Documentos de Académico
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articles
A Guide to Tax Planning
Contemporary
Issues on
Income Tax and
Real Property
Gains Tax
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(1) Advanced Malaysian Taxation. 2005 7th edition, Infoworld, Kuala Lumpur.
(2) Malaysian Taxation. 2005 11th edition, Infoworld, Kuala Lumpur.
(3) Practitioners’ Guide on Tax Incentives: An Anatomy. 2004 1st edition, Infoworld, Kuala Lumpur.
(4) Tax Audit and Investigation. 2006 (loose leaf edition), Infoworld, Kuala Lumpur.
(5) How to Fill in Your Income Tax Form B. 2005 2nd edition, Infoworld, Kuala Lumpur.
(6) Istilah Percukaian. 2004 1st edition, Sweet and Maxwell, Kuala Lumpur.
(7) Real Property Gains Tax - Principles, Policies and Practices. 1997 1st edition, Infoworld, Kuala Lumpur.
(8) Inland Revenue Guidelines, Rulings and Government Gazettes. 2002 2nd edition, Infoworld, Kuala Lumpur.
(9) Malaysian Taxation – Revision and Practice Set. 2004 4th edition, Infoworld, Kuala Lumpur.
(10) Tax Planning for Income Tax Waiver. 1999 1st edition, Infoworld, Kuala Lumpur.
(11) Personal Finance in Malaysia, 2000 1st edition, Infoworld, Kuala Lumpur.
(12) Malaysian Leading Cases in Income Tax. 2003 1st edition, Sweet and Maxwell, Kuala Lumpur.
(13) Tax Planning for Malaysian Employees. 2003 1st edition, Sweet and Maxwell, Kuala Lumpur.
(14) Tax Planning on Business Income. 2004 1st edition, Sweet and Maxwell, Kuala Lumpur.
(15) Advanced Taxation – Revision and Practice Set. 2003 1st edition, Infoworld, Kuala Lumpur.
(16) Malaysia Revenue Law Cases – A Practical Index (1932 – 2002). 2003 1st edition, Infoworld, Kuala Lumpur.
(17) Malaysian Tax Digest. 2005 1st edition, Infoworld, Kuala Lumpur.
(18) All Malaysia Tax Cases (1932 – 2005). 2006 (Loose Leaf), (5 volumes) Sweet and Maxwell, Kuala Lumpur.
He can be contacted at kwaifatt@yahoo.com
An update of Malaysian tax changes can be viewed at www.kwaifatt.com
Compensation on Termination of
Joint Venture Agreement
– Capital or Income receipts?
Introduction compensation for loss of income assessable under s
It is a trite law in the Malaysia Income Tax Act 22(2)(b) of the Act or alternatively an amount paid for
1967 (the Act) that capital gains are not taxed services rendered as stipulated in s 24(1)(b) of the
while transactions that are ‘income’ in nature Act, thus income in nature and subject to tax. This
will be taxed. Making the distinction between argument found favor with the Special Commissioners
‘capital’ or ‘income’ is never an easy task, and the High Court. The Court of Appeal was asked to
especially in relation to the compensation on hear this appeal to verify the correctness of the law
termination of a business contract. Generally, as decided by the lower courts.
compensation for payment of services is income
receipts while compensation for destruction Does a JV amount to partnership?
of capital structure is capital receipts. The The Court of Appeal was asked to decide whether the
Court of Appeal in Suasana Indah Sdn Bhd v Ketua JV is a partnership, therefore the amount received
Pengarah Hasil Dalam Negeri1 had an opportunity was an amount for withdrawal of partnership. In the
to expound the legal principles on compensation JV agreement, two clauses expressly disclaimed that
receipts in the Malaysian context. the JV did not constitute a partnership or a principal-
agency relationship. The taxpayer conceded that
The facts of the case the JV was not a partnership by the “ordinary legal
In Suasana Indah, the taxpayer through a Joint Venture concepts of partnerships” but maintains that it was a
(JV) agreement had provided services to convert partnership solely because it satisfied the definition of
two pieces of land in Gombak, extend the leasehold “partnership” stipulated in s 2 of the Act.
period to 99 years and subdivide these lands. These Abdul Aziz Mohamed JCA delivered the Court
services ware valued at RM4.8 million, reflected as of Appeal judgment which affirmed the established
contribution of capital to the JV. The other JV partner legal principle that the existence of a partnership
contributed the said land, valued at RM5.3 million. is referred to the law of partnership and not the
Due to some disagreement between the JV partners, definition of partnership as stated in s 2 of the Act.
the JV was terminated and the taxpayer was paid a The definition of “partnership” in the Act is intended
compensation of RM6.4 million. The issue is whether only for the interpretation of that word where it is
such receipts are capital or revenue receipts. used in the Act. The provision in the JV agreement
The taxpayer contended the RM6.4 million must prevail and be given effect to. Since it was
was capital receipts as the amount was paid for agreed between the JV partners that no partnership
the loss of rights under the JV or alternatively existed, the argument for ‘capital withdrawal from
capital withdrawal form the partnership. The tax partnership’ was rejected.
authorities however argued that the payment was a
whole structure test to determine the nature of the making apparatus. This is a two-fold test:
contract termination receipts being capital receipts. (Refer to Diagram 1)
First, the test involves ‘structure of a profit-making In this case, the JV merely governs the sharing
apparatus’ and not just any ‘structure’. Second, of profit of the JV parties. It does not regulate the
such a profit-making apparatus is not referring to carrying-on of the business as seen in Van Den
business. The profit-making apparatus referred is an Berghs. It is an ordinary contract under which they
organisation, a set up, a capital framework that a were to provide the land improvement services
taxpayer must necessarily and inevitably already have in return for an interest in the land development
that makes profit. Third, the test does not require that project. In short, it was a contract for the provision
the business of the taxpayer company be destroyed of services. The facts of the case as determined
or brought to an end3. The Special Commissioners by the Special Commissioners’ show that the JV is
and the High Court have misunderstood the test to not a framework agreement, and the taxpayer was
mean that the cancellation of the JV agreement must not restrained in any way from providing its services
result in the destruction of the profit-making apparatus to other persons whether through another JV or
of the taxpayer company, which was never intended otherwise. Thus, the amount paid in its true essence
or seen in Van Den Berghs. In Van Den Berghs, the is compensation for loss of income, and thus subject
profit-making apparatus of the English company did to tax.
not suffer from the termination of the agreements.
The correct application of the whole structure test Conclusion
is to examine the nature of the agreement in relation The analysis of the two-fold test as suggested in
to the whole structure of the profit-making apparatus the Court of Appeal in Suasana Indah is crucial
of the company and to see whether the impact of the in ascertaining whether compensation for the
termination affects the whole structure of the profit- termination of a contract is an income or a capital
(i) Nature of the agreement in relation to the whole structure of the profit-making
apparatus
(ii) The termination of the affects the whole structure of the profit-making
agreement apparatus
Diagram 1
Income Capital
Diagram 2
Endnotes
income tax
Case Study 1 2 3
Gross income RM RM RM
Management fees 40,000 60,000 40,000
Investment income
(includes exempt income) 160,000 80% 160,000 73% 140,000 78%
200,000 220,000 180,000
IHC ≠ IHC ≠ IHC
from YA 2005 will never be utilised within the IHC. Presumption of being IHC
The new IHC concept continues to suffer the s 60F(1B) was inserted into the Act, and sets down
deduction constraint. It severely restricts the the IHC presumption application. Once a company
deduction of overhead expenses incurred in IHC. has been established as an IHC between the tax
s 60F, since the inception into the Act from YA 1993, authorities and the company, it shall be presumed the
has restricted the deduction of permitted expenses company continues as an IHC for all subsequent YAs
into the following statutory formula: unless the contrary is proven.
The company under the self-assessment regime
B may have to use the YA2005 tax computation
A x or 5% x B
4C to gauge whether it falls into the IHC category in
Which ever is the lower YA2006. Proper tax planning is discussed below and
is required to ensure it is not IHC.
Where A is the total of the permitted expenses
incurred for that basis period reduced by any receipt Management Alert
of a similar kind; “Permitted expenses” means The newly-amended IHC concept requires that at least
expenses incurred by an investment holding company 80% of its gross income (including exempt income)
in respect of – is derived from investment sources. Although exempt
(a) directors’ fees; income is not taxed, it is however used to examine
(b) wages, salaries and allowances; whether a company is an IHC.11 Once this condition
(c) management fees; is fulfilled, income other than investment income is
(d) secretarial, audit and accounting fees, treated as s 4(f) income. (Refer to Chart 1)
telephone charges, printing and stationery Management may exercise its discretion to either
cost and postage; and increase management fees or reduce investment
(e) rent and other expenses incidental to the income in YA 2006 and subsequent years to avoid
maintenance of an office which are not being labelled as IHC. If a company falls under IHC,
deductible under s 33(1). management fees would be treated as s 4(f) income
B is the gross income consisting of dividend, and no capital allowance and current year business
interest and rent chargeable to tax for that basis loss are accorded.
period; and
C is the aggregate of the gross income consisting The unresolved issues
of dividend (whether exempt or not), interest With effect from YA 2006, IHC is redefined to mean
and rent, and gains made from the realisation of ‘a company whose activities consist mainly in the
investments for that basis period. holding of investments and not less than 80%
C = B + exempt dividends + gains made from the of its gross income (whether exempt or not)13 is
realisation of investment. derived therefrom. The issue of deciding whether
an acquisition of asset is tantamount to ‘holding
In conclusion, IHC restricts the deduction of permitted of an investment’, ‘dealing with an investment’ or
expenses. Where an amount of A is incurred, the ‘holding of a trading stock’ is never easy. It has to
maximum expenses that are deductible are only be examined with its peculiar facts. To be an IHC, it
25% of A.9 The fraction of permitted expenses are has to be ‘holding of an investment’ and this sets the
deducted from the aggregate income to arrive at the demarcation line.
total income of IHC.10
IHC is a company incorporated with the primary “If a company was formed to carry on
object to invest its share capital or borrow funds in business, and in fact it carried it on, I think,
shares, real properties, unit trust, bonds and deposits it cannot matter that its activities had been
in order to derive dividend, rental or interest income. an isolated one… A company’s business may
The issue of whether an activity constitutes ‘making have been quiescent for a number of reasons.
an investment’ or ‘carrying on business’ is a question For example, following a business set-back,
of law, to be decided by the law lords. Generally, consolidating its business waiting for the
a business is said to exist if there is repetition of ripe opportunity to occur…If the company
transactions, short period of holding, profit intention still carries it on, then I think the company is
and carrying out business using a profit-making carrying on business.”
structure.
A company incorporated with its objective of Where a company is incorporated with a business
investment dealing, which actively buys or disposes object to provide management services, trading
shares or landed properties for profit is prima facie or carrying on manufacturing, its excess funds
carrying on business. In an economic downturn, may be utilised to derive investment income. Such
such a company may withhold from acquiring its companies cannot be termed as IHC even though
trading stock and can never be treated as IHC even 80% of the gross income is from investment income.
if it derives dividend or rental income at the time of The primary objective that it never intended to be an
quiescence. IHC is conclusive evidence that must be accepted
In J.P. Harrison (Waford) Ltd v Griffiths14 by the tax authorities. The determination is based on
Danckwerts J. opined:15 circumstances and degree, a question of fact to be
decided and argued at the Special Commissioners’
“When you find that there is a trading company level upon further appeal.
and it acquires the shares in question for the Likewise, in a securitisation exercise, a special
purpose of making a profit out of those shares, purpose vehicle (SPV) company which is incorporated
and it makes profit by getting an enhanced price to issue bonds to finance the construction project of
on resale or by getting an advantage out of its holding company will release its bond proceeds in
the temporary possession of the shares in the trunk batches while the excess funds will be placed in
form of dividend, to my mind it is dealing in the the money market. Although it derives interest income
shares in the course of its trade and not in any from the money market and pays the bond interest to
other capacity whatever.” its investors, it can never be held as IHC.
The SPV is carrying on business. The series
Raja Azlan Shah FJ in I Investment Ltd v Comptroller of transactions, continuity and repetition of funds
General of Inland Revenue16 held that a company placement and paying interest over a period of time
carrying on a business does not necessarily always to bondholders are strong evidence pointing towards
have high-frequency transactions as the business business. That the interval between the investment
cycle can go up and down. The lordship held17: of funds in the money market and the payment of
Burden of proof
The taxpayer has the onus to show that a company is
not IHC in YA 2006. The tax authorities during the tax
audit may issue an additional assessment to contend
Endnotes
1. The Act.
2. YA.
3. Finance Act 497/ 1993.
4. [2005] 3 AMR 743.
5. Ibid at p 775.
6. The previous legislation refers to the IHC as a company whose activities consist wholly in the making of investments and whose
income is derived therefrom. It applies to prior YA 2006 assessments.
7. s 60F(1A) was inserted into the Act. It takes effect from YA 2006 and subsequent YAs.
8. [1979 - 1996] AMTC 903.
9. See Choong Kwai Fatt, Advanced Malaysian Taxation - Principal and Practice, 2005 7th ed at pp 98 - 100.
10. Tax practitioners who require a copy of the format of tax computation, examples of IHC at post and pre finance act 2005, please
email the author at kwaifatt@um.edu.my or kwaifatt@yahoo.com.
11. For examples of exempt income, see Choong Kwai Fatt, Malaysian Taxation - Principles and Practice 2005 11th Ed, pp 7, 181-182
and 193 - 194.
12. For a detailed discussion of business source versus investment source, see n 9 at pp 515 - 517.
13. The previous legislation refers IHC as a company whose activities consists wholly in the making of investments and whose income is
derived therefrom.
14. 40 TC 281.
15. Ibid at pp 285 - 286.
16. [1937 - 1978] AMTC 721.
17. Ibid at p 731.
18. [1979 - 1996] AMTC 903.
19. Ibid at p 908.
20. 5 TC 159 at pp 165 - 166
21. It was first propounded by Lord Diplock in American Leaf Blending v DGIR [1979 - 1966] AMTC 903, accepted and applied in the
subsequent case of I investment v CGIR. [1937 - 1978] AMTC 721.
Chart 2
Case Study 1 2 3
RM RM RM
Management fees 40,000 60,000 40,000
Investment income
(includes exempt income) 160,000 80% 160,000 73% 140,000 78%
Gross income 200,000 220,000 180,000
IHC ≠ IHC ≠ IHC
charges, printing and stationery costs, and postage the company continues as an IHC for all subsequent
and rent are fully deductible against the gross YAs unless the contrary is proven.
income7. The company under the self-assessment regime
Although the newly-inserted provisions s 60FA(2) may have to use the YA2005 tax computation to
and (3) in the Act recognise the source as being a gauge whether it falls under IHC in YA2006. The
business source, the deduction however is very much proper tax planning discussed below is required to
restricted. If there is no gross income, the deduction ensure it is not an IHC.
of expenses shall be disregarded. Likewise, if the
deduction of expenses exceeds gross income from Management Alert
the business source, the excess shall be disregarded The newly-amended IHC concept requires at least
too. Unlike the normal treatment of business source, 80% of its gross income (including exempt income)
current year loss and unabsorbed loss accorded in s be derived from holding of investments8. Although
43(2) and 44 are denied in listed IHC. exempt income is not taxed, it is however used to
Capital allowances on plant, machinery, and examine whether a company is an IHC9. Once this
industrial building are available for deduction against condition is fulfilled, the company is an IHC .
adjusted income to arrive at statutory income. The (Refer to Chart 2)
excess capital allowance in a YA however is not Management may exercise its discretion to either
allowed to be carried forward and is thus permanently increase management fees or reduce investment
lost. Unlike the normal treatment of business source, income in YA 2006 and subsequent years to avoid
unabsorbed capital allowances accorded in para 75 being labelled as IHC. If a company falls under IHC,
of schedule 3 of the Act are denied in listed IHCs. current year business loss is not accorded and
A comparison of the listed IHC, non-listed IHC and unabsorbed capital allowance is permanently lost.
a company with a business income is as follows: If a listed IHC has no management fees, then it
(Refer to Chart 1) would be an IHC in YA 2006 and subsequent YAs.
Endnotes
Director General of Inland Revenue v Kulim Rubber In conclusion, these decisions are highly persuasive
Plantations Ltd [1979-1996] AMTC 10527: and will serve as a guide to all interested parties on
tax matters.
“The court has laid down in Khalid Panjang &
Ors v PP (No 2) [1964] MLJ 108 the principle Conclusion
that a Privy Council decision on appeal from The decision of Exxon Chemical (M) Sdn Bhd v Ketua
another country is binding on it and the Pengarah Hasil Dalam Negeri is a welcome note. It
other courts of this country if the appeal is helps to reduce the cost of doing business in each
on a provision of law in pari material with a year and increases the competitiveness of a company
provision of the local law. The decision in in the global market. It is hoped that taxpayers
Lasala v Lasala [1979] 2 All ER 1146, that seeking justice are not deterred even if they are
the Privy Council would consider itself bound defeated at both Special Commissioners and High
by a decision of the House of Lords. Insofar Court level. One must keep pursuing justice to the
as the decisions of other courts in these doors of the Court of Appeal to seek a final verdict:
and other countries are concerned, we have victory or defeat. This is what we call courage and
always treated these judgements as of only professionalism.
persuasive authority, but we have never lightly
treated them or refused to follow them, unless
we can successfully distinguish them or hold
them as per incuriam. Other than for these
reasons, we should as a matter of judicial
comity and for the orderly development of
law, pay due and proper attention to them.
(emphasis added)”
Endnotes
In cases where a landed property has changed other hand, if such gains are subject to income tax,
its status from trading asset under business source resident individual shareholders having a marginal
to investment asset under investment source or vice income tax rate below 28% will, under the imputation
versa, an apportionment of the profit between income tax credit system, be able to obtain a tax refund from
tax and RPGT has to be carried out which is never an the tax credit on taxable dividend income received
easy task to do. The Court of Appeal acknowledged from the company6.
such difficulty in Mount Pleasure Corporation Sdn Bhd The burden of proof on whether a landed property
v Director General of Inland Revenue5. is to be regarded as a long-term investment or as
This article aims to analyse the Court Of a trading asset lies on the taxpayer7. In ABC v The
Appeal’s decision and derive from the judicial Comptroller of Income Tax8, it was held by the High
wisdom, guidelines for taxpayers in future or similar Court that the taxpayer had the onus not only to
circumstances. show that the assessment was wrong but also what
must be done to put it right. Documentation such as
The distinction between Income Tax and RPGT sale and purchase agreements, financial position of
Where a landed property is disposed, RPGT is the the company, board meetings’ minutes, accounting
preferred choice for the taxpayer as the tax rate is classifications and percentage of loan finance is
much lower than that computed under income tax. required to substantiate a long-term investment
However, in the case of a company, such capital motive.
gains derived from the disposal are not available to The table below gives a comparison between
be paid out as dividends to shareholders. On the income tax and real property gains tax:
The case of appropriation of landed property change must be clearly reflected in the company’s
from investment asset to trading stock documentations and accounts. A valuation of the
When a property developer sells a landed property land from a reputable real estate firm is a must to
it is holding as a trading asset, the sale which is ascertain the market value of the land at the time
considered to be carried out in the ordinary course of the appropriation. The regime of taxation is then
of business is subject to income tax. However, in moved from RPGT to income tax.
certain circumstances, the developer may also hold The market value of the land at the time of
land as a long-term investment. In such a case, the appropriation will be regarded as the cost of the
disposal of such land is considered capital gains business. The intention of appropriation must be
which are not subject to income tax but subject to supported by accounting classification of the land
Real Property Gains Tax. The question of whether from non current asset (fixed asset) to current asset.
the profit realized from the sale of the land is to be Precision is required. The market value is a cost
considered as an investment or business profit is to to the business; it is tax deductible from the gross
be determined according to the merits of each case. income and from the sale proceeds of the land. In
To qualify as an investment profit, the intention of this regard, Lee Hun Hoe CJ (Borneo) held in Federal
acquiring the property for the purpose of investment Court’s decision, Director General of Inland Revenue
must be shown to have existed at the time of v LCW10:
purchase of the land9. Documents and circumstantial
evidence ought to be provided to affirm a long-term “When respondent (taxpayer) converted his
investment motive. Such evidence may include capital assets into stock in trade and started
receipts of rental income from the land, minutes dealing in them the taxable profit on the sales
of board meetings, relevant material witnesses, must be determined by deducting from the
availability of funds at the time of acquisition of sale proceeds the market value of the assets
the land to carry out planned projects such as the at the date of conversion into stock in trade
building of a cinema, golf course, etc. since that is the cost of his business and not
When land is originally acquired as an investment the original cost to him.”
asset, the question of appropriation will arise if
the property developer later wishes to develop it The capital appreciation between the original cost
by applying land conversion and subdividing the and the market value at the time of appropriation has
property into smaller units for sale at a profit. In such nothing to do with the property developer’s business.
a case, the land is said to have been appropriated Such sum above its original cost is a chargeable
from investment asset to trading asset. The change gain assessable under the RPGT Act 1976. (Refer to
of intention from investment to trading involves a Diagram 1)
shift of asset from one category to another. This
(2) The date of appropriation from investment The tax authorities argued otherwise. It contended
asset to the trading stock is clearly reflected by that:
documents such as minutes of board meetings, (i) The land was acquired in 1971 with the intention
valuation of the market value of the land at the to develop to sell. Thus the question of asset
time of appropriation, accounting classification, appropriation cannot arise because the land was a
furnishing of material witnesses, etc. trading stock in 1971.
(ii) The cost to the business is the original cost as at
Non-compliance to either one of the above is fatal. the date of acquisition of the land.
It is a commonplaced law that the onus of proof
to establish (1) and (2) is on the taxpayer. It has The Special Commissioners headed by Augustine
to demonstrate the balance of probabilities in Paul13 rejected the initial intention of the company
compliance to (1) and (2). of having the casino as a valid investment intention.
There was no license granted to the company to
Mount Pleasure Corporation Sdn Bhd v The operate a casino at the time of acquisition of the
Director General of Inland Revenue land in 1971. In Malaysia, the operation of a casino
In the above case, Mount Pleasure Corporation Sdn required a special license that was wholly beyond the
Bhd acquired five plots of land in Penang, Malaysia, control of the taxpayer.
for RM570,000 in 1971. On 12 April 1972, the The casino project was something severely
company submitted a layout plan to the local council circumscribed and its implementation indefinite at that
to construct a hotel complex and a theater club point in time. The Commissioners held that such an
which included the operation of a casino. However, intention of obtaining a casino license cannot amount
its proposal to operate a casino on the property to an intention acceptable in law as an investment
was rejected by the local council. Six years later in intention14.
1979, the company resubmitted a new layout plan The Company failed in the onus of proof to
to develop a housing and commercial project on the establish its investment intention as:
land – minus the casino. This was approved in March (a) No witness was called to give evidence to
1979 by the local council. The company, wanting to establish that the property was bought as an
obtain Real Property Gains Tax savings and citing the investment.
case of Director General of Inland Revenue v LCW, (b) No evidence was adduced to demonstrate that
contended that: the proposed development of the hotel complex,
(i) The land was acquired for investment with the theater club and casino was for the company’s
initial intention to develop the property as a hotel own use or personal enjoyment.
complex and a theater club including a casino. It (c) The Memorandum of Association of the company
was being retained as a fixed asset; did not authorize the company to purchase land
(ii) The Company had to change its initial intention for purposes of investment except with surplus
when its application to operate a casino at Mount funds which it did not have.
Pleasure was rejected;
(iii) The land therefore should be valued at the market The Special Commissioners found the following facts
value in 1979 when it was appropriated to trading which were fatal to the company: (Refer to Diagram 2)
stock.
Diagram 2
stock cost to the business. Raus Sharif J sitting at the Court of Appeal
In the income tax regime of taxation, capital gains acknowledged the Special Commissioners’ jurisdiction
from investment assets are not within the scope of as the final judges with regard to the question of facts.
taxation, i.e. they are tax free. Only the profits from Such facts cannot be overruled or supplemented by
the disposal of trading assets are taxed. Whether the courts. The determination by badges of trade
an asset was originally acquired for investment or has to be based on proven facts. The taxpayer failed
trading has tremendous impact on the tax paid by the to adduce evidence that the land was acquired for
company in YA 1984. If the taxpayer was able to base investment as no witness was called to give evidence.
the cost of the trading stock on the market value in Neither did it have a license to operate a casino. Its
1978, a higher amount will be deducted from the intention of obtaining the casino license cannot amount
sale proceeds of land, and the tax in YA 1984 will be to an intention in law.
substantially reduced. Since the onus is on the taxpayer to establish
Addul Aziz JCA expressed his difficulty in evidence and it failed to do so, the assessment must
understanding the significance of investment asset stand. Raus Sharif J accepted in totality the findings
and trading asset on the amount of tax to be paid by of the Special Commissioners that the taxpayer was
the taxpayer. His Lordship said20: carrying on a business of land dealing either as a land
developer or real estate merchant. Mokhtar Sidin JCA
“I have not been able to understand how the concurred with the decision of Raus Sharif J.
value is affected according to whether the
stock was originally acquired for investment Conclusion
or trading. Even if, as contended by the Mount Pleasure’s case reaffirms the importance of the
appellants, the holdings were acquired in 1971 law of evidence in the winning of an appeal. The onus
for investment and in 1979 were appropriated of proof rests on the taxpayer and the assessment
to stock, I am not able to see that that would of proof is on the balance of probability. Both the
make their stand…correct…” High Court and Court of Appeal emphasized that the
taxpayer failed to discharge its burden by calling no
Although Abdul Aziz JCA had difficulty in witnesses or adducing any supporting documentary
understanding the income tax law, which is a very evidence. The taxpayer has to maintain complete and
technical branch of law, he nonetheless accepted adequate accounting records on the transaction to
the findings of the Special Commissioners and held sustain its intention. This is all the more important
that they were right in their decision and affirmed when it encounters tax audit in a self assessment
that the High Court was right in dismissing the regime. The tax planning opportunity given in LCW’s
taxpayer’s appeal. case only bears fruit if the investment intention was
established and the precision test complied with.
1. See s 2 of the RPGT Act 1976 and MR Properties Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2003 - 2005] AMTC 298.
2. A complete collection of the Malaysian tax precedent cases can be found in Choong Kwai Fatt, All Malaysia Tax Cases, (1937
- 2005) 4 volumes, Sweet and Maxwell.
3. Section 2 of the Real Properties Gains Tax Act 1976 sets out the scope of charge, defining gains as gains other than gain or profit
chargeable with or exempted from income tax under the income tax law.
4. See Choong Kwai Fatt, Malaysian Taxation - Principles and Practice, 2005, 11th ed, Infoworld, pp 223 - 233.
5. [2006] 1 AMR 563.
6. For an understanding of tax imputation system, see Choong Kwai Fatt, Malaysian Taxation - Principles and Practice, 2005 11th Ed,
Infoworld, pp 493 - 506.
7. Para 13, Sch 5 of the Act.
8. [1937 - 1978] AMTC 102.
9. This rule of law was developed by Lord Wilberforce in Simmons v Inland Revenue of Commissioners [1980] 2 ALL ER 798.
10. [1937 - 1978] AMTC 667 at p 681.
11. Ibid at p 682.
12. See NYF Realty Sdn Bhd v Comptroller of Inland Revenue [1937 - 1978] AMTC 523.
13. A leading expert on evidence. Now he sits in the Federal Court.
14. See Lower Perak Co-operatives Housing Society v Director General of Inland Revenue [1979 - 1996] AMTC 1638, Kirkham v William
[1991] STC 342.
15. Precedent cases do hold that a purchase of land which does not produce income or personal enjoyment and is later sold at a profit
is considered as trading. See CIR v Fraser (24 TC 498), Lowe v JW Ashmore (46 TC 597).
16. [1980] 2 All ER 798.
17. Ibid at 801.
18. Simmons’ case was followed by the Privy Council’s in Lim Foo Yong Sdn Bhd v Comptroller General of Inland Revenue [1979 - 1996]
AMTC 1264 and recently by the Supreme Court’s in Lower Perak Co-operative Housing Society v DGIR [1979 -1996] AMTC 1638.
19. [2006] 1 AMR 563 at p 569.
20. Ibid at p571.
subsequently sold 368 acres of the land on 10 should be considered final once the tax had been
August 1990 for a sum of RM29 million. imposed and duly paid. However, the tax authorities
said they had the power to review the RPGT
The gain from the sale is as follows: assessment and substitute with income tax upon
RM million findings that the gain from the sale of the land was of
Sale proceeds of land 29 income in nature. It pointed out that the principle of
Less: Cost of land (14) estoppel did not apply to revenue law.
15 The Special Commissioners were asked to decide
whether a RPGT assessment which had already been
The tax liability for RPGT @ 5% 1 concluded and tax paid could be discharged and
The tax liability for income tax @ 28% 4 income tax imposed instead. The Commissioners’
answer was in the affirmative following the precedent
It can be observed that the difference between set in the Court of Appeal’s decision in Bye v Coren12
income tax and RPGT on the sale of the land is a where it was held that the tax authorities were not
considerable sum of RM3 million. precluded from raising an assessment under income
The taxpayer contended that as the land was a tax after the finalization of capital gains tax. In
long-term investment it filed in Form CKHT 1 for the Malaysia, RPGT is a limited version of capital gains
gain to be assessed as RPGT. It pointed out that the tax. The Commissioners held that accordingly the tax
tax authorities had accepted the submission and authorities have the power to switch from RPGT to
levied a RPGT of RM1 million on 2 May 1992. The income tax.
taxpayer paid the tax and obtained the certificate Raus Sharif J in the High Court accepted this
of clearance in accordance with the RPGT Act rule of law in its totality. The Special Commissioners’
1976. The tax administration cycle was completed. decision was affirmed. His Lordship felt that the tax
However, on 9 August 1993 the tax authorities authorities were empowered to review, revise and
cancelled the RPGT assessment and substituted an discharge an assessment on the grounds that no
income tax assessment of RM4.2 million for the year RPGT was payable. Since the sale of land was income
of assessment 1991. in nature, the tax authorities were empowered to
The legal issue was whether the tax authorities raise the assessment under income tax. His Lordship
were empowered to switch an assessment from RPGT opined13:
to income tax after the taxpayer had already been
assessed to RPGT and paid the tax that was levied. “The respondent (tax authorities) is not
precluded from raising the assessment
The Special Commissioners’ and High Court’s under income tax after reviewing the earlier
decisions assessment made under the RPGT. To me,
The taxpayer argued that there was no statutory the respondent has the power to review or
power given to the tax authorities to discharge revise an assessment which include vacating
the RPGT assessment and switch to income tax an assessment on the ground that no RPGT
assessment. It contended that the RPGT assessment is payable on the gains...Thus, I am unable to
Endnotes
1. Section 2 of RPGT Act 1976 sets the scope of charge for the imposition of RPGT. It defines gains as gains other than gain or profit
chargeable with or exempted from income tax under the income tax law.
2. For a discussion on the distinction between RPGT and income tax, see Choong Kwai Fatt, The critieria for the determination of
income tax and real property gains tax in the case of land appropriation from investment to trading asset, 2006 tax research series.
3. See Choong Kwai Fatt, Malaysian Taxation - Principles and Practice, 2005, 11th ed, Infoworld, pp 223 - 233 on the application of
badges of trade.
4. [2003 - 2005] AMTC 298.
5. Section 15 of RPGT Act 1976 and s 96 of the Income Tax Act 1967.
6. [2003 - 2005] AMTC 371.
7. [2006] 1 AMR 563.
8. [1937 - 1978] AMTC 668.
9. [1979 - 1996] AMTC 1556.
10. [1979 - 1996] AMTC 1565 at p 1571.
11. A leading expert on evidence matters. Now he is a Federal Court Judge.
12. 60 TC 116.
13. [2003 - 2005] AMTC 298 at p 304.
deceased via the wife. This can only be done provided of the opinion that a legal representative unfolds itself
the wife is the executor of the deceased as provided immediately upon the death of the person concerned,
in s 74 of the Act. When the wife of the deceased until such time as a grant of probate or letters of
failed to settle the tax and penalty, the tax authorities administration are obtained. Therefore, the wife is
commenced recovery proceedings against the wife in the executor notwithstanding that no grant of probate
her capacity as executor by virtue of ss 106 and 142 or letters of administration had been applied for. RK
of the Act. The wife contended that she was never Nathan J opined:
an executor as no grant of probate was extracted.
Therefore, it was not her responsibility to make the “I have no hesitation in holding that the
payment to the tax authorities. defendant clearly fell into the third category
The crux of the issue is whether the wife can of a person defined as executor, namely as a
be held as an executor under the Act given the fact person administering or managing the estate
that she did not apply for the grant of probate or of the deceased person.”
for letters of administration as the deceased did not
leave any assets to be distributed. The only act she The High Court held that despite the fact that the
had done for the deceased was to file the income tax wife of the deceased did not apply for a grant of
returns forms for the YA 1984 and 1985. probate or letters of administration, she was clearly
administrating the estate of her deceased husband
The arguments when she signed the Form B for the YA 1984 and
The wife testified that she was a housewife with no 1985. Thus, she falls within the meaning of executor.
income whatsoever. After the demise of her husband, Judgment was entered against the wife of the
she did not petition for any grant of probate or for deceased in the sum of RM290,919.
letters of administration as the deceased did not
leave any assets at all. The wife contended that she RK Nathan J held:
did not in any way administer or manage the estate
of the deceased because there was nothing for her “To my mind the definition in s 2 of the Act
to administer. She argued that the income tax and clearly encompasses persons under the
penalties of RM290,919 for her husband were never category of the defendant. Although she
her responsibility because she was not indebted to had neither taken probate nor letters of
the tax authorities. administration, she was clearly administrating
The tax authorities contended otherwise. They the estate of her deceased husband when she
found that the wife who had signed the Form B for the signed the Form B for the years 1984 and
deceased, must have acted as a legal representative, 1985. ... It is clear therefore that until probate
falling squarely within the definition of “executor” as or grant of legal administration is obtained, the
defined in s 2 of the Act. Section 2 reads as follows: person most acceptable to manage the estate
of the deceased until such time as the grant
“Executor’ means the executor, administrator is obtained is the legal representative. In this
or other person administering or managing the case it is the wife. She contends that since
estate of a deceased person.” there was nothing left in the estate, she had
nothing to administer and therefore, she could
The filing of Form B on behalf of the deceased person not be the legal representative. The position of
and the signature of the wife on those forms are fatal. a legal representative does not impose itself
It denotes that she is administering or managing the only when there are assets to administer. That
estate of a deceased person and is an executor under position unfolds itself immediately upon the
the Act. She can be sued and is responsible for the death of the person concerned, until such time
deceased husband’s tax. as probate or legal administration is obtained.”
The High Court’s decision In conclusion, the signing of the respective income
RK Nathan J at the High Court rejected the taxpayer’s tax returns form for the deceased person was held to
argument that a legal representative can only exist be an act administering the estate of the deceased.
when there are assets to administer. His Lordship was She was then termed as legal representative, falling
“Executor means the executor, administrator “The agreed documents in the CABD show that
or other person administering or managing the it was the defendant who had completed and
estate of the deceased person.” signed Form B, being the “Return of income by
an individual” for years of assessment 1984
His Lordship examined the scope of executor as and 1985. She had declared herself on signing
defined in s 2 of the Act and concluded that the the said forms as the wife of Abdul Hamid
definition encompassed two groups of persons bin Tun Azmi (deceased). … To my mind, the
being an executor. The first group is the person definition in s 2 clearly encompasses persons
who has obtained the grant of probate or letters of under the category of the defendant. Although
administration of a deceased person. These persons she had neither taken probate nor letters of
are legally appointed. The second group refers to administration, she was clearly administrating
the person “administering or managing the estate of the estate of her deceased husband when she
the deceased person” which must refer to those who signed the Form B for the years 1984 and
are not legally appointed. The wife falls into the latter 1985.”
group and was therefore an executor and liable to tax.
Reading the above passage, does it mean that if she
Augustine Paul FCJ held4 did not sign the Form B, she would have escaped the
tax liability of RM290,918?
“It follows that reference in ss 64 and 74 of The answer is Yes and No. It is felt that if the
the Act to an ‘executor’ includes a person deceased taxpayer has distributed his wealth to
who is administrating or managing the estate his beneficiaries before his death for a bona fide
of a deceased person. Such a person is consideration, then the tax authorities have no
assessable and chargeable to tax and is recourse from the beneficiaries. However, if there
therefore a person who can be sued in law. is ample circumstantial evidence that the deceased
The corollary is that Order 15 r 6A will have taxpayer has distributed his wealth during his
no application to proceedings under the Act lifetime solely to avoid his income tax responsibility,
against such a person. The extension of the tax authorities can have recourse from those
the scope of Order 15 r 6A by the Court of beneficiaries notwithstanding that none of them
Appeal to proceedings under the Act cannot signed the Form B on behalf of the deceased and
therefore be sustained. The answer to the were not executors under the Act.
question posed to us must therefore be in the
negative.” Conclusion
Yong Siew Choon’s decision is a landmark authority
The final victory goes to the tax authorities. The tax in tax recovery matters relating to deceased persons.
recovery from the deceased wife is valid in law as she It defines the scope and responsibility of an executor
is the executor as defined under the Act. under the Act. Its complexity is shown through the
various opinions expressed by the learned judges of
Yong Siew Choon post script the High Court, Court of Appeal and Federal Court.
It is the finding of the High Court that the wife of the The comprehension of this decision has a great
deceased taxpayer is the person administering the impact on succession planning. So now, to sign or
estate of the deceased when she signed the Form B not to sign that Form B?
for YA 1984 and 1985 as legal representative. RK
Nathan J opined:
Endnotes
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