Tax issues in Land Structuring and Planning in Malaysia...
Transcript of Tax issues in Land Structuring and Planning in Malaysia...
© 2018 Crowe Malaysia
Debunking GAF
GST Conference 2018
8th May 2018
Chris Yee
Director, Tax
Debunking GAF GST Conference 2018
8th May 2018
Sales and Service Tax
GST Conference 2018
8th May 2018
23rd May 2018 Fennie Lim
Executive Director, Tax
Tax issues in Land Structuring
and Planning in Malaysia
26 July 2018
Smart decisions. Lasting value.
© 2018 Crowe Malaysia 2 2
Agenda
2 Tax implications for land owners
3 Tax implications for development and joint
venture partners
4 Issues and case studies
1 Updates on critical land matters, land issues and
structuring of Joint Venture Agreements
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1. Updates on critical land matters,
land issues and structuring of
Joint Venture Agreements
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Structuring Joint Venture Agreement (“JVA”)
Landowner
Forms of Joint
Venture?
Consideration in cash? In kind? Or
both?
Fixed or variable
consideration?
Payment terms?
Timing of receipts?
Termination clause?
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Taxpayer acquired
additional 10 units
of properties to
make up the whole
tower. Taxpayer let
out the office for
rental income.
2015 Year 2009 Year 2004 Year 2003
IH v KETUA PENGARAH HASIL DALAM NEGERI
Taxpayer
acquired a
piece of land
Building
completed
Taxpayer entered into a JVA to
construct an office and residential
property (“Subject property”) and
receives entitlement in-kind (i.e.
office) in return
Taxpayer elected to be
taxed under RPGT but
was RPGT exemption
period
IRB conducted an
investigation and
viewed the entitlement
in-kind should be
subjected to Income
Tax at the time of VP
Year 2009
to 2016
Facts
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IH v KETUA PENGARAH HASIL DALAM NEGERI
Taxpayer’s
Justification
• Subject to RPGT not Income
Tax
• Reason:
Taxpayer is a property
investment company
Never sold any of its
entitlement units from the
development
• Timing of tax – Not applicable
and time barred
IRB’s
Justification
• Subject to Income Tax not
RPGT
• Timing of tax – In the
relevant year of assessment
when the entitlement units
were delivered by the JV
partner to the Taxpayer.
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2. Tax implications for
landowners
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Real Property Gains Tax vs Income Tax
Intention?
Real Property
Gains Tax
(RPGT)
Real Property
Gains Tax
(RPGT)
Investment property Stock in trade
Real Property
Gains Tax
(RPGT) Income Tax
Land owner
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Disposal period
RPGT rates
Companies Individual
(Citizen / PR)
Individual
(Non-Citizen)
For disposal within 3 years 30% 30% 30%
For disposal in the 4th year 20% 20% 30%
For disposal in the 5th year 15% 15% 30%
For disposal in the 6th and
subsequent years 5% 0% 5%
Real Property Gains Tax vs Income Tax
RPGT rates
Corporate tax rates
Person Corporate tax rate
Companies 24%
Individual (resident) Depending on the tax bracket of the
resident individual – up to 28%
Individual (non-resident) 28%
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Real Property Gains Tax vs Income Tax
The length of the period of ownership
The way in which a sale is secured
The way in which the asset is acquired
The method of financing
Profit-seeking motive
The subject matter of realisation
Modification of the asset
The frequency of transaction
Badges
of trade
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Income Tax Act, 1967
Section 24(1) of Income Tax Act, 1967 (“ITA”) reads as follows:
"Where in the relevant period a debt owing to the relevant person arises in
respect of –
(a) any stock in trade sold in or before the relevant period in the course of
carrying on a business;
(aa) any stock in trade parted with by any element of compulsion including on
requisition or compulsory acquisition or in a similar manner, in or before the
relevant period;
(b) any services rendered or to be rendered at any time in the course of carrying
on a business; or
(c) the use or enjoyment of any property dealt or to be dealt with at any time
in the course of carrying on a business,
the amount of the debt shall be treated as gross income of the relevant person
from the business for the relevant period."
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Section 24(2) of ITA reads as follows:
“Where in the relevant period any stock in trade of a business of the relevant
person is –
(a) withdrawn for his own use; or
(b) withdrawn (otherwise than on requisition or compulsory acquisition or in a
similar manner) without any consideration being received therefor or for a
consideration consisting of –
(i) any property not being either a debt owing to the relevant person or a sum
in cash or the equivalent of cash;
(ii) any such property together with a debt owing to the relevant person or
any such sum; or
(iii) any such property together with a debt owing to the relevant person and
any such sum,
then, subject to subsection (3), an amount equal to the market value of that stock
in trade at the time of its withdrawal shall be treated as gross income of the
relevant person from the business for the relevant period.”
Income Tax Act, 1967 (“ITA”)
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Section 24(3) of ITA reads as follows:
“Where in a case to which subsection (2) applies the consideration for the
withdrawal of any stock in trade is consideration of the kind described in
paragraph (b) (ii) or (iii) of that subsection, then, for the purposes of that
subsection –
(a) the amount of the market value of that stock in trade shall be reduced by the
amount of the debt or sum or the amount of the debt and sum, as the
case may be, referred to in whichever of those subparagraphs applies to the
case;
(b) subsection (1) shall apply to the debt as if it were a debt arising on the sale
of that stock in trade; and
(c) section 28 shall apply to any such sum.
Income Tax Act, 1967 (“ITA”)
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Section 28 of ITA reads as follows:
“Subject to this Act, where in the relevant period there is received by the relevant
person from a source any gross income to which sections 24 to 27 do not
apply, the amount of that income (or, where the income consists of something
having a market value, the amount of its market value at the time of its receipt)
shall be treated as gross income of the relevant person from that source for the
relevant period.”
Income Tax Act, 1967 (“ITA”)
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Contractual terms of JVA
Stock in trade
Cash An amount of debt, i.e. liquidated sum or value of the cash
shall be treated as gross income of the relevant person
from the business for the relevant period
Scenario
1
Joint venture
Property
developer Landowner
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Joint venture
Completed units An amount equal to the market value of that land at the time
of its withdrawal, i.e. date of JVA shall be treated as gross
income of the relevant person from the business for the
relevant period
Landowner Property
developer
Contractual terms of JVA
Scenario
2
Stock in trade
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Landowner
Cash + Completed units
An amount equal to the market value of that stock in
trade at the time of its withdrawal, i.e. date of JVA less the
amount of debt, i.e. cash shall be treated as gross income
of the relevant person from the business for the relevant
period
Joint venture
Property
developer
Stock in trade
Scenario
3
Contractual terms of JVA
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Active Landowner vs Passive Landowner
Active Landowner
Business of property
development
Passive Landowner
Not in business of
property development
Landowner
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Deemed disposal?
What is the RPGT implication when
entering into JVA?
Real Property Gains Tax Act, 1976
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Real Property Gains Tax Act, 1976
Example 1:
Ali has acquired a piece of land at the price of RM1,000,000 on 20.06.2011. He has
entered into a joint venture agreement with a developer (Company A) on 2.8.2015.
According to the agreement, Ali will receive 8 units of terrace houses and 2 units
of side terrace houses as a consideration for the transfer of right to the Company
A in developing the land.
Company A had fixed the price of terrace house at RM300,000 per unit and side
terrace house at RM450,000 per unit. The market value of the land on 2.8.2015
was RM3,000,000.
Joint venture
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Real Property Gains Tax Act, 1976
The computation for the landowner would be as follows:
RM
Market value of the land on 2.8.2015 3,000,000
Acquisition price on 20.6.2011 (1,000,000)
Chargeable gain 2,000,000
Less: Exemption under Para 2, Schedule 4 (200,000)
Net chargeable gain 1,800,000
RPGT payable (1,800,000 x 15%) 270,000
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Real Property Gains Tax Act, 1976
As per Example 1 earlier, after receiving the 2 units of terrace houses in 2017, Ali
disposes one unit of terrace house at the price of RM350,000 in 2017. The RPGT
payable would be computed as follows:
RM
Market value in 2017 (1 unit of terrace house) 350,000
Acquisition price on 2.8.2015 (Note below) (272,727)
Chargeable gain 77,273
Less: Exemption under Para 2, Schedule 4 (10,000)
Net chargeable gain 67,273
RPGT payable (67,273 x 30%) 20,182
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Real Property Gains Tax Act, 1976
Acquisition price would be computed as follows:
Acquisition price =
Value of the unit disposed
(determined by
Property developer) x
Market value of
vacant land on
02.08.2015 Total market value for the
units received
= 300,000
x 3,000,000
300,000(8) + 450,000(2)
= 272,727
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- Acquisition price of the houses disposed of by taxpayer -
YONG MF
v KETUA PENGARAH HASIL DALAM
NEGERI (2003) MSTC 3503
(Special Commissioners of Income Tax)
4.2.
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Year 1995 & 1996 Year 1994 30.11.1993 7.11.1990
YONG MF v
KETUA PENGARAH HASIL DALAM NEGERI
Taxpayer
acquired a
piece of land
Taxpayer enter into a JVA to
develop the land into a
residential housing estate in
return for 6 units of houses
Approval for the
subdivision of the land into
30 lots together with the
building plan was obtained
Taxpayer
disposed of the
6 units of houses
The IRB raised RPGT assessments for the relevant years in respect of these disposals.
Based on the valuation done by the Jabatan Penilaian dan Perkhidmatan Harta Negeri
Pahang, Kuantan on 2 March 1999, the market value of the land as at 30 December 1993 was
taken as RM343,000.
Facts
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YONG MF v
KETUA PENGARAH HASIL DALAM NEGERI
What is the acquisition price of the houses disposed of by the
Taxpayer in 1995 and 1996?
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YONG MF v
KETUA PENGARAH HASIL DALAM NEGERI
The exchange of the land for the houses vide the joint venture
agreement was a disposal of the said land and simultaneously, an
acquisition of the houses.
Pursuant to Paragraph 13, Schedule 2 of the RPGT Act, the date
of disposal of the said land was deemed to take place on the date
of execution of the agreement i.e, 30 December 1993.
Correspondingly, the acquisition date of the houses should be 30
December 1993.
Since there were no houses erected yet at the time the taxpayer
disposed of his land to the developer in exchange for 6 houses, the
acquisition price of the houses should be the market value of the
said land, i.e. RM343,000.
The DGIR had adopted a mathematical formula to apportion the
acquisition price of the houses. This appeared reasonable and the
taxpayer had failed to adduce any evidence to prove otherwise.
Appeal
dismissed
SCIT
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YMF
v KETUA PENGARAH HASIL DALAM
NEGERI (2001) MSTC 3257
(Special Commissioners of Income Tax)
4.4.
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YMF v
KETUA PENGARAH HASIL DALAM NEGERI
The taxpayer was a marketing executive with Esso (M) Bhd till he ceased employment in 1985.
He inherited land from the estate of his late father (“the land”).
The taxpayer went into a land sale agreement with a developer, S Sdn Bhd wherein the land
was transferred to S Sdn Bhd in return for 20% of the total developed units to be built on the
land.
However, S Sdn Bhd failed to develop and construct the units.
The taxpayer rescinded the agreement with S Sdn Bhd and the land was transferred to another
developer, LO, in return for which the taxpayer was entitled to receive 18% of the total units to
be sold. The taxpayer attended the meetings of LO, to protect his interest and to use his
marketing experience to ensure proper construction and sale of the units.
LO developed the land and on 8 August 1991 allocated property valued at RM22,184,992 to
the taxpayer. On 12 September 1994, the developers made available the keys to the
taxpayer's units. The taxpayer sold about half of the 91 units received, and kept the balance for
investment purposes.
Facts
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YMF v
KETUA PENGARAH HASIL DALAM NEGERI
The Director General of Inland Revenue (“DGIR”) contended that the profits from the
disposal of the units were profits from the taxpayer's trading activities and chargeable to
tax under Section 4(a) of the ITA. The DGIR also argued that the profits should be taxed
for the YA 1992 as the income accrued on 8 August 1991.
IRB argued
Taxpayer responded
The taxpayer argued that the sale proceeds were not taxable pursuant to Section 4(a)
as it was capital enhancement and not an adventure or concern in the nature of trade.
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YMF v
KETUA PENGARAH HASIL DALAM NEGERI
In order to decide whether proceeds from the sale of the land
amounted to profit is liable to tax, it was necessary to determine
whether the income was profits of a trade or merely accretions
to capital.
Appeal
allowed
SCIT
There was no evidence to suggest that the joint venture
agreement between the taxpayer and the developers was a
transaction which involved the carrying on of a trade or was an
adventure in the nature of a trade. The terms of the agreement
indicated that the agreement did not constitute a joint venture
business within the meaning of the Income Tax Act.
The fact that the nature of the asset lent itself to commercial
transactions did not, without more, make it a trading activity. The
land here was inherited and therefore required much more to be
classified as trading stock.
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YMF v
KETUA PENGARAH HASIL DALAM NEGERI
The land was acquired by inheritance and not purchased for
resale at a profit. The taxpayer's father held the land since 1954
– more than 40 years at the time of disposal. The taxpayer did
not have any organisation and did not enter into any
transactions in land, nor alter the land, nor carry out any activity
to render the land more saleable and no special exertion was
made to find or attract purchasers. The mere fact that an
agreement was entered into or that the land was disposed of for
a relatively high price did not make the transaction a trade or
adventure in the nature of trade.
Appeal
allowed
SCIT
As the gains from disposal were not subject to tax, the relevant
Year of Assessment was not an issue.
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Tax avoidance vs Tax evasion
Tax avoidance (legal) E.g. minimising of taxes through legitimate
tax deductions
Tax evasion (illegal) E.g. Not paying taxes by not reporting income /
understating income / claiming extra deduction
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IRB’s view on “aggressive tax planning”
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3. Tax implications for
development and Joint
Venture partners
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Tax implications for development and JV Partners
Property
developer
Develop for
investment
Develop for sale
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Develop for sale
Section 24(1) of the ITA
Public Ruling No. 1/2009
(Percentage of Completion)
Timing of taxing for developer
Completed units
“stock in trade”
Property
developers Purchasers
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Marketing costs?
Interest expense?
Do you claim immediately or
progressively?
Common issue for developer
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4. Issues and Case studies
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IH v KETUA PENGARAH HASIL
DALAM NEGERI
4.1.
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Taxpayer acquired
additional 10 units
of properties to
make up the whole
tower. Taxpayer let
out the office for
rental income.
2015 Year 2009 Year 2004 Year 2003
IH v KETUA PENGARAH HASIL DALAM NEGERI
Taxpayer
acquired a
piece of land
Building
completed
Taxpayer entered into a JVA to
construct an office and residential
property (“Subject property”) and
receives entitlement in-kind (i.e.
office) in return
Taxpayer elected to be
taxed under RPGT but
was RPGT exemption
period
IRB conducted an
investigation and
viewed the entitlement
in-kind should be
subjected to Income
Tax at the time of VP
Year 2009
to 2016
Facts
© 2018 Crowe Malaysia 42 42
IH v KETUA PENGARAH HASIL DALAM NEGERI
Whether the assessments are null and void – Inland Revenue
Board (“IRB”) did not indicate which particular provision of the
Income Tax Act, 1967 (“ITA”) the taxpayer is liable to be taxed
under
Whether the assessments are time barred – IRB had not alleged
that any of the exceptions to the time bar applies
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The taxpayer is a property investment company and has
not disposed of any of the Subject property since
completion. As such, the Taxpayer had taken a view that it
is a capital transaction and hence it is liable to Real
Property Gains Tax (“RPGT”).
On-going
tax case
IH v KETUA PENGARAH HASIL DALAM NEGERI
Taxpayer’s contention
The IRB had taken the view that there was a deemed
disposal of the property held by the Taxpayer which was
subject to income tax.
IRB’s contention
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- Gain on disposal of property reassessed by the IRB: from
RPGT to income tax -
TERUNTUM THEATRE SDN BHD
v KETUA PENGARAH HASIL DALAM
NEGERI (2006) MSTC 4250
(Court of Appeal, Putrajaya)
4.2.
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TERUNTUM THEATRE SDN BHD v
KETUA PENGARAH HASIL DALAM NEGERI
10.03.1973 02.05.1978 21.03.1979 4.12.1980 &
29.02.1981
Executors of an
estate agreed to sell
the land in undivided
shares to nominees
of taxpayer
SPA date
Submit application to:
(1) convert land use
from “residential”
to “limited
commercial”
(2) for planning
approval
(1) Conversion of
land – approved
(2) Plan for the
building of a
cinema – rejected
Taxpayer sold 2 lots of land.
Area of land after sales: 11% of
subject properties.
Broker’s commission & traveling
expenses were incurred in
connection with the sales.
SPA date
Facts
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TERUNTUM THEATRE SDN BHD v
KETUA PENGARAH HASIL DALAM NEGERI
Material clauses on SPA dated 10.03.1973:
a) Clause 2: If the area occupied by the cinema hall exceeded 30,000 square feet, the
purchase price of the subject properties shall be reduced, and to an amount agreed by
the parties and stated so in the agreement
b) Clause 7: the taxpayer covenanted that they would use their best endeavours to cause the
appropriate authority to convert the zoning affecting the subject properties so as to permit
the erection of a cinema hall thereon. The proviso to clause 7 then provided that if the
approval for the erection of a cinema was not given, then clause 7 would be rendered
null and void, and the purchase price of the property revised.
The taxpayer was assessed to RPGT under the RPGT Act 1976 (“RPGTA”), on the gains made
arising from the disposal of the property in issue and a Certificate of Clearance was issued
after the sum assessed was paid.
However, the IRB changed its mind and subjected the gains to income tax under Sec 4(a) of
the Income Tax Act 1976 (“ITA”), and informed the taxpayer that the RPGT paid would be
transferred to the taxpayer’s income tax account.
Facts
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TERUNTUM THEATRE SDN BHD v
KETUA PENGARAH HASIL DALAM NEGERI
1) After having assessed the taxpayer for RPGT under the RPGTA, and upon
payment of the sum assessed and a Certificate of Clearance issued, whether the
IRB could vacate the assessment and re-assess the taxpayer for income tax on
the same receipt as a trading gain under the ITA; and
2) Whether on the merits, the Special Commissioners were correct in concluding
that the sale of the lands amounted to a trading in land constituting an adventure
in the nature of trade and not a realisation of capital asset.
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TERUNTUM THEATRE SDN BHD v
KETUA PENGARAH HASIL DALAM NEGERI
No person can raise an estoppel against himself so as to defeat
a positive duty imposed upon him by a statute. The duty of both
parties, the Director-General (“DG”) and the taxpayer, was to
obey the law. There was therefore no rule of law precluding the
DG from discharging the assessment under the RPGTA and
proceeding with an assessment under the ITA.
Appeal
dismissed
Court of
Appeal
Upon rejection by the authorities of a plan to build a cinema,
there was no evidence being led to show why the taxpayer could
not proceed with the development of the subject properties, as
the subject properties had already been approved by the
authorities for limited commercial use. Thus, it could not be said
that the subject properties were of no use to the taxpayer.
The taxpayer could not be said to “intend” to build the cinema as
this was subject to the approval of the authorities and was
something which was wholly beyond the taxpayer’s control.
The Special Commissioners (“SC”) had carefully considered the
evidence, that the factors taken into consideration were relevant
and they had applied the correct principles.
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What is our conclusion?
Be Conservative and …
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Any questions?
© 2018 Crowe Malaysia 51 51
Thank you Fennie Lim
Executive Director, Tax
Mobile +6016 202 6333
© 2018 Crowe Malaysia 52 52
Disclaimer
This presentation (including oral statements and other hand outs) should be used as a general guide
only. No reader should act solely upon any information contained in this presentation.
Nothing mentioned in these slides are binding on any tax authority. We recommend that professional
advice be sought before taking any action on specific issues and making any significant business
decisions.
While every effort has been made to ensure the accuracy of the information contained herein, the
presenter and/or Crowe Malaysia shall not be responsible whatsoever for any errors, inaccuracies or
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