Recently, the High Court in NPC Resources v Ketua Pengarah Hasil Dalam Negeri [2022] MSTC 30-515 upheld the decision of the Special Commissioners of Income Tax (SCIT) regarding the basis of which the disposal price of shares is determined when such assets are disposed by a real property company.
Brief Facts
In 2004, the taxpayer acquired 3,000,000 ordinary shares in a real property company amounting to RM 14,397,000. In 2016, the taxpayer disposed the 3,000,000 shares for RM 35,500,000 including existing bank liabilities amounting to RM 14,611,777.29.
The taxpayer subsequently declared the share disposal to the Inland Revenue Board (IRB). Having reviewed the documents submitted by the taxpayer, the IRB proceeded to issue a real property gains tax assessment (Assessment) amounting to RM 1,055,149.50 being 5% of the chargeable gain of RM 21,902,990, taking into consideration of the disposal price of RM 35,500,000.
However, the taxpayer objected to the Assessment raised on the ground that the RPGT should be imposed based on the net disposal price which is the disposal price less existing bank liabilities belonging to the real property company that was settled out of the balance of the consideration i.e. RM 20,888,222.71.
Being aggrieved, the taxpayer filed an appeal to the SCIT challenging the Assessment.
The Taxpayer’s Contentions
The taxpayer’s argument before the SCIT is summarised as follows:
(i)The bank liabilities should be excluded in the calculation of the disposal price since the taxpayer did not actually receive any funds for those liabilities.
(ii)Paragraph 5 of Schedule 2 of the Real Property Gains Tax Act (RPGTA) applied in the present case. Paragraph 5 of Schedule 2 of the RPGTA provides that the disposal price is calculated on the value of the consideration less any expenditure wholly and exclusively incurred on the asset for the purpose of enhancing or preserving the value. Therefore, the taxpayer is eligible to deduct the existing bank liabilities from the disposal price.
(iii)The facts of the appeal is similar to the case of Datuk Lai Kon Fah v Ketua Pengarah Hasil Dalam Negeri, where the taxpayer agreed to sell shares for the consideration of RM 6,022,100. Similar to the present case, the taxpayer had an agreement that the sum equivalent to the net liabilities would be deducted from the consideration. The SCIT decided that the deduction of liabilities ought not to be taken into account. However, the High Court reversed the SCIT’s decision and the Court of Appeal upheld the High Court’s decision.
IRB Contentions
The IRB was of the view that the that RPGT should be raised on RM 35,500,000 being the entirety of the consideration for the disposal as provided by paragraph 34A of Schedule 2 of the RPGTA. The IRB had raised the Assessment on the basis of the disposal price of RM 35,500,000 less the acquisition price of RM 14,397,000 and expenses being the stamp duty at RM10. Therefore, the chargeable gain amounted to RM 21,102,990 and the tax of 5% was charged on the chargeable gain.
SCIT’s Decision
The SCIT unanimously dismissed the appeal by the taxpayer on the basis that the IRB had correctly raised the Assessment under paragraph 34A of Schedule 2 of the RPGTA. The shares disposed by the taxpayer were subjected to Paragraph 34A and the bank liabilities amounting to RM 14,611,777.29 cannot be deducted from the disposal price.
High Court’s Decision
The High Court held that paragraph 5 of Schedule 2 of the RPGTA did not apply to shares disposed by a real property company. It is clear that Paragraph 34A of the RPGTA provided the definition of ‘disposal price’ in real property companies. According to paragraph 34A of the RPGTA, the disposal price of the chargeable asset is the amount or value of the consideration in money or money’s worth for the disposal of the chargeable asset.
The High Court cited paragraph 34A. Therefore, the taxpayer’s appeal against the SCIT’s decision was allowed.
Further in, PF Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2009) MSTC 3840, the SCIT considered whether expenses could be deducted from the consideration price of an asset of a real property company. In PF Sdn Bhd (supra), the SCIT concluded that paragraph 34A clearly provides that the Appellant is not entitled to any deductions on the consideration price.
Moreover, the High Court stated that the disposal price for assets belonging to real property companies under the RPGTA is only concerned with the price that the purchaser is willing to pay and the price that the seller is willing to accept. Thus, paragraph 34A is very clear and does not admit any ambiguity in its application. The manner in which the actual consideration price is to be paid is immaterial for the determination of disposal price.
The High Court also looked at the case of Datuk Lai Kon Fah but given that there were no grounds for judgement provided by the Court of Appeal, the High Court held that it was not a binding precedent.
It is the High Court’s view that the existing bank liabilities form part of the consideration in the disposal of shares by the taxpayer. This is due to the existence of a termination clause that provides that the failure to settle the bank liabilities will terminate the sale of the shares. Further, the taxpayer has also agreed that if the bank liabilities were not paid, the sale of shares will not be completed. Thus, the bank liabilities were part and parcel of the sale price forming the consideration. Therefore, RPGT must be assessed on the whole sum of RM 35,000,000.
Conclusion
In the disposal of assets belonging to real property companies, it is clear that expenses could not be deducted from the disposal price of an asset belonging to real property companies under RPGTA. The High Court has adopted the view that paragraph 34A of Schedule 2 of the RPGTA has provided for the acquisition and disposal of shares in real property companies. Therefore, paragraph 5 of Schedule 2 of the RPGTA cannot apply to the calculation of disposal price of assets belonging to real property companies.
In accordance with the RPGTA, the computation of the disposal price of assets belonging to real property companies is based on the consideration stated in the agreement. In the event where liabilities form part of the consideration of the disposal price, the High Court is of the view that such liabilities cannot be deducted from the disposal price as the they are part and parcel of the consideration. This decision requires real property companies to be prudent in determining the disposal price of assets.
This case is currently on appeal before the Court of Appeal.
2 June 2023
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