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(SINGAPORE) The Court of Appeal has delivered a landmark judgment against the Inland Revenue Authority of Singapore (Iras), allowing a property developer tax deductions of $4.3 million for borrowing and refinancing expenses.

Decision will also affect traders who obtain loans to finance the purchase and development of trading stock.

BT understands that several cases involving property developers were held pending the outcome of this case. And the decision affects not just property developers but all traders who obtain loans to finance the purchase and development of trading stock.

Previously, Iras did not allow deduction of borrowing expenses, saying they were capital and not revenue in nature.

Lawyers say this will change now that the court has decided that the deductibility of borrowing expenses depends on the purpose of the taxpayer in getting the loan.

As for refinancing expenses, Iras previously allowed deductions on a concessionary basis. But lawyers say such expenses will now be deductible by law if the original loan is a revenue loan.

They also say that after this case, the way loans are structured will have a bearing on whether expenses incurred in connection with them are tax deductible.

'Often businesses take large general purpose loans because they want to have the flexibility to use the money,' said Teoh Lian Ee, head of tax at Drew & Napier.

'But this flexibility to use the loan means they cannot get tax deductions under the new ruling which only allows tax deductions on loans which have the specific purpose of funding revenue purchases.'

This means that companies that are certain that a loan is to fund revenue purchases or to develop trading stock should make sure this is stated in the agreement, and that amounts drawn down are only used for such a purpose.

According to Mrs Teoh, they should then be able to enjoy tax deductions on expenses incurred in connection with the loan.

Mrs Teoh represented the developer with team members Stacy Choong and Seah Ching Ling in the long-drawn appeal, which took more than four years from the date of filing the petition of appeal to the delivery of judgment.

In the case, the property developer obtained a syndicated loan of $113 million to finance a major condominium project. The developer was able to repay the loan from progress payments received from the sales of the condo units before it was due, but had to furnish a bank guarantee to the Urban Redevelopment Authority to withdraw the sum.

The identity of the property developer was not disclosed.

The issues before the court were whether expenses of $4.3 million incurred in connection with the syndicated loan and the bank guarantee were revenue expenses and deductible against the developer's taxable income.

Under the Income Tax Act, revenue expenses are generally deductible if they are wholly and exclusively incurred in the production of income, but capital expenses are generally not deductible.

The expenses incurred in connection with the syndicated loan included underwriting and agency fees, and expenses associated with the bank guarantee included bank commissions and agency fees.

The court, which looked at cases from various jurisdictions, held that whether an expense is capital or revenue in nature depends on the purpose of the taxpayer in obtaining the loan.

The court, which comprised judges Andrew Phang, Judith Prakash and VK Rajah, found that the loan was obtained for a revenue purpose because it was to develop the condominium project for sale.

Because of this, the borrowing and refinancing expenses in connection with the loan were also revenue in nature and deductible.

However, developers who develop projects not for sale but for lease will not enjoy tax deductions on borrowing and refinancing expenses connected to a loan, as this will be considered a capital investment.