1. Were the taxpayers employees despite not having contracts of service and not drawing any salary or remuneration?
   
   Yes, - "by operation of law" through section 2(a) of the Income Tax Act (1993 amendment) which states "employee – in relation to a company, includes a director of the company ". The Board agreed with the Comptroller that the 1993 amendment was intended to close a tax loophole - directors could choose not to enter into any contract of employment and give themselves perquisites rather than cash.
2. Were the interest-free loans given to the taxpayers “in respect of” gains or profits from an employment?
   
   Yes - the interest-free loans were perquisites of employment in that there was a personal advantage from the loans i.e. the interest saved
3. Were the interest-free loans “advances on capital” to shareholders?
   
   No – There were repayments to these loans. Advances on capital need not be repaid or returned but loans would have to be. Advances on capital will mean a reduction of the share capital and requires compliance with the Companies Act. (Company had undistributed capital reserves of between S$17 million to S$22 million). Note : taxpayers did not argue that these were distributions or dividends in which case section 44 may be an issue
4. Was the interest rate used by the Comptroller reasonable?
   
   Yes – the Comptroller had used the lowest prime lending rate which a bank would extend to its most credit worthy customers.

   Note : The Board of Review concluded “Without this (1993) amendment the appellants would not have been chargeable to tax on the interest benefit …. ”

NYK & Anor vs Comptroller of Income Tax

Taxpayers appealed the March 2001 Income Tax Board of Review’s decision to the High Court. The High Court reaffirmed the Board’s judgment in July 2001. Following the High Court judgment, IRAS launched an audit programme in Sept 2001.

IRAS has extended the deadline for voluntary disclosures to 30 Nov 2002. Taxpayers will pay the back taxes and a penalty of 5% p.a. on the back taxes. Under the Income Tax Act, the penalties are : (a) 100% for incorrect returns (b) 200% for negligent returns and (c) 300% for fraud; in addition to the back taxes.

Basis Of Taxation

Where interest-free or interest-subsidised loans are made to the directors of a company, the directors derive a benefit from such loans. The income tax law regards company directors as employees, and the benefits so derived from interest-free/subsidised loans are taxable as employment benefits.

IRAS accepts that interest free/subsidised loans made to directors in their capacity as shareholders are not perquisites of an employment.

There must be evidence to show that the loans are given solely in their capacity as shareholders for bona-fide reasons other than tax. This will be the primary factor IRAS will look for in determining the true nature of loans.