Section 2(2) of the Property Tax Act – Does Manufacturing Necessarily Imply Sale?

A. Introduction

Sect 2(2) of the Property Tax Act ("PTA") provides that the enhanced value given to premises by machinery used for any of the following purposes shall be disregarded in computing annual value:

(a)           the making of any article or part thereof;

(b)           the altering, repairing, ornamenting or finishing of any article; or

(c)           adapting for sale of any article.

In an important new decision, Skyventure VWT Singapore Pte. Ltd. v Chief Assessor [2021] SGCA 40 ("Skyventure"), the apex court in Singapore, the Court of Appeal ("CA"), had to decide whether a wind tunnel ("Wind Tunnel") used in the iFly indoor skydiving attraction was machinery falling within PTA Sect 2(2).

The following is a summary of the elements of the Wind Tunnel.

• The facility in question contains several vertical concrete columns bridged at the top and bottom.
• In the middle is a flight chamber where the simulated skydiving takes place.
• Air flows upwards through the flight chamber and at the top, there is a diffuser, used to slow the airflow, and 4 wind turbines.
• Air drawn into the wind turbines would then be redirected downwards through 2 side columns (called return air towers).
• Within the bottom bridge are water-cooled turning vents, which remove heat from the air-flow and move the air upwards into an 'inlet contractor'.
• The inlet contractor increases the pressure and velocity of the airflow to one that is suitable for simulated skydiving within the flight chamber.

 The CA held that PTA Sect 2(2) did not apply to the Wind Tunnel.

This Note considers the CA's decision in Skyventure and its reasoning.

B. Decisions of the Chief Assessor, the Valuation Review Board, the High Court and the Court of Appeal

Chief Assessor

The Chief Assessor was of the view that the Wind Tunnel was not machinery, and was also not used for industrial purposes, and hence did not fall within PTA Sect 2(2).

Valuation Review Board

In the Valuation Review Board ("VRB"), all members of the tribunal found that the Wind Tunnel was machinery. This conclusion was further upheld by all the judges on appeal and is not further considered in this Note.

This Note also does not seek to address the issue that the air in the Wind Tunnel was an "article" – an interesting question but where the answer – "yes" – is by now not particularly controversial.

The majority in the VRB also held that the Wind Tunnel fell within PTA Sects 2(2)(b) and (c) as it altered and adapted the air within it “by increasing its velocity and pressure while reducing its temperature — such that the lifting effect of the cooled airflow could be sold.” The majority held that Sect 2(2) was not confined to industrial machinery on industrial premises.

The majority was convinced by the fact that there was an explicit definition of "industrial premises" in the PTA from 1960 to 2013, which was first introduced in the Property Tax Ordinance in 1960 to enable the Government to grant reduced rates to "industrial premises". In 2013, the PTA was redrafted to enable the Government to prescribe favourable tax treatment to any property or class of property. Thus, all references to “industrial premises” were removed.

The majority of the VRB thus reasoned that "... Within this context of a continual evolution of the local property tax regime in tandem with the development of the Singapore economy, it is reasonable for the operation of [Sect 2(2)] to be consistent with the reach of s 9 of the PTA especially when it was no longer government policy to favour “industrial premises” after 2013."

The majority also argued that its position "... is not in discord with the judicial opinions expressed in [e.g. Chief Assessor and another v First DCS Pte Ltd [2008] SGCA 15 ("First DCS")]. The view that s 2(2) of the PTA was most likely enacted “to encourage investments in plant and machinery in manufacturing, processing and other industrial purposes” is consistent with the promotion of industrialisation following internal self-government. However, such promotion of the industrial sector does not mean that plant and machinery investments for other economic sectors are to be denied tax relief under the proviso. That being said, the dominance of industrial activities in the early stages of Singapore’s economic development would have meant that machinery for industrial use were the most likely to benefit from s 2(2). In the absence of any explicit restriction to s 2(2) of the PTA or its antecedents, the focus should be on the function(s) of the machinery, and not the economic sector or land use zone in which the machinery is used."

The minority by contrast held that PTA Sect 2(2) only applied to machinery used for “manufacturing, processing and other industrial purposes”, relying on First DCS. The minority was also not persuaded that “other industrial purpose”’ could be read or understood to include any reference to either the service, leisure, sports or recreational industry.

High Court

The High Court judge (Choo Han Teck J.) held as follows:

(a)           the CA in First DCS had held that the legislative purpose was to promote investments in manufacturing machinery and the judge was "bound by its decision".

(b)           “industrial” must be distinguished from “leisure” purposes - there was no dispute that the Wind Tunnel was used for social events, and not for any industrial purpose.

(c)           he had reservations about the correctness of the CA's decision in First DCS because "... where ownership of the article does not pass to someone else, the situation seems more akin to a hire agreement than a sale".

(d)           an interpretation of PTA Sect 2(2)(c) to cover the sale of the effect of pressurized air would not further the legislative purpose of promoting manufacturing.

(e)           factually the Wind Tunnel altered the air, but "... it would be unreasonable to find that any alteration would suffice".

Court of Appeal

The CA, upholding the High Court, held that PTA Sect 2(2) did not apply, deciding as follows.

A key question in ascertaining the scope of PTA Sect 2(2) of the PTA was to determine the meaning of the word "article".

The Court would apply the purposive approach in interpreting statutory provisions in accordance with Section 9A of the Interpretation Act. The framework for this was the 3 step approach laid out in Tan Cheng Bock v Attorney-General [2017] 2 SLR 850, namely:

(i)            ascertain the possible interpretations of the provision, having regard not just to the text of the provision but also to the context of that provision within the written law as a whole;

(ii)           ascertain the legislative purpose or objective of the statutory provision in question; and

(iii)          compare the possible interpretations of the text against the purposes or objectives of the statute. The interpretation which furthers the purpose ascertained should be favoured.

The CA noted that a court may rely on extraneous material in determining the legislative object or purpose of a statutory provision. However, quoting Tan Cheng Bock, the CA noted that "... primacy should be accorded to the text of the provision ... the meaning and purpose of a provision should, as far as possible, be derived from the statute first ..."

The CA proceeded to reason as follows.

The word "article", at its broadest, may refer to commodities or substances in general, in either solid, liquid or gaseous form. The CA referred to the UK House of Lords case of Longhurst v Guildford, Godalming and District Water Board [1963] 1 AC 265 ("Longhurst") where the term article was given its "ordinary meaning" (per Lord Guest) and held to apply to water contained in filter beds. The CA also noted that reasoning of Lord Reid in Longhurst revealed that the broad meaning of the term “article” was applied to the Factories Act 1937 because it directly determined which classes of employees could benefit from the protection afforded by the statute from unsatisfactory working conditions.

This broad meaning (which the writer would argue in fact also accords with the ordinary meaning, as noted by Lord Guest in Longhurst) did not however necessarily apply in other statutory contexts.

Turning to the question of the legislative purpose of PTA Sect 2(2) in Singapore, the CA referred to its previous decision in First DCS, where the Court traced the history of the relevant provisions of the property tax legislation, noting that :

(a)           the language used in PTA Sects 2(2)(a) to 2(2)(c), including in particular, the use of the terms “making”, “altering etc” and “adapting for sale”, was “clearly adopted after the introduction of similar terminology” in earlier English legislation, namely, the Factory Acts Extension Act 1867 (c 103) (UK), which “used the terms to define a ‘[m]anufacturing [p]rocess’ … which is the essence of what the terms are trying to capture”

(b)           the Municipal Ordinance 1887 contained a proviso virtually identical to Section 2(2) of the [PTA], and this continued to be adopted in subsequent legislation. It departed from the position set out in Indian Acts Nos 25 and 27 of 1856, as modified by An Ordinance to amend the Indian Act No 25 of 1856, which was the genesis of the property tax legislation in Singapore. The CA in First DCS stated that "... While there is no direct evidence of the reasons for this change, it was most likely to encourage investments in machinery for manufacturing, processing and other industrial purposes ..."

The CA in Skyventure therefore concluded that: "... the language adopted in ss 2(2)(a) to 2(2)(c) of the [PTA] had been used to define a “manufacturing process” in 19th century English legislation for the protection of workers before being imported into local property tax legislation. This indicates that Parliament, in importing the aforesaid language, intended s 2(2) of the [PTA] to incentivise the use of machinery for “manufacturing processes”. Thus, ss 2(2)(a) to 2(2)(c) of the [PTA] should be interpreted in the context of a manufacturing process”."

Next, the Court considered the proper definition of "article" in PTA Sect 2(2).

The CA held that term “article” is used in Sects 2(2)(a), 2(2)(b) and 2(2)(c) of the PTA. It therefore presumed that the same definition applies across all three of those limbs.

The CA (correctly) said that it was clear that the “article” referred to in PTA Sect 2(2)(c) referred to a thing that is intended to be sold, since that provision refers to the “adapting for sale of any article”.

In so far as PTA Sect 2(2)(a) was concerned, the CA said "... it is difficult to discern any reason why Parliament would, in enacting that particular provision, intend to grant an exemption from property tax in respect of machinery used for the purposes of making matter which would not be sold, or in the processing of matter not intended to be sold ... It seems to us that that would imply, rather counterintuitively, that Parliament intended to deprive the State of property tax revenue in order to encourage such an economically unproductive and potentially wasteful activity. We do not think that to be likely, in the absence of evidence to the contrary."

The CA said that "... when considered in the light of the legislative purpose of s 2(2) of the Act, namely the incentivisation of machinery used for manufacturing processes, it is clear that the term “article” as used in s 2(2)(b) of the Act bears the same meaning as that in ss 2(2)(a) and 2(2)(c). It is, in our view, difficult to conceive of manufacturing processes in which the eventual sale of the manufactured article was not intended."

The Court also noted "... however, that the possible fact situations are myriad and Parliament may have intended to extend s 2(2) of the Act to fact scenarios which may not involve the eventual sale of the article. We have in mind, in particular, machinery that is used only in the context of “repairing” the article concerned. However, even in such a situation there is a sale of services to repair the article concerned and this may therefore fall within the letter and spirit of s 2(2)(b) of the [PTA]."

Therefore, the CA concluded " ... the definition of “article” in s 2(2) of the Act refers to matter which is intended to be sold or which is the subject-matter of a sale of services to make, alter, repair, ornament, finish or adapt for sale the same.".

Based on this interpretation, the CA found that the Wind Tunnel was not within PTA Sect 2(2).

Firstly, the CA noted that the taxpayer had (correctly, in the Court's view) accepted that PTA Sect 2(2)(a) was clearly not applicable in the present case as there was no “making of any article or part thereof”.

With respect to PTA Sect 2(2)(b), the CA said : "There is no doubt in our mind that the Wind Tunnel did alter airflow so as to induce its skydiving-friendly aerodynamic properties. However, ... such altered airflow was not an article which was intended to be sold per se. There was also no sale of an alteration service to the skydivers in respect of the airflow in the Wind Tunnel ...". Thus Sect 2(2)(b) did not apply.

With regard to PTA Sect 2(2)(c), the Court said "... while we are prepared to accept that the adapted airflow in this case did carry aerodynamic properties of a kind conducive to simulated skydiving – which in turn would not have existed but for the adaptation of airflow by the Wind Tunnel – we are not satisfied that there was any transfer of ... the skydiving-friendly aerodynamic properties of the air ... to the customers of the appellant."

Thus CA distinguished its earlier judgment in First DCS, where a district cooling facility was held to be machinery which adapted water for sale, even though there was no transfer of any property in the water itself but only its chilling effect.

The CA in Skyventure did however further note that "... the reasoning as well as decision of this court in [First DCS] probably stand at the very border of what would pass legal muster under s 2(2)(c) of the [PTA]."

C. Comments

The CA in Skyventure has confirmed that the legislative purpose of PTA Sect 2(2) is to incentivise the use of machinery for "manufacturing processes" and therefore the section ought to be interpreted in the context of a "manufacturing process".

Given that this point has now been affirmed by the CA twice (in Skyventure and First DCS), it must now be regarded as settled law in Singapore – although a secondary question could still remain as to whether there is any difference between encouraging the use of machinery for "manufacturing" and for " manufacturing, processing and other industrial purposes", as the CA judgments in both Skyventure and First DCS had used both terms in describing the legislative purpose.

Next, the manner adopted by the CA in Skyventure of distinguishing, and not extending, First DCS, also appears technically sound. To the writer, it seems clearly correct to say that the skydiving-friendly aerodynamic properties of the altered airflow were not transferred to the skydiver in the same way that the "coldness" of the coolant water was sold in First DCS. That being said, the CA's observation in Skyventure that First DCS lies at the "very border" of what passes "legal muster" suggests that it is now unlikely to be extended. Indeed, the High Court judge in Skyventure went further and expressed reservations about the CA's reasoning on this point in First DCS.

From the writer's perspective, the CA's decision in First DCS on the "sale" issue has, respectfully, long been open to doubts as a matter of language and logic and if the question had arisen de novo, the decision may have gone the other way given the observations made by the CA in Skyventure. That said, the CA in Skyventure opted not to say that First DCS was wrongly decided (meaning that it remains good law) but to label it instead as a decision on the "very border" of acceptability.

One feature of the CA's analysis in Skyventure which may appears puzzling at first glance was the Court's explanation that the legislative context of the English Factories Acts (i.e. to protect workers labouring in as broad a range of industrial plants) pointed towards the broad (ordinary) meaning of "articles" being appropriate, while in the PTA, the CA in both Skyventure and First DCS also noted that the words in PTA Sect 2(2) were “clearly adopted after the introduction of similar terminology” in the English factories legislation.

Thus, the question which arises is - if the English factories legislation pointed to a wide meaning of "articles", why shouldn't a similar wide meaning apply to the PTA given that the wording in the PTA seemed to have arisen after similar words were used in the English factories legislation?

The Singapore Courts have not supplied any answer to this conundrum, but the answer may possibly lie in the fact that the scope of the factories legislation in English is constrained by various other words not found in the PTA (e.g. words indicating that a factory is a place where "manual labour" was engaged) – so that what the Singapore Courts could take away from the English factories legislation was not the scope of the expression "article" but simply its general "context" (i.e. being a manufacturing / industrial context).

More controversially (in the writer's view), the CA in Skyventure held that it was "clear" that manufactured products were inherently made to be eventually sold, and that if this were not so, Parliament would be encouraging "... an economically unproductive and potentially wasteful activity ...".

However, with the greatest respect to the Court, this reasoning is certainly not clear, and indeed it could be said to be unpersuasive as a matter of fact and ordinary language.

In the writer's view, an enterprise can easily be conceived of as manufacturing "articles" for uses other than sale, and this is by no means uncommon, unproductive or wasteful. For instance, articles could be made to be rented out rather than sold, or for the use in the manufacturer's own operations as capital assets or spare parts.

To the writer's mind, such activities would clearly be manufacturing within the ordinary meaning of that term. To the writer, it does not seem at all to accord with the breadth of modern industry and commerce to say that the only manner of exploitation of the products made etc. is for them to be sold, let alone that this is clear.

Also, there is directly contrary English authority.

For example, in the context of de-rating, the House of Lords has recognised that an industrial hereditament could involve premises where items were manufactured for the maker's own use. In Potteries Electric Traction Company, Limited v Bailey [1931] 151, for example, a company operating a fleet of omnibuses used premises for the manufacture of spare parts for use in its own fleet, and for other manufacturing and repair processes distinct from ordinary maintenance. With exception for certain parts, e.g. such as a painting shop, the premises were held to be a factory.

In addition, the CA in Skyventure had to grapple with the difficulty that PTA Sect 2(2) clearly covered some situations where an industrial process was applied to articles never intended to be on-sold. Specifically, the CA noted that "... that the possible fact situations are myriad and Parliament may have intended to extend s 2(2) of the Act to fact scenarios which may not involve the eventual sale of the article. We have in mind, in particular, machinery that is used only in the context of “repairing” the article concerned.". However, the CA sought to work its way out of the difficulty created by its own (respectfully unjustified) emphasis for the need for a sale : "... However, even in such a situation there is a sale of services to repair the article concerned and this may therefore fall within the letter and spirit of s 2(2)(b) of the [PTA]." With the greatest of respect, this reasoning is not convincing and appears redolent of ex-post rationalisation.

Bearing in mind the exhortation of the CA in Skyventure that "... primacy should be accorded to the text of the provision and its statutory context ...", the writer is regrettably left with the impression that the CA in Skyventure did not entirely succeed to follow its own adage on this particular point.

D. Takeaways Summarised

While the argument which convinced the majority of the VRB in Skyventure is not without technical merit altogether, and the courts have indeed acknowledged that there is " no direct evidence" for the legislative purpose of PTA Sect 2(2), the principle that the machinery must be used in a "manufacturing, processing or other industrial" context has now been endorsed twice by the CA. It must now be regarded as well settled law in Singapore. Indeed, the majority of the VRB in Skyventure was always going to struggle to distinguish the previous CA decision in First DCS to begin with, despite a valiant effort.

It is, however, hoped that the CA will revisit, in a future appropriate case, its line of reasoning that in order for articles to fall within a "manufacturing, processing or industrial" context, the articles in question must be intended to be sold or be the subject-matter of a sale of services to make, alter, repair, ornament, finish or adapt for sale the same. The reasoning adopted on this point is, with the greatest respect, not at all convincing.

The CA's decision in First DCS has not been overruled and thus remains good law in Singapore. However, it has been described in Skyventure as being at the "very border" of acceptability. It may thus receive a cooler reception in future in cases not entirely on all fours with First DCS.

Finally, the taxpayer in Skyventure had filed a Summons seeking to adduce evidence of the Chief Assessor's practice in other cases which were alleged to be inconsistent with the scope of PTA Sect 2(2) being limited to the goods manufactured etc. for sale. The CA dismissed this Summons as irrelevant (rightly). Nonetheless, the fact that such potential inconsistencies may exist does indicate that taxpayers should not simply assume that the Chief Assessor will invariably follow his past decisions, but may instead re-examine his stance in light of what the CA has now held in Skyventure. As such, taxpayers may wish to familiarize themselves with the CA's reasoning in this important case.