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KP v Ketua Pengarah Hasil Dalam Negeri: Gains From Disposal Of Land Are Not Subject To Income Tax






Recently in KP v Ketua Pengarah Hasil Dalam Negeri, the Special Commissioners of Income Tax allowed the taxpayer’s appeal to set aside the income tax assessment raised by the Director General of Inland Revenue (DGIR). This alert highlights the key points of this appeal.


The taxpayer was successfully represented by the firm’s Tax, SST & Customs Partner, S. Saravana Kumar and Associate, Dharshini Sharma.


Background


The taxpayer was an investment holding company incorporated in Malaysia. The taxpayer acquired a piece of land that was subdivided into 12 parcels by the previous owner prior to the signing of the Sales and Purchase Agreement. The land was acquired as a capital investment and retained it in taxpayer’s possession for almost 20 years.


Upon disposal of the land, the taxpayer submitted the real property gains tax (RPGT) forms to subject the gains arising from the disposal of real property gains tax. As the land was held for a long period of time, the gains would have been subjected to real property gains tax at the nominal rate of 5%.


The DGIR informed the taxpayer that the gains arising from the disposal of the land would be subjected to income tax under the Income Tax Act 1967 (ITA) and raised the notice of assessment for the year of assessment 2014 amounting to RM 3,058,827.25 on the taxpayer.


The main issue considered by the SCIT was whether the gains arising from the disposal of the 12 parcels of land were trading receipts taxable under Section 4(a) of the ITA or capital receipts taxable under the Real Property Gains Tax 1976 (RPGTA).


Case Analysis


The DGIR’s main contention in this appeal was that the taxpayer held the land as its trading stock instead of investment asset. It is trite law that the mere realisation of capital appreciation is not income under the ordinary concepts and usages of mankind. However, profit arising from the sale of any property which is acquired for the making of profit by sale is subjected to income tax. In determining the intention of the taxpayer, the focal point of enquiry is the dominant purpose for which the particular property was originally acquired.


Intention To Trade


The taxpayer in this case had always and only been involved in the property investment business and never had any intention to trade. The SCIT had agreed with the taxpayer’s submission that the sole intention of the acquisition of the land was as a long-term investment and the DGIR was not able to lead any evidence to dispute that. The DGIR also contended that the taxpayer had made profit out of the sale of the land and to that effect, the taxpayer submitted that mere fact that the taxpayer made a profit did not per se make the profit liable to tax.


Subject Matter Of Transaction


Further to that, the SCIT had also found that the taxpayer has always been principally engaged in investment holding as the land was consistently held as the taxpayer’s non-current assets in the taxpayer’s audited accounts and the taxpayer’s auditors agreed to this treatment after making their due enquiry. Had the taxpayer intended to use the land for development purposes, it would have been treated as the taxpayer’s current assets.


No Investment Income


The DGIR further contended that the taxpayer was involved in trading in the land because the taxpayer did not generate any investment income from the land. At the outset, the taxpayer submits that the DGIR’s decision to subject the gains from the disposal to income tax on this basis was erroneous in law. There was no legal requirement whether via statute or case law that compelled a taxpayer to use or rent out their investment asset to generate income. Neither was there any statute or case law that stated that if no income was generated from the land, the taxpayer was then to be considered trading in the Land. The SCIT agreed with the taxpayer in stating that the DGIR has no basis to state that the taxpayer was trading in the land without putting forward any evidence to support its claim.


Period Of Ownership


The taxpayer held the land in its possession for nearly 20 years. The SCIT was persuaded that the period of ownership for such a substantial amount of time has to be given due consideration especially when it has been held by our courts time and time again that even a short ownership period of the land is sufficient to prove that the land was indeed the taxpayer’s investment asset.


Alteration To Property


Further, the SCIT found that no alterations were made to the land to render it more saleable. There was no evidence to show any alteration, improvement or changing of the character and quality of the land so as to render it more merchantable. As a matter of fact, the land had remained vacant for nearly 20 years. In fact, the land was not maintained and was constantly in an unkept state, with no access path or drainage on it.


Methods Employed In Disposing Of The Property


The SCIT in examining the case had found that no form of advertising was conducted by the taxpayer in efforts to dispose the land. In fact, the land was only disposed for the sole purpose of restructuring the company from a Bumi company to a non-Bumi company. There was no special exertion was made to procure or attract purchasers such as the opening of a marketing office or extensive advertising. In the ALF Properties Sdn Bhd case, it was held that: 


“In respect of the sale of the unused portion, there was no evidence to show that the appellant made preparation for the sale such as advertising or that the appellant had opened an office just for the purpose of selling the unused portion or other activity pertaining to sale or development of the unused portion. The evidence shows that the sale of the unused portion was by chance in that there was a good offer by Chanrai Investment Corporation and it was on the unused portion which prompted the appellant to sell the land. The badges of trade does not exist in this sale.”


Conclusion


In applying the principle enunciated in the NYF Realty Sdn Bhd case, the SCIT was correct in deciding that the initial intention of the taxpayer in acquiring the said plots of land were for investment purposes. The conduct of the taxpayer in disposing the plots of land were necessary for the sole intention of restructuring the company.


Allowing the taxpayer’s appeal, the SCIT ordered for the DGIR’s additional assessment to be set aside.


7 June 2023

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