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SINGAPORE – Three specialist doctors in private practice who avoided income tax by choosing to pay themselves very low salaries have lost their challenge in the High Court against a ruling by the Inland Revenue Authority of Singapore (IRAS).<\/p>\n
In a written judgment, Justice Alex Wong said their application was \u201cthe latest of several cases where medical professionals have run afoul of the tax authorities in how they have conducted the business of their medical practices\u201d.<\/p>\n
Obstetricians and gynaecologists Adrian Tan Chek Jin, Caroline Khi Yu May and Jocelyn Wong Sook Miin were colleagues at KK Women\u2019s and Children\u2019s Hospital before they ventured into private practice. The doctors, who set up a series of jointly and individually owned companies through two rounds of corporate restructuring, had given themselves very high tax-exempt dividends and interest-free loans.<\/p>\n
Following a tax audit, IRAS revised the assessment for the years of assessment 2013 to 2018 such that income from the business could be taxed in the doctors\u2019 individual names. IRAS also adjusted the corporate tax for some of the companies as a claw-back of the tax exemptions and rebates they had received.<\/p>\n
The three doctors sought a review of the decision from the Income Tax Board of Review, but were unsuccessful. They then applied to the court to set aside the board\u2019s decision. On June 18, the trio\u2019s bid to challenge the tax ruling was dismissed by the High Court.<\/p>\n
Tan, the most senior of the three doctors, drew a monthly salary of $5,000 from the company they jointly set up, though he was paid $45,600 a month before moving to private practice.<\/p>\n
The judge said Tan\u2019s evidence that he was new to private practice \u201cpartially\u201d explains why his salary was set at a modest level. But Tan could not explain why his salary remained at that level as the practice became more profitable or why those profits were instead extracted as dividends and loans, the judge said.<\/p>\n
During the years of assessment from 2013 to 2018, Tan was paid dividends of $5.14 million from one firm and $2.35 million from another. He obtained up to about $830,000 in loans from one firm and up to $2.1 million from another.<\/p>\n
The judge said: \u201cIn the absence of a reasonable explanation from Dr Tan, the payment of substantial tax-exempt dividends and shareholder loans points to the avoidance or reduction of tax as one of the main purposes for the arrangement.\u201d<\/p>\n
The case centred on whether IRAS was justified in invoking a provision in the Income Tax Act which empowers it to disregard any arrangement in order to counteract tax advantages obtained by taxpayers.<\/p>\n
The judge upheld the board\u2019s finding that the structure of the trio\u2019s business was an arrangement that fell within the provision. He rejected Tan\u2019s contention that tax considerations were not in play when the practice was set up. The other two doctors did not give evidence before the board.<\/p>\n
When the trio first went into private practice in 2004, they incorporated a company called ACJ Women\u2019s Clinic (ACJW).<\/p>\n
Each was a director and held one third of the shares. Each also signed employment contracts with ACJW for a monthly salary of $5,000, excluding annual bonus.<\/p>\n
As the business evolved, they set up separate medical companies.<\/p>\n
Tan and his wife set up AT OG Services in April 2005 as co-directors and equal shareholders; Khi set up CKYM Holdings in May 2007 as its sole director and shareholder; and Wong set up JW Medical Holdings in May 2007 as its sole director and shareholder.<\/p>\n
The practice was reorganised again in March 2014, when the trio established separate surgical companies for which each of them was the sole director and shareholder.<\/p>\n
Tan set up ACJ Tan Surgery; Khi set up CKHI Surgery; and Wong set up Joy Wong Surgery.<\/p>\n
These surgical companies would invoice patients and receive fees for inpatient services, while ACJW would invoice patients and receive fees for outpatient services.<\/p>\n
Each doctor signed employment contracts with their respective surgical companies for a monthly remuneration of $6,000, excluding annual bonus.<\/p>\n
They also received directors\u2019 fees and dividends from their respective surgical companies.<\/p>\n
The establishment of the individually owned companies allowed the trio to obtain tax rebates under the Start-Up Tax Exemption and the Partial Tax Exemption schemes.<\/p>\n
In 2016, the trio took steps to strike off the medical companies: AT OG Services, CKYM Holdings and JW Medical Holdings.<\/p>\n
IRAS objected to the striking-off application of one of the firms, and commenced the tax audits soon after.<\/p>\n
IRAS concluded, among other things, that tax advantages could be a main reason for the setting up of the medical and surgical companies.<\/p>\n
The tax authority then invoked the provision under the Act to disregard the arrangement consisting of ACJW, the medical companies and the surgical companies.<\/p>\n
This allowed IRAS to make adjustments so that the income of the companies can be taxed in the name of the doctors as individuals.<\/p>\n
In October 2019, IRAS issued additional and amended income tax assessments for the doctors for years of assessment 2013 to 2018.<\/p>\n
In December 2019, it raised additional assessments for year of assessment 2015 to claw back tax benefits derived from fragmenting the business into multiple companies.<\/p>\n<\/div>\n
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