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ANTI-AVOIDANCE PROVISIONS IN MALAYSIA

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ThisarticleisanupdatedversionofthearticlepublishedinNovember2011.Itisrelevanttocandidates
preparingforP6(MYS)andthelawsreferredtoarethoseinforceat31March2016.Thisarticle
discussesonlytheprovisionsintheIncomeTaxAct1967(theAct).Whilereadingthisarticle,candidates
areexpectedtomakeconcurrentreferencestotherelevantprovisionsoftheAct,asamended.

Taxliabilitiesconstituteadirectcostofdoingbusiness.Logically,legitimatelyminimisingtaxexposure
throughtaxplanningisanimportantaspectofmanagingabusinessactivity.

Fromtheperspectiveofrevenueauthorities,itisequallyimportanttocountertaxavoidance.Thus,in
mosttaxjurisdictions,antiavoidanceprovisionsareincludedinthetaxlawstodefeatorpreempt
anticipatedavoidanceschemes,mischief,ortoplugloopholesthathavecometolight.

ANTI-AVOIDANCE PROVISIONS

InMalaysia,therearegeneralaswellasspecificantiavoidanceprovisionsinplace:

General
Section65Settlements
Section140Powertodisregardcertaintransactions
Section140APowertosubstitutethepriceanddisallowanceofinterestincertaintransactions
Section140BSpecialprovisionapplicabletoloansoradvancestodirectorsbyacompany
Section141Powersregardingcertaintransactionsbynonresidents

Specific
Sections29(1)and(2)Basisperiodtowhichincomeobtainableondemandisrelated
Sections29(3),(4)and(5)Furtherprovisionsapplyingtorelatedpersons
Section32(3)(a)Ascertainmentofvalueoflivingaccommodationforadirectorofacontrolledcompany
Sections33(4)and(5)Deductibilityofinterestexpensewhen'duetobepaid'
Sections44(5A)to(5D)Shareholdercontinuityrules
Paragraphs38to40,Schedule3andincometaxrulesrelatingtodisposalssubjecttocontrol

Someoftheantiavoidanceprovisionsarediscussedbelow.

SECTION 65 SETTLEMENTS

Ahighincomeindividualmayresortto'splitting'hisincomeby'settling'(bestowingorgivingpossession
underlegalsanction)or,inlaymanslanguage,'givingaway'someofhisincomeproducingassetsor

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incomestreamstoindividualswhoareinlowertaxbrackets,yetatthesametimeretainingpowerto
revokesuchsettlementorholdasignificantmeasureofcontroloraccessibilitytothesaidincome.

Therefore,bysplittinghisincome,thetotaltaxliabilityofthesettlorisreducedasseenbelow.

Example1
Fatherderivesincomeasfollows:

RM

Businessincome 100,000

Rentalincome 150,000

Totalincome 250,000

Lesspersonalreliefs,say (20,000)

Chargeableincome 230,000

TaxchargedonfirstRM100,000 11,900

TaxonremainingRM130,000
at24% 31,200

Taxpayable 43,100

Ifthefathergiftstherentalpropertytohisdaughter,whoisstillastudent,therentalincomeofRM150,000
willbelegallythatofthedaughterand,undernormaltaxlaws,thetaxliabilitywillbeasfollows:

Father Daughter Total

RM RM RM

Businessincome 100,000 nil

Rentalincome nil 150,000

Totalincome 100,000 150,000

Lesspersonalreliefs,say (20,000) (15,000)

Chargeableincome 80,000 135,000

Taxcharged 7,700 20,300 28,000

ThetotaltaxpayableonthesameamountofincomeofRM250,000,whensplitbetweenfatherand
daughter,isRM28,000,yieldingareductionofRM15,100(43,10028,000).

ObjectiveofSection65
Thus,section65,asanantiavoidanceprovision,seekstonegateorfrustratetheincomesplittingeffect
ofasettlementbydeeminganyincomearisingfromtherelevantpropertyorincomestreamtobethe
incomeofthesettlor,eventhoughthesettlorhaslegallygivenitaway.WithreferencetoExample1
above,ifthedaughterisbelowtheageof21andunmarried,therentalincome,althoughlegallyhers,is
deemedtobetheincomeofherfather,thesettlor.ThustherentalincomeofRM150,000willbetaxable
underthefathersname,andtheincomesplittingeffectwillbenegated.

Settlementscaughtundersection65
Asettlementcaughtundersection65isdefinedinsection65(11)toincludeanydisposition,trust,
covenant,arrangementoragreementandanytransferofassetsorincomewithoutadequatevaluable
consideration.AlsonotethattheprovisionsofSection65donotapplytoasettlementmadeasaresultof
acourtorderormadebyanemployertothewidow/widower/beneficiariesofadeceasedemployee.

Anotherrequisitefeaturefortheantiavoidanceprovisiontoapplyisthatthesettlorretainsameasureof
controlorretainsaccessibilityofthepropertyortheincomearisingfromtheproperty.

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Therearethreepossiblesettlementsituationsundersection65:
1.Settlementbyasettloronanunmarriedrelativewhoisbelow21yearsofage[Section65(1)],or
2.Settlementbyasettloronanyotherpersonwithabsolutepowertorevokethesettlement,thuscausingthepropertyor
incometoreverttothesettlororhis/herspouse[section65(2)],or
3.Settlementthatdoesnothavetheabovetwofeatures,butthesettlor(oranypersoncontrolledbyhim)neverthelessis
abletoaccessanyincomeoraccumulatedincomearisingfromthesettlement[Section65(3)].

Thefirsttwosituationsarespecificandareoftenencountered,whilethethirdsituationisageneralback
upmeasure.Wewillfocusonthefirsttwomeasuresinthisarticle.

1.Section65(1):Settlementonanunmarriedrelativeunder21yearsofage
Thesituationenvisagedentailstheelementsofasettlor,arelativeandthedeemingofincomeieasa
resultofasettlement,incomebecomespayabletoarelativewhoisunmarriedandaminor.Suchincome
isdeemedtoincomeofthesettlor,notthatoftherelative.

Itisimportanttonotethatdeemingoftheincomeisapplicableduringthelifeofthesettlor(theperson
whomakesorentersintothesettlement).Aftermakingthesettlementascaughtundersection65(1),if
thesettlordies,theincomeafterthedateofdeathcannotbedeemedasincomeofthesettlor.Instead,
theincomeafterthedateofdeathwillconstituteincomeoftherelativeasthelatterhasinheritedthe
propertyandtheincomearisingtherefrom.

Therelativeisdefinedinsection65(11)as:
achildofthesettlor(includingastepchildofthesettlor,achildunderhiscustodyorfinancialsupport),andalegally
adoptedchild
awife
agrandchild
abrotherorsister
anuncleoraunt
anephew,nieceorcousin.

Donotethatforasettlementtobecaughtundersection65(1),therelativemustbeunmarriedandbelow
theageof21yearsasatthebeginningofthebasisperiod.Therefore,iftherelativeattainstheageof21
sometimeduringtheyear,section65isstillapplicableforthatyearofassessment.

Example2

Facts
On1January2015,MrGenerousUnclegiftedarentalpropertytohisunmarriednephewwhowasborn
on6April1994.Itwasintendedthattherentalincomefromthepropertywouldfinancethenephews
education.Theannualrentalincomefortheyearsofassessment2015and2016isRM36,000and
RM48,000respectively.

Taxtreatment
Astheunclegiftedthepropertytohisnephew,itisnotatransactionforvaluableandadequate
consideration.Itisalsomadevoluntarily,notunderacourtorder.Therefore,thissettlementiscaught
undersection65.Thenephews21stbirthdaywas6April2015,whichmeanshewasunder21yearsof
ageon1January2015.

Fortheyearofassessment2015,asatthebeginningofthebasisperiodieon1January2015the
nephewwasunder21yearsofageandunmarried.Asalltherequisiteelementsaresatisfied,section
65(1)applies:therentalincomeofRM36,000isdeemedtobeincomeofMrGenerousUncle,notthatof
thenephew.

Fortheyearofassessment2016,oneoftheconditionsisnotfulfilledieasat1January2016,the
nephewhasalreadyattained21yearsofage.ThereforeSection65(1)doesnotapply.Therentalincome
ofRM48,000isincomeassessableonthenephew,notonMrGenerousUncle.

Example3

Facts
ThefactsareasinExample2ieon1January2015,MrGenerousUnclegiftedarentalpropertytohis
unmarriednephewwhowasbornon6April1994.Itwasintendedthattherentalincomefromthe
propertywouldfinancethenephewseducation.Theannualrentalincomefortheyearsofassessment
2015and2016wasRM36,000andRM48,000respectively.Additionalfact:MrGenerousUnclediedon
30September2015.

Taxtreatment
Fortheyearofassessment2015,rentalincomeofRM27,000(forJanuarySeptember2015)willbe
deemedasincomeofMrGenerousUncle.IncomeofRM9,000(OctoberDecember2011)wouldbe

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assessableonthenephew.Provisionsofsection65areapplicableonlyduringthelifeofthesettlor.Upon
thedemiseoftheuncle,section65(1)nolongerapplieswitheffectfrom1October2015.

2.Section65(2):Settlementonotherpersonswithpowertorevoke,thuscausingtheproperty
orincometoreverttothesettlor.
Inthissituation,thesettlementmaybemadeinfavourofanyperson:therearenostipulationsasto
relationshipwiththesettlor,ageormaritalstatusietherecipientofthesettlementneednotbea
relative,maybemarriedorunmarried,andmaybeofanyage.Theexamplebelowillustratesthe
arrangement.

Example4

Facts
MrRichManfoundedabusinessthathasgrowntobeprofitable.On1July2015,hevoluntarilyentered
intoanarrangementwithMrHardworkingmakinghimapartnerandgivinghima30%shareoftheprofits
ofthebusiness.

MrHardworkingwasnotrequiredtocontributeanycapitaltothusbeapartner.Thearrangementfurther
stipulatesthatMrRichManmaywithamonthsnoticeunilaterallyrevokethearrangement,inwhich
caseMrHardworkingwillforthwithceasetobeapartnerandMrRichManwillbeentitledtothe30%
profitspreviouslyduetoMrHardworking.

Taxtreatment
Thesubjectofthesettlementisthe30%shareofthebusinessprofits.Asnocapitalcontributionwas
madebyMrHardworking,thesettlementoftheshareofpartnershipprofitswasnotmadeforvaluable
andadequateconsideration.Furthermore,MrRichManhaspowertorevokethearrangementand,upon
revocation,MrRichManhimselfisentitledtothe30%profits.

Thisisthereforeasettlementcaughtundersection65(2).The30%profitswillbedeemedtobeincomeof
MrRichMan,notthatofMrHardworking,eventhoughitmaybeprovedthatMrHardworkingdidinfact
receivethe30%profits.

Conclusion
Theprovisionsofsection65wereincludedintheActasanantiavoidancetooltopreemptthelowering
oftheincidenceoftaxbysplittingtheincomeoflivinghighincomeindividuals.However,thissectiondoes
notapplyifthetransactionsare:
carriedoutwithvaluableandadequateconsideration,or
courtordered,or
transferredtorelativeswhoaremarriedorabove21yearsofage,or
transferredoutrighttoanyothersfullyrelinquishinganyrightofrevocationorcontroloftheincomethereafter.

SECTION 140 POWER TO DISREGARD CERTAIN TRANSACTIONS

Section140oftheActprovideswideandgeneralpowerstotheDirectorGeneraloftheInlandRevenue
(DGIR)tocombattaxavoidancebydisregardingcertaintransactionsandcomputingorrecomputingtax
liabilityofataxpayer.

Theprovisions
WheretheDGIRhasreasontobelievethatanytransactionproducestheeffectof:
alteringtheincidenceoftax
relievingfromataxliability
evadingoravoidingtax,or
hinderingorpreventingtheoperationoftheAct

hemaydisregardorvarysuchatransactiontocounteractitsintendedeffect.

Inparticular,DGIRmayinvokesection140inrespectoftransactionsbetween:
relatedpartiesiepersons,oneofwhomhascontrolovertheotherorbothofwhomareundercommoncontrol,or
individualswhoarerelatives(parent,child,sibling,uncle,aunt,nephew,niece,cousin,grandparent,grandchild)

onthegroundsthatsuchtransactionsarenotonparwithtransactionsbetweenindependentparties
dealingatarmslength.

Ininvokingsection140,theDGIRmustadheretotherulesofnaturaljusticeieprovidethegroundsand
basisofhisadjustmentsandrecomputationoftaxliability.Section140(5)stipulatesthatparticularsof
theadjustmentshallbegivenwiththenoticeofassessmentbytheDGIRtothetaxpayer.

Principlesdevelopedbycaselaw
VariousprincipleshavebeenestablishedinsuccessivecaselawdecisionsbothintheBritish

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CommonwealthandinMalaysia.Theyinclude:
FormoversubstanceWhenatransactionhasaproperlegalformandisgivenlegaleffect,thetransactionis
generallynotdisregarded.
SubstanceoverformDespitehavingproperlegalform,thetransaction,whenstrippedofitstaxadvantage,hasno
meritstoitieitisashamtransaction.Insubstance,itisnothingbutatransactiontoavoidtax.Thetaxauthoritieswill
bejustifiedindisregardingsuchatransactionanddenyingtheintendedtaxdeduction,relieforallowance.
ThechoiceprincipleAtaxpayerretainstherighttochooseacertaincourseofactionoutoftwoormorealternative
choicesaslongasthechosencourseofactionhascommercialsubstance.Forinstance,ataxpayerhasachoiceof
whethertoacquireanassetortoleaseitforhisbusiness.Ifhechoosestoleaseit,andsuchacourseofactionbrings
withitahighertaxdeductionthanifhehadacquiredtheasset,thetransactionshouldnotbedisregardedsimply
becauseitreducedhistaxliability.Leasinganassetisnotashamtransactionitisafitandproperbusinessfacility
availableinordinarycommerciallife.
TaxmitigationNomaninthiscountryisunderthesmallestobligation,moralorother,sotoarrangehislegal
relationstohisbusinessortohispropertyastoenabletheInlandRevenuetoputthelargestpossibleshovelintohis
stores.LordClyde.Thismeansthatataxpayerhasarighttoarrangehisaffairssothathepaysthelowesttax
possible.
CommercialsubstanceIfatransactionhascommercialsubstanceandyieldsataxadvantage,itshouldnotbe
brandedastaxavoidanceandbedisregarded.Forinstance,ifagroupofcompaniesisrestructuredtomaximiseits
businesssynergies,complementaryactivities,upstream,downstream,orhorizontalintegration,distributionnetwork,
branding,etc,thetaxbenefitsreapedalongthewayshouldnotbedeniedbecause,undeniably,thereiscommercial
substanceinsuchrestructuring.
OrdinarycourseofcommercialactivitiesIfatransactionisundertakenintheordinarycourseofcommercial
activities,notjustfortaxavoidance,itshouldprevail.Forinstance,byraisingworkingfundsfromabondissuerather
thanabankloantherebyincurringdiscountsratherthaninterestwithholdingtaxisavoided.Raisingworkingfunds
isintheordinarycourseofcommercialactivitiesadoptingonemodevisvisanotherisamatterofchoiceanda
functionofmanybusinessconsiderations.Therefore,anytaxbenefitaccruingtosuchamodeofraisingfundsshould
notbeviewednegativelyandbedenied.
RulesofnaturaljusticeInMalaysia,ithasbeenestablishedinsuccessivejudicialpronouncementsthatininvoking
section140,theDGIRmustobservetherulesofnaturaljusticeietheDGIRmuststatethegroundsinsufficientdetail
atthetimeofraisingtheassessmentsothatthetaxpayerisfullyapprisedofthebasisofallegationsoftaxavoidance
andisgivensufficienttimetoprepareandpresenthisdefence.TheDGIRmusthavevalidgroundsatthetimeof
invokingsection140,andnotmerelyactonsuspicionorconjecture.

Taxplanninganddefenceagainsttaxavoidance
Inplanningbusinessactivitiesandtransactions,reapingthemaximumtaxsavingsmaybelegitimately
achievedprovidedthefollowingfactorsarepresent:
Thereisgoodandproperlegalformthatisenforcedandenforceable.
Thetransactionisproventohavecommercialsubstancesuchasbusinesssynergies,complementarystrengthssuch
asgooddistributionnetworks,establishedbranding,strongmanagementteamoreffectivebusinessmodel,etc.
Thetransactionisnotashamtransactiondevoidofanysubstanceorpurposeotherthantoavoidtax.
Thetransactioniscarriedoutintheordinarycourseofcommercialactivityieitisnotconvolutedorcontrivedpurely
toachieveataxadvantage.
Itistransactedatarmslengthataprevailingmarketpriceieitcanstandupagainstatransferpricingscrutiny.

IndefendingagainsttheinvocationofSection140,ataxpayershouldsimilarlybearinmindallorsomeof
theprinciplesstatedabove,aswellasdeterminingwhethertheDGIRhasadheredtotherulesofnatural
justice.

SECTION 140A POWER TO SUBSTITUTE THE PRICE AND

DISALLOWANCE OF INTEREST IN CERTAIN TRANSACTIONS

Thissectionformsthebasisfortransferpricingreviews/auditsbythetaxauthorities.Suchpricing
betweenassociatedpartiesshouldbebasedontheprincipleofindependentpartiesdealingatarms
length.Referencematerialspertainingtotransferpricingabound.Therefore,thissubjectisnotdiscussed
here.

Subsections(4)and(5)ofsection140Arelatetothethincapitalisation(thincap)rules.The
implementationoftheseprovisionshasbeendeferredbytheMinisterofFinance(MoF)until31
December2017.On22February2016,theMoFhasalsoconfirmedthatthethincapruleswillcommence
toapplywitheffectfrom1January2018.Moredetailsastotherules,suchastheratioofcapitaltodebt,
definitionof'debt',etc,arestillpendingasatthetimeofwriting.Hence,thispartofsection140Aisnot
discussedhereandtheserulesarenotcurrentlyexaminable.Atechnicalarticlewillbepublishedonthe
ACCAglobalwebsitewhentheserulesdocomeintoforcewhich(basedoncurrentlylegislative
timescales)islikelytofirstaffectexamsintheyear1October2018to30September2019.

SECTION 140B SPECIAL PROVISION APPLICABLE TO LOANS OR

ADVANCES TO DIRECTORS OF A COMPANY

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Ithaspreviouslybeenperceivedbythetaxauthoritiesthatcompaniessometimesgiveinterestfreeor
lowinterestloanstodirectors(whoareshareholders)asadisguiseddistribution.WitheffectfromYA
2014,section140Bwasintroducedtodeemthecompanytohavederivedinterestincomeinrespectof
suchloanstodirectors.PublicRuling8of2015wasissuedtoelucidatethenewsection.

AccessatabulatedanalysisoftheprovisionsandtheexplanationsinIRBsPublicRuling8of
2015

SECTION 141 POWERS REGARDING CERTAIN TRANSACTIONS BY

NON-RESIDENTS

Whereanonresidentcarriesouttradingwitharesidentcontrolledbythenonresidentand,owingtothe
closerelationshipbetweenthetwoparties,theresidentderiveslittleornoincome,thenonresidentmay
betaxedontheincomereasonablyexpectedtoaccruetotheresidentunderarmslengthconditions.The
residentwillbedeemedtobeanagentofthenonresidentforthispurpose.

Althoughsection141appearstobeintendedasthebasisfortransferpricingreviews,inpracticethetax
authoritieshavetendedtohaveutilisedsection140andsubsequentlysection140Aforitstransferpricing
audits.

Nevertheless,dobearinmindthatthissectionexistsandmaybeusedtoimposetaxondeemedincome
madeinsuchtradingrelationships.

SECTIONS 29(1) AND (2) BASIS PERIOD TO WHICH INCOME

OBTAINABLE ON DEMAND IS RELATED

Grossincomeinrespectofinterest,discounts,rent,royalties,pensions,annuitiesorotherperiodical
paymentsaretaxableonlywhentheincomeisreceived.However,asanantiavoidancemeasure,section
29wasputinplacetoenablesuchincometobetaxablewhenthegrossincomehasnotbeenreceived
butisobtainableondemand.Forinstance,whereataxpayerisduetoreceiveinterest,andthepayeris
readyandabletopaytheinterest,ifthetaxpayerchoosesnottoreceivetheincomeyet,section29may
beinvokedtoassesstheincomeifitcanbeestablishedthatthepaymentisobtainableondemand.

SECTIONS 29 (3), (4) AND (5) FURTHER PROVISIONS APPLYING TO

RELATED PARTIES

Inaloanorotherarrangementbetweenrelatedpersons,theabilitytocontrol/dictatethetimingofthe
paymentoftheinterestorotherincomeisperceivedtorenderitselftomanipulationforataxadvantage.

Asanantiavoidancemeasure,sections29(3),(4)and(5)werevariouslyintroducedinYA2014andYA
2015.

Interestincomedeemedobtainableondemand
S.29(3)Interestonloansbetweenrelatedparties(includedrelatives)isdeemedobtainableondemandwhenitisdueto
bepaid,therebyrenderingittaxableinthatYA.

Theupshotis,interestistaxabletothepersonsgivingtheloaneveniftheyhavenotreceivedtheinterest
yet.

A'relative'isdefinedintheIncomeTaxActtomean:
aparent
achild(includingastepchildandachildadoptedinaccordancewithanylaw)
abrother,asister
anuncle,anaunt
anephew,aniece
acousin
anancestor,and
linealdescendant

Employment,interestandotherincome
S.29(4)Employmentincome,interest,discounts,premiums,rent,royalties,pensions,annuities,and
otherincomearisingbetweenrelatedpartiesisdeemedtobeobtainableondemandintheyear
immediatelyfollowingtheyearinwhichitfirstbecomesreceivable.Itthereforebecomestaxableinthe
followingyear.

Theconsequenceofthisprovisionisthatifthesesourcesofincomearisepursuanttotransactions:

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betweenpersons,oneofwhomhascontrolovertheother,or
betweenrelatives,or
betweenpersonswhoarebothcontrolledbysomeotherperson,

andtheamountbecomesreceivablebythetaxpayerintherelevantperiod,say,inYear1,thetaxpayeris
deemedtobeabletoobtainondemandtheamountinYear2,therebybecomingassessabletotaxon
theamountinYear2,regardlessofwhethertheamounthasbeenreceived.

Thisprovisionaimstonegatetheability(becauseofthenatureoftherelationshipbetweenrelated
parties)todelayorpreplanthetimingofpaymentofsuchmoniestoachieveataxadvantage.

Itisenvisagedthatthesituationsofcontrolandrelativeswouldariseintransactionsbetweenrelated
companies,groupofcompanies,familyrunbusinessesetc.

SECTION 32(3)(A) ASCERTAINMENT OF VALUE OF LIVING

ACCOMMODATION FOR A DIRECTOR OF A CONTROLLED COMPANY

Indeterminingthevalueoflivingaccommodationprovidedbytheemployertoanemployee,thedefined
valueofthelivingaccommodationiscomparedto30%ofthegrossemploymentincomeundersection
13(1)(a).Thelowerofthetwofiguresistakentobethevalueassessabletotaxontheemployee.Thisis
theapplicablemethodwhereabonafideemployeremployeerelationshipsubsists.

Wheretheemployeeisadirector(notbeingaservicedirector)ofacontrolledcompany,theabove
restrictionofthevalueoftheassessablebenefitto30%ofthesection13(1)(a)incomeisnotapplicable.
Therefore,thefulldefinedvalueofthelivingaccommodationconstitutesassessableincometothe
director.

Aservicedirectorisdefinedinsection2oftheActtomeanadirectorwhoisemployedintheserviceofthe
companyinamanagerialortechnicalcapacityandwho,whetheraloneorwithassociates,holdsnotmore
than5%oftheordinarysharecapitalofthecompany.

Therationaleforthisantiavoidanceprovisionisthatanonservicedirectorofacontrolledcompanyis
likelytobeinapositiontobeabletoarrangesuchthathissection13(1)(a)employmentincomeis
depressedwhileahighvaluelivingaccommodationisprovidedtohim.

Theantiavoidanceprovisioninsection32(3)(a)meansthatsuchadirectorwillbeassessabletotaxon
thefulldefinedvalueofthelivingaccommodationprovidedtohim.

SECTIONS 33(4) AND (5) DEDUCTIBILITY OF INTEREST EXPENSE

WHEN 'DUE TO BE PAID'

Theseprovisionsdealwiththequestionofwhenaninterestexpenseisataxdeductibleexpense.

Section33(4)providesthatwhereanyinterestpayableforabasisperiodforaYAisnotduetobepaidin
thatperiod,thesumshall,whenitisduetobepaid,bedeductedinarrivingattheadjustedincomeofa
personforthatoriginalperiod.

Therefore,theinterestexpenseisdeductibleonlywhenitisduetobepaid,andwhenthatarises,the
expensemustberelatedbacktotheYAforwhichitispayable.

Example5
InterestofRM100ispayableforYA2013,butonlybecomesduetobepaidinYA2016.TheamountofRM100firstbecomes
deductibleinYA2016butisrelatedbacktoYA2013.

Theimpactisthatthereisaneedtorevisetheprioryeartaxcomputation.

SECTIONS 44(5A) TO (5D) SHAREHOLDER CONTINUITY RULES

Inanutshell,wheretheshareholdingofacompanywaschangedsubstantiallyduringabasisperiod,any
unabsorbedlossandcapitalallowancebroughtforwardweredisregardediewereeffectivelylost
forever.

Theseprovisionshavebeensomewhatsuspendedordeferredasithasbeenconfirmedbythetax
authoritiesthattheserulesareonlyapplicableinthecaseofasubstantialchangeofshareholdingin
dormantcompanies.Assuch,theseprovisionsarenotdiscussedanyfurtherhere.

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PARAGRAPHS 38 TO 40, SCHEDULE 3 AND INCOME TAX RULES

RELATING TO DISPOSALS SUBJECT TO CONTROL

Theserulesrelatetothecalculationofcapitalallowanceswherethequalifyingassetsaretransferred
betweenrelatedpartiesundercommoncontrol,orwhereonepartycontrolstheother,orwherethe
assetsaretransferredinaschemeofreconstructionoramalgamation.

Themischiefenvisagedhereisthatthedisposalpricemaybeartificiallyinflatedtoincreasetheclaimfor
capitalallowancesbytheacquirerorartificiallydeflatedtoleadtoabiggerbalancingallowanceforthe
disposer.

Thecontrolledsalerulesarethereforedesignedtodeemtheassettobetransferredattheresidual
expenditureoftheasset.Thiswillleadtoanilbalancingadjustmentforthedisposerienobalancing
allowanceandnobalancingcharge.Inaddition,theacquirerwillclaimcapitalallowancesatarateand
amountnodifferentfromwhatthedisposerwouldhaveclaimedhadthedisposercontinuetoownthe
asset.

Therulesarenotdiscussedindetailhereasthereareamplematerialsavailabletocandidatesonthis
subject.

CONCLUSION

Incarryingouttaxplanningorassessingbusinessdecisions,itisimperativethatakeeneyebetrainedon
therelevantantiavoidanceprovisionsintheMalaysiantaxregimetoensurethattheproposed
transactionswillstanduptoscrutinybythetaxauthorities.Thiswillstandthetaxpayeringoodsteadin
thecaseofataxaudit,taxinvestigationoratransferpricingauditandwillstandthecandidateingood
steadintheP6(MYS)exam.

WrittenbyamemberoftheP6(MYS)examiningteam

Lastupdated:29Apr2016

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