The Court of Final Appeal on Friday reserved judgment on a landmark case which will decide whether profits acquired through real estate by non-profit organizations are taxable or not.

A source close to the case told China Daily the judgment would have a precedential effect on those who owned lands or properties in the New Territories when they sold them after enhancement.

The case stems from an Anglican group's decision in 1993 to redevelop land it owned into a luxury residential zone with a developer - gaining hundreds of millions of dollars from the deal.

At the center of the litigation is a plot of land in Tai Po - the original location of an orphanage run by the charitable arm of Hong Kong Sheng Kung Hui (SKH). The charitable group applied to relocate the orphanage and redevelop the plot in 1989, and got approval in 1990. It then entered into an agreement with real estate developers Cheung Kong in 1993 and the parcel of land was developed into luxury residential project Deerhill Bay.

SKH gained at least HK$1.1 billion after the luxury houses were sold. But as a non-profit organization, it refused to pay HK$150 million in taxes demanded by the Inland Revenue Department.

The department's counsel Eugene Fung Ting-sek submitted to the five-member panel of judges that the church, by redeveloping and selling property, had changed the nature of the property from a capital asset to a trading asset. Therefore, it was taxable by law. Also, by entering into a joint venture with a developer, it had embarked on business.

Although the land was first acquired as a capital asset, the charitable group had changed its intention to one of using it for the purpose of trading in 1989 or 1990, Fung argued.

The judge questioned the submission. He said there was no clear-cut evidence to support the change of intention at the time. This was because the group had not gone beyond what a non-trader would do to realize its capital asset.

Senior counsel Denis Chang Khen-lee, for the religious group, contended that the act of selling and redeveloping was merely a realization of the capital asset. This would not change the nature of the property, he said.

stushadow@chinadailyhk.com