tax issues in land structuring and planning in malaysia...

© 2018 Crowe Malaysia

Debunking GAF

GST Conference 2018

8th May 2018

Chris Yee

Director, Tax

[email protected]

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

[email protected]

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


1. Updates on critical land matters,

land issues and structuring of

Joint Venture Agreements


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



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.


2. Tax implications for

landowners


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



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%


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%



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


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."


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”)


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.



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.”



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


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


Scenario

2

Stock in trade


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



Active Landowner vs Passive Landowner

Active Landowner

Business of property

development

Passive Landowner

Not in business of

property development

Landowner



Deemed disposal?

What is the RPGT implication when

entering into JVA?

Real Property Gains Tax Act, 1976

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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



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



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



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


- 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.


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


YONG MF v


What is the acquisition price of the houses disposed of by the

Taxpayer in 1995 and 1996?


YONG MF v


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


YMF



(Special Commissioners of Income Tax)

4.4.


YMF v


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


YMF v


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.


YMF v


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.


YMF v


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.


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


IRB’s view on “aggressive tax planning”


3. Tax implications for

development and Joint

Venture partners


Tax implications for development and JV Partners

Property

developer

Develop for

investment

Develop for sale


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


Marketing costs?

Interest expense?

Do you claim immediately or

progressively?

Common issue for developer

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4. Issues and Case studies


IH v KETUA PENGARAH HASIL

DALAM NEGERI

4.1.


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


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



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


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


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


- Gain on disposal of property reassessed by the IRB: from

RPGT to income tax -

TERUNTUM THEATRE SDN BHD



(Court of Appeal, Putrajaya)

4.2.


TERUNTUM THEATRE SDN BHD v


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




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




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.




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.


What is our conclusion?

Be Conservative and …


Any questions?


Thank you Fennie Lim

Executive Director, Tax

Mobile +6016 202 6333

[email protected]

https://www.crowe.my/


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

omissions in it.

Crowe Malaysia refers to the network of member firms of Crowe Global, each of which is a separate

and legal independent entity.

https://www.crowe.my/

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