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The Court Of Appeal Rules On The Deductibility Of Bumiputera Release Fee

Bumiputera Release Fee is a payment made by property developers to state governments for the release of the Bumiputera units when they are unable to sell the units to Bumiputera purchasers. The deductibility of this payment has always been in contention as to whether such an expenditure incurred by the developers is capital or revenue in nature.

This issue was considered recently by the Court of Appeal in Ketua Pengarah Hasil Dalam Negeri Malaysia v Mitraland Kota Damansara Sdn Bhd which dealt with appeal arising from the decision of the High Court. The Court of Appeal affirmed the High Court’s ruling that the Bumiputera Release Fee made by the taxpayer to procure approval from the state government for the release of the Bumiputera units is deductible.

Brief Facts

In the year of assessment (YA) 2014, the taxpayer, a property developer, claimed a deduction on a payment made to the Lembaga Perumahan dan Hartanah Selangor (LPHS) for the release of unsold units reserved for Bumiputera purchasers. The release was to enable the unsold units in one of its mixed developments in Selangor to be sold to all purchasers including non-Bumiputera buyers (Bumiputera Release Fee).

The deduction taken by the taxpayer was based on the State Government’s policy which states that a certain portion of the development units are reserved for the Bumiputera community and discounts are to be given to the Bumiputera buyers. However, if the reserved units could not be sold to Bumiputera buyers after a specified period of time, the developer could apply to LPHS to lift the reservation, provided that efforts have been made for marketing and sales. In the event the approval is granted, an amount that is equivalent to the discount that would have been given to the Bumiputera buyers is to be paid to LPHS by the developer.

Subsequent to a field audit, the Inland Revenue Board (Revenue) disallowed the deduction taken by the taxpayer on the Bumiputera Release Fee on the basis that it was not allowable under Section 33(1) of the Income Tax Act (ITA). The Revenue then raised a Notice of Additional Assessment (Form JA) for the YA 2014.

Following this, the taxpayer appealed to the Special Commissioners of Income Tax (SCIT).

The SCIT’s Decision

The SCIT held that the nature of the Bumiputera Release Fee was penal in nature, and it is a pecuniary punishment imposed on the taxpayer for selling the Bumiputera reserved units to non-Bumiputera buyers. The SCIT viewed the sales were in violation of the State Authority’s policy on the reservation of units for the Bumiputera community. Accordingly, the SCIT dismissed the taxpayer’s appeal.

Aggrieved by the SCIT’s decision, the taxpayer appealed to the High Court.

The High Court’s Decision

The High Court allowed the taxpayer’s appeal for the following reasons:

(1) The Bumiputera Release Fee was not a fine or penalty

The payment was made for the sole purpose of procuring approval from the State Government. It was not penal in nature i.e. it was not meant to punish the developer.

(2) The Bumiputera Release Fee was incurred in the production of income

Without making the payments, the taxpayer would not be able to sell the unsold Bumiputera units to non-Bumiputera buyers as the unsold units have to be released first. By selling the unsold Bumiputera units to non-Bumiputera buyers, the taxpayer was able to generate income which otherwise would not have been possible. The payment was closely related, incidental and relevant to the taxpayer’s business as a property developer.

(3) The Bumiputera Release Fee was not a capital expenditure

The payment did not bring about any fixed capital nor enduring benefit to the taxpayer’s business. In contrast, the incurrence of the Bumiputera Release Fee was unavoidable and purely a business one, where the purpose or object behind the same was to earn revenue through sales of the unsold Bumiputera units to non-Bumiputera buyer.

Being dissatisfied with the High Court’s decision, the Revenue lodged an appeal to the Court of Appeal.

Appeal To The Court Of Appeal

The central issue under appeal was whether the Bumiputera Release Fee was deductible under Section 33(1) of the ITA.

The Revenue submitted that based on the letters from LPHS, the taxpayer was required to make payment to release the Bumiputera units for violating the original terms prohibiting the sale of Bumiputera reserved units to non-Bumiputera purchasers. In other words, the Bumiputera Release Fee could be construed as penalty or pecuniary punishment imposed on the taxpayer for violating the State Authority’s policy as discussed above.


Even if the payment is not penalty, it was also not deductible as the element of consideration or benefit exists in the form of release of the unsold Bumiputera reserved units. Thus, the Bumiputera Release Fee should be regarded as a capital expenditure.

The Court Of Appeal’s Finding

The Court of Appeal dismissed the Revenue’s appeal. According to the court, the taxpayer had declared the full non-Bumiputera purchase price stated in the invoices or the sale and purchase agreements, instead of the discounted Bumiputera purchase price, as the turnover. In other words, the revenue from the sale of the released Bumiputera units had been subjected to income tax.

In determining whether the Bumiputera Release Fee falls within the scope of Section 33(1) of the ITA, the Court of Appeal began with the reasoning behind the State Government’s policy in giving an option to the developers to seek the release of the Bumiputera units. The following passage is instructive:

“The simple answer is that the units that the property developers build and complete are their stock-in-trade. Property developers receive income from the sale of these units. If the units cannot be sold, there is no income. The option was provided by the Selangor State Government so that property developers can unlock and sell these units that could otherwise be not sold to the general public. The effect of the payment to LPHS was to achieve sales. The payment is exclusively related to business operations, in order to generate income. If not, there would be no income from these Bumiputera units. This would be a classic revenue expense, and is quite the opposite from being a capital expense as contended by the Appellant, as the payment is directly related to the Respondent’s stock-in-trade.”

Furthermore, the Court of Appeal added that the Bumiputera Release Fee recurs every time an unsold Bumiputera unit is to be sold to a non-Bumiputera purchaser. It is therefore a clear indication that such an expenditure is a revenue expense, as opposed to a capital expenditure. Plus, the Bumiputera Release Fee did not bring about any enrichment or improvement to any fixed capital for them to be construed as capital expenditure.

In fact, the taxpayer had to first show to the satisfaction of the State Government that there was no potential Bumiputera buyers for the reserved units before the taxpayer could apply for the release of the Bumiputera units. Moreover, the State Government’s policy has also stated the following:

“6.1 Pemaju yang diberikan pelepasan kuota Bumiputera akan dikenakan syarat pemulangan potongan harga Bumiputera kepada LPHS sebelum proses pindahmilik dibuat.”

Evidently, where a developer is given a release of the Bumiputera units, it will be imposed with a “condition” that the Bumiputera discount must be repaid to the State Authority after release is obtained. In view of that, the Court of Appeal opined that the Bumiputera Release Fee was indeed a revenue expenditure as it was merely made to secure the sales of the unsold units and thereby, earning more income for the taxpayer.


In gist, not only has this authoritative Court of Appeal ruling entitled the property developers to claim a deduction from income tax but also rejected the notion that the Bumiputera Release Fee was punitive in nature.

17 July 2023

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