As part of a restructuring of the B Group, AQQ had been incorporated to acquire several Singapore subsidiaries using funds raised from issuing convertible notes to a bank. Interest on those notes was then claimed as a deduction against franked dividends paid by the subsidiaries.
The tax authorities issued an assessment based on anti-avoidance provisions, asserting that AQQ had entered into an arrangement designed mainly to obtain a tax advantage.
AQQ appealed against the assessment but the Income Tax Board of Review dismissed the appeal. AQQ then appealed to the High Court.
Judgment of the Court
The High Court agreed with the tax authorities that the arrangement was caught by anti-avoidance provisions because its main effect was to generate artificially high interest deductions while passing on section 44 tax credits, even though the broader group restructuring itself had legitimate commercial rationales.
It held that AQQ could not rely on the exception in the anti-avoidance provision, section 33(3)(b) because the financing was contrived and lacked bona fide commercial reasons. However, the tax authorities in exercising their powers had acted unreasonably by disregarding both the dividend income and the interest expenses in their entirety. Only the artificial interest deductions should have been disregarded; the legitimate portion of the deductions as well as the dividend income ought to remain intact.
The Court further found that the tax authorities could not raise additional assessments and set aside that part of the assessment and indicated the steps they ought instead to have taken.
SGHC 249″]