On March 3, 2025, the Inland Revenue Authority of Singapore (IRAS) issued an advance ruling summary clarifying the corporate income tax treatment of unit redemptions by a licensed fund management company from an open-ended fund it manages. The core question addressed was whether these redemptions would be considered non-taxable capital gains.

The ruling, accessible via the provided IRAS link, centers on Article 10(1) of the Singapore Income Tax Act (ITA), the legislative basis for taxing “gains or profits from any trade, business, profession or vocation.” As the ITA doesn’t explicitly define “trade” or “business,” IRAS and Singaporean courts rely on common law principles, known as the “badges of trade,” to distinguish taxable business income from non-taxable capital gains.

Key “Badges of Trade” Considered in Singapore:

No single factor is conclusive, but the following are typically assessed:

• Nature of the Subject Matter: Is the asset typically traded (e.g., commodities) or held for investment (e.g., artwork)?
• Length of Ownership (Holding Period): Shorter holding periods often suggest trading intent; longer periods imply investment.
• Frequency of Transactions: Frequent or systematic transactions indicate trading, whereas isolated ones suggest otherwise.
• Supplementary Work/Enhancement: Significant work to enhance an asset’s value points towards trading.
• Circumstances of Realisation: Was the sale forced, or part of a planned profit-making scheme?
• Motive/Intention: Crucially, was the asset acquired with the intent to sell for quick profit or to hold for long-term investment? This is assessed objectively.
• Mode of Financing: Short-term financing for non-income-generating assets might suggest a trading motive.
• Existence of Similar Trading Transactions or Interests: Prior engagement in similar trading activities supports a trading classification.

Analysis of the Ruling:

While the general expectation is that disposals of investments by a fund management company would be classified as taxable income (given a professional money manager’s inherent profit-making intent), this ruling classified the unit redemptions as non-taxable capital gains.

The decisive factor was the motive/intention (badge #6). The specific circumstances that led to this conclusion were:

• The units in question were exclusively for the management company, its affiliates, employees, and related parties.
• No management or performance fees were charged for this class of units, despite sharing features with other units.
• The fund had never distributed any income.
• All units acquired by the management company were held for a substantial period and redeemed simultaneously.
• The unit acquisition was not financed by debt.

Additional Comments:

This IRAS ruling is a positive development, contributing to greater consistency in the tax treatment of professional investments in Singapore. Further rulings relevant to the Singapore asset management industry would be beneficial.

However, some aspects remain unclear:

• The precise duration of the units’ holding period by the management company (estimated at around six years) is not fully detailed.
• Information on the fund’s legal structure (e.g., trust, partnership) would be valuable.
• There is some ambiguity regarding the fund’s structure, which appears to exhibit characteristics of both an umbrella fund (with sub-funds) and a master/feeder structure.