two variants to the ‘value to the taxpayer’ basis of
valuation. Generally, the value is dependant on what a willing but not
anxious purchaser might pay for the benefit. This is the first variant. Where
there are personal or other restrictions which come with the conferring of the
benefit, then the question is what a prudent person would pay for the benefit.
This, the second variant, is really the basis of valuation for land resumption
(ie. where the land owner repossesses his land from the authorities)
purposes.
It should be noted that this basis of valuation is quite different from the
‘market value’ basis. If one were to apply this basis to the facts of Wilkins‘
case, the taxpayer in Wilkins’ may not be a ‘willing but not anxious purchaser’
of a suit at £14 15s (which is the cost of the suit to the employer) but may
be such a purchaser at, say, £10, (which is more than the second hand market
price of £5). The distinguishing feature of the ‘value to the taxpayer’ basis
is that it is more subjective than the market value basis. The latter can be
determined by what a hypothetical market participant would pay for a
particular benefit and is objective. Take for example the case of a benefit
comprising shares of a listed company on the Stock Exchange. What an
investor in the stock market would pay for the shares would depend on
public perception of the shares’ worth and the growth potential of the company
based on known facts. If however the employee has special knowledge that
the company may be the subject of say a hostile takeover, or that there will
be some matter to be announced by the authorities which will cause the
company’s share price on the Stock Exchange to rise, he will want to pay
a premium over the Share market price to acquire the share. The point is
that ‘value to the taxpayer’ is different because the employee may or may
not wish to pay market value to acquire the benefit. The choice to pay or
not to pay market value will depend on the taxpayer’s individual
circumstances, his idiosyncrasies, and perception of the benefit concerned.
Back to Donaldson’s case. Having stated the basis of valuation as above,
Bowen C.J., recognising that the whole process of valuation involved immense
difficulties continued,
If by placing a value on options one means stating a precise figure
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which will prove to be correct, then one would agree that in the case
of a complex set of rights involving a multiplicity of contingencies the
task is an impossible one. But if by placing a value on rights one refers
to the formation of a judgement of what the rights might be worth, or
what some willing but not anxious person might be prepared to give,
rather than fail to obtain them, then I do not think it can be said that
valuation in this sense is impossible.
It is submitted that in the absence of any legislative provision for valuation
of benefits this is the approach that one should take. It is clear that it is very
difficult to value accurately a non-monetary benefit on the ‘value to taxpayer’
basis of valuation, but once a certain basis of valuation is taken, then any
difficulties that arise should not be reasons to shirk from the task of valuation.
A rough and ready approach to valuing particular benefits may have to be
adopted. This appears to be what the Singapore Revenue authorities have
done - various methods of computation have been laid down for calculating
the benefit from the provision of a car, air passages and accomodation.65
Fixed values have also been attributed to furniture and equipment in furnished
accomodation provided to employees. It is noted that under these
computations and valuations provided by the authorities, the taxable value
attributed to the benefits provided appears to be low. For example, the
taxable benefit of leave passage is limited to only 20% of the cost of airfare,
but with certain conditions. Where the employer provides furniture like
chairs, tables, setees, the taxable benefit is just $5 per month. The low
values are probably to discourage objections to assessment by the taxpayers.
However the main problem remains – should the ‘value to the taxpayer’
basis or the ‘market value’ basis apply? Tax accountants are divided on the
basis of valuation.66 Regrettably, there are no legislative provisions governing
valuation of employment benefits and Singapore courts have not ruled on the
matter. This writer tentatively submits that tax should in the first instance
be chargeable on market value of a benefit. The principles in Wilkins’s case
should be adopted. As a matter of administrative convenience, ‘value to the
taxpayer’ may be too subjective and difficult to value. As mentioned earlier
on, what if the employee does not want the benefit or if he wanted a particular
65. See paragraphs 820 – 824 of the Singapore Master Tax Guide 1992 which describes certain
benefits and their deemed values for tax purposes.
66. The Singapore Master Tax Guide states, at paragraph 845, that the principle established by the
courts, which has gained acceptance, is that “the amount to be taxed in the hands of the
employee in relation to a benefit or advantage is not the cost incurred by the employer in
providing the benefit or advantage but the value to the employee”. Pok & Hong, Singapore
Taxation 1989, states at p. 234, that if a benefit is not covered by any special valuation rules
provided in the Act nor any scale rates provided by the Revenue authorities, then it is to be
valued on “the open market price which [the employee] could sell it for”, “otherwise the value
is to be based on what it costs the employer to provide it to the employee.” Unfortunately both
works do not give any legal authorities supporting these propositions.
5 S.Ac.L.J.
Taxation of Employment Benefits
243
benefit, would have only been prepared to pay less for it? In the assessment
of market value, a more objective assessment can be made with the assistance
of expert valuers, if necessary.67
III. APPORTIONMENT
It was earlier mentioned that in many cases a benefit conferred on an employee
may also be advantageous to the employer. It may be beneficial to the
employer (or it may even be part of an employee’s duties of employment)
that a certain benefit be conferred; e.g., where employees are provided with
an entertainment expense account to enable them to entertain clients and/or
buy clients (and themselves) lunch at the employer’s expense. It cannot be
said that such lunch expenses are benefits conferred solely for the employee’s
benefit even though the employee has saved the cost of a lunch. A better
way of getting round the problem is by apportioning the benefit conferred on
the employee. While the Act does not provide for apportionment of benefits68
the ‘allowance’ or ‘perquisite’ can be read in such a manner that it would
only relate to the employee and hence can be apportioned as such. So if
lunch expenses for the employee and the client come to $60, then the
‘allowance’ to the employee, for tax purposes is $30 and tax is therefore
chargeable on $30 instead of $60. A difficulty here however would be
whether you can take the taxpayer’s choices into account; for instance, if not
for the client’s lunch, the taxpayer may well have only spent $3 on a bowl
of prawn noodles and a soft drink at the hawker centre. Case law authority
in the U.K. suggests that the taxpayer’s personal choices are immaterial;69 by
accepting a benefit a taxpayer is deemed to have chosen it.
IV. CONCLUSION
The writer has raised various issues in the taxation of employment income.
In the Singapore context it can be seen that many basic issues are unresolved
and clarification by way of legislation is urgently required. This priority
becomes all the more compelling when one considers the fact that tax from
employment income impinges on the lives of the largest number of taxpayers
in Singapore. As can be observed from the above, the law is complex
(because of the difficulties of determining when a benefit will or will not be
67. Though it may be possible that certain rights may not even have a market value – see Warner
J.’s comments in Zim Properties Ltd. v. Proctor [1985] S.T.C. 90 where he took the view that
a taxpayer’s right to sue solicitors for negligence may not have a market value. Perhaps in the
unlikely situation where something does not have a market value, ‘the value to taxpayer’ basis
may be an alternative. Issues involving valuation are very technical and beyond the scope of
this article.
68. For the U.K. position see Section 154 and 156(2) Income and Corporation Taxes Act 1988 c.1
and Westcott v. Bryan [1969] 3 All E.R. 564 which allows for apportionment.
69. See Rendett v. Went [1964] 2 All E.R. 464 and Butter v. Bennett (1962) 40 T.C. 402 at p. 414.
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taxed and also the valuation problems) and can work out unfairly to certain
taxpayers (who are paid in cash rather than in kind) and presents opportunities
for planning and avoidance. Some form of legislation setting out the legal
position, on at least some of the issues raised concerning the conferring of
benefits in kind would certainly be welcome.
LIU HERN KUAN*
*
LL.B. (Hons.)(S’pore), LL.M. (Cantab.), Advocate & Solicitor (S’pore), Lecturer, Faculty of
Law, National University of Singapore. I wish to thank Teoh Ai Lin for her helpful comments.
I remain responsible for all errors and omissions.