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articles T A Guide to Tax Planning Contemporary Issues on Income Tax and Real Property Gains
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A Guide to Tax Planning

Contemporary Issues on Income Tax and Real Property Gains Tax

ACCA ACCA (the Association of Chartered Certified Accountants) is the largest and fastest-growing international

ACCA

ACCA (the Association of Chartered Certified Accountants) is the largest and fastest-growing

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Author’s Profile

Author’s Profile Dr. Choong Kwai Fatt is an Associate Professor and tax consultant at the Faculty

Dr. Choong Kwai Fatt is an Associate Professor and tax consultant at the Faculty of Business and Accountancy of the University of Malaya.

Prior to joining the University of Malaya, he was a tax consultant involved

in both tax advisory and tax compliance services through attachment

with Malaysia Price Waterhouse Tax Services Sdn Bhd (now known as PricewaterhouseCoopers Tax Services Sdn Bhd), an international accounting firm. Dr Choong is a member of the Malaysian Institute of Certified Public

Accountants (MICPA), a member of the Malaysian Institute of Accountants (MIA) and a fellow member of the Malaysian Association of Company Secretaries (MACS). He holds a Bachelor’s degree in Accounting (Honours) from the University of Malaya, a Bachelor’s degree of Laws (Honours) from the University of London, a Master’s degree in Comparative Laws and also

a Doctorate in Philosophy (Taxation Law) from the International Islamic

University of Malaysia. He has written and published papers in local and international tax, law and accounting journals. He is also the author of the following books:

(1)

Advanced Malaysian Taxation. 2005 7 th edition, Infoworld, Kuala Lumpur.

(2)

Malaysian Taxation. 2005 11 th edition, Infoworld, Kuala Lumpur.

(3)

Practitioners’ Guide on Tax Incentives: An Anatomy. 2004 1 st 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 2 nd edition, Infoworld, Kuala Lumpur.

(6)

Istilah Percukaian. 2004 1 st edition, Sweet and Maxwell, Kuala Lumpur.

(7)

Real Property Gains Tax - Principles, Policies and Practices. 1997 1 st edition, Infoworld, Kuala Lumpur.

(8)

Inland Revenue Guidelines, Rulings and Government Gazettes. 2002 2 nd edition, Infoworld, Kuala Lumpur.

(9)

Malaysian Taxation – Revision and Practice Set. 2004 4 th edition, Infoworld, Kuala Lumpur.

(10)

Tax Planning for Income Tax Waiver. 1999 1 st edition, Infoworld, Kuala Lumpur.

(11)

Personal Finance in Malaysia, 2000 1 st edition, Infoworld, Kuala Lumpur.

(12)

Malaysian Leading Cases in Income Tax. 2003 1 st edition, Sweet and Maxwell, Kuala Lumpur.

(13)

Tax Planning for Malaysian Employees. 2003 1 st edition, Sweet and Maxwell, Kuala Lumpur.

(14)

Tax Planning on Business Income. 2004 1 st edition, Sweet and Maxwell, Kuala Lumpur.

(15)

Advanced Taxation – Revision and Practice Set. 2003 1 st edition, Infoworld, Kuala Lumpur.

(16)

Malaysia Revenue Law Cases – A Practical Index (1932 – 2002). 2003 1 st edition, Infoworld, Kuala Lumpur.

(17)

Malaysian Tax Digest. 2005 1 st 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

Contents

Compensation on Termination of Joint Venture Agreement

4

-

Capital or Income receipts?

The New Outlook for Investment Holding Company

8

-

post Finance Act 2005

Listed Investment Holding Company

1

-

The New Outlook post Finance Act 2005

Provision or Accrued Expenses?

16

An analysis of the Court of Appeal’s decision in Exxon Chemical (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri

-

The Criteria For Determination Of Income Tax Or Real Property Gains Tax In The Case Of Land Appropriation From Investment To Trading Asset

19

The Tax Authorities’ power to revoke an assessment made under Real Property Gains Tax and switch to Income Tax

8

The scope of an ‘Executor’ and his/her liability to income tax

To sign or not to sign the Income Tax Form B for the deceased person?

-

income tax

income tax

Compensation on Termination of Joint Venture Agreement

– Capital or Income receipts?

Introduction It is a trite law in the Malaysia Income Tax Act 1967 (the Act) that capital gains are not taxed while transactions that are ‘income’ in nature will be taxed. Making the distinction between ‘capital’ or ‘income’ is never an easy task, especially in relation to the compensation on termination of a business contract. Generally, compensation for payment of services is income receipts while compensation for destruction of capital structure is capital receipts. The Court of Appeal in Suasana Indah Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 1 had an opportunity to expound the legal principles on compensation receipts in the Malaysian context.

The facts of the case In Suasana Indah, the taxpayer through a Joint Venture (JV) agreement had provided services to convert two pieces of land in Gombak, extend the leasehold period to 99 years and subdivide these lands. These services ware valued at RM4.8 million, reflected as contribution of capital to the JV. The other JV partner contributed the said land, valued at RM5.3 million. Due to some disagreement between the JV partners, the JV was terminated and the taxpayer was paid a compensation of RM6.4 million. The issue is whether such receipts are capital or revenue receipts. The taxpayer contended the RM6.4 million was capital receipts as the amount was paid for the loss of rights under the JV or alternatively capital withdrawal form the partnership. The tax authorities however argued that the payment was a

compensation for loss of income assessable under s 22(2)(b) of the Act or alternatively an amount paid for services rendered as stipulated in s 24(1)(b) of the Act, thus income in nature and subject to tax. This argument found favor with the Special Commissioners and the High Court. The Court of Appeal was asked to hear this appeal to verify the correctness of the law as decided by the lower courts.

Does a JV amount to partnership? The Court of Appeal was asked to decide whether the JV is a partnership, therefore the amount received was an amount for withdrawal of partnership. In the JV agreement, two clauses expressly disclaimed that the JV did not constitute a partnership or a principal- agency relationship. The taxpayer conceded that the JV was not a partnership by the “ordinary legal concepts of partnerships” but maintains that it was a partnership solely because it satisfied the definition of “partnership” stipulated in s 2 of the Act. Abdul Aziz Mohamed JCA delivered the Court of Appeal judgment which affirmed the established legal principle that the existence of a partnership is referred to the law of partnership and not the definition of partnership as stated in s 2 of the Act. The definition of “partnership” in the Act is intended only for the interpretation of that word where it is used in the Act. The provision in the JV agreement must prevail and be given effect to. Since it was agreed between the JV partners that no partnership existed, the argument for ‘capital withdrawal from partnership’ was rejected.

income tax
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“In my opinion that asset, the congeries of rights which the appellants (company) enjoyed under the agreements and which for a price they

surrendered, was a capital asset

framework within which their circulating capital operated; they were

not incidental to the working of their profit-making machine

The agreements formed the fixed

Compensation for loss of rights On the issue whether the compensation received constituted a loss of rights under JV or merely compensation for services rendered (loss of income), the Court of Appeal approved the application of the

Commissioners’ decision as income receipts. In the House of Lords, Lord Macmillan propounded the “whole structure” test as the test for determining the nature of such compensation and held, on the facts, that such payment was a capital receipt. His

fundamental to the trader’s activities, it was therefore

whole structure test as enunciated by Lord MacMillan

Lordship was of the opinion that these terminated

in

Van Den Berghs Ltd v Clark 2 .

contracts were not ordinary commercial contracts

In Van Den Berghs Ltd, the margarine manufacturer (cum dealer) entered several business alliance agreements with its competitor, a Dutch company, to improve its sales. These contracts included agreements on the sharing of profits of their respective margarine businesses, goods’ pricing, designated places of trade and restrictions against pooling with competing third parties. In short, these

made in relation to the sale of goods but were related to the whole structure of the profit-making apparatus of the manufacturer. The contracts regulated the taxpayer’s activities, defined what the parties in the contract may or may not do and further affected the whole conduct of the business. As the compensation was related to the termination of that which was

contracts governed the business operations and were

a

capital receipt. Lord Macmillan held:

expected to be in force for a period of 20 years, with changes made as time necessitated. The contracts

“In my opinion that asset, the congeries of

were in operation for 7 years after which certain disputes arose and the Dutch company paid Van Den

rights which the appellants (company) enjoyed under the agreements and which for a price

Berghs £450,000 as “damages” for the termination

they surrendered, was a capital asset

The

of the contracts and the withdrawal of all future claims. The issue of whether the compensation was an income or capital receipt was a complicated one. The tax authorities assessed the payment as trading income and taxed it accordingly. The general commissioners agreed with the tax authorities and held that it was a trade receipt. Upon further appeal

agreements formed the fixed framework within which their circulating capital operated; they were not incidental to the working of their profit-making machine but were essential parts of the mechanism itself. They provided the means of making profits, but they themselves did not yield profits. The profits of the appellants arose from manufacturing and

to the King’s Bench division, the High Court reversed the commissioners’ decision and held that it was

dealing in margarine.”

a

capital receipt. However, the Court of Appeal

In

Suasana Indah, the Court of Appeal elaborated

reversed the High Court decision and affirmed the

the fundamental requisites on the application of the

income tax

income tax

whole structure test to determine the nature of the contract termination receipts being capital receipts. First, the test involves ‘structure of a profit-making apparatus’ and not just any ‘structure’. Second, such a profit-making apparatus is not referring to business. The profit-making apparatus referred is an organisation, a set up, a capital framework that a taxpayer must necessarily and inevitably already have that makes profit. Third, the test does not require that the business of the taxpayer company be destroyed or brought to an end 3 . The Special Commissioners and the High Court have misunderstood the test to mean that the cancellation of the JV agreement must result in the destruction of the profit-making apparatus of the taxpayer company, which was never intended or seen in Van Den Berghs. In Van Den Berghs, the profit-making apparatus of the English company did not suffer from the termination of the agreements. The correct application of the whole structure test is to examine the nature of the agreement in relation to the whole structure of the profit-making apparatus of the company and to see whether the impact of the termination affects the whole structure of the profit-

making apparatus. This is a two-fold test:

(Refer to Diagram 1) In this case, the JV merely governs the sharing of profit of the JV parties. It does not regulate the carrying-on of the business as seen in Van Den Berghs. It is an ordinary contract under which they were to provide the land improvement services in return for an interest in the land development project. In short, it was a contract for the provision of services. The facts of the case as determined by the Special Commissioners’ show that the JV is not a framework agreement, and the taxpayer was not restrained in any way from providing its services to other persons whether through another JV or otherwise. Thus, the amount paid in its true essence is compensation for loss of income, and thus subject to tax.

Conclusion The analysis of the two-fold test as suggested in the Court of Appeal in Suasana Indah is crucial in ascertaining whether compensation for the 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 agreement

affects

the whole structure of the profit-making apparatus

Diagram 1

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receipt. A contract for business alliances is a capital asset of the company. It governs the whole structure of the business, stipulating what the company may or may not do. It has to regulate the conduct of the business operations. It is different from a contract of sale or an agency contract, which are made in the ordinary course of the business. In a business alliance, when one receives payment for the termination of an agreement, the sum received is a capital receipt and not a revenue receipt as it involves

the loss of an enduring trading asset. The following test summarizes the legal principles of the compensation receipts in relation to termination of contract: (Refer to Diagram 2)

 

Income

Capital

(i)

Contract for disposal of trading stock

_

(ii)

Ordinary commercial contracts in the course of carrying on their trade

_

(iii)

Contract related to the whole structure of the profit-making apparatus

_

Diagram 2

Endnotes

1. [2006] 1 AMR 302.

2. 19 TC 390.

3. [2006] 1 AMR 302 at p320.

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The New Outlook for Investment Holding Company

- post Finance Act 2005

Introduction Since the incorporation of Investment Holding Company (IHC) legislation in s 60F of the Income Tax Act 1967 1 with effect from year of assessment 199 , it has been accepted that an IHC merely derives investment income such as dividend, interest and rental. However, the recent High Court’s decision in Fernrite Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 4 held that an IHC, no less than an investment dealing company, has been treated as carrying on a business for taxation purposes. Business source is given preferential treatment over investment source as it claims capital allowances, has current year loss and is able to set off unutilised business loss brought forward. With Fernrite’s decision, IHC as computed with the business source concept will have a lower income tax payable as compared to the earlier investment source concept. This tax treatment of IHC with business source is consistent with all companies having business sources such as an investment dealing company, or a manufacturing, trading or service provider company. It too complies with the tax neutrality policy in a tax system. This landmark decision delivered by the eminent tax judge Faiza Tamby Chik J is short-lived with the recent Budget 2006 proposal to amend s 60F via the Finance Act 2005. The new amendments have an effect on the YA 2006 and subsequent YAs. This article examines the newly amended

legislation and concludes that it contains more contentious arguments instead of clarifing the law to guide the taxpayer in a self-assessment regime.

The concept of IHC With effect from YA 2006, IHC is redefined to mean ‘a company whose activities consist mainly in the holding of investments and not less than 80% of its gross income (whether exempt or not 6 is derived therefrom)’. s 60F is further amended to provide that the income from the holding of investment shall not be treated as business income under s 4(a) and income other than income from holding the investment be treated as s 4(f) income 7 . This new legislation serves as an anti-avoidance provision, preventing a company from camouflaging management services as business source into IHC and setting off a large portion of expenses against it. Alternatively, it also denied a company with several units of properties from having its rental income assessed as business income, relying on the Malaysian landmark Privy Council decision of American Leaf Blending Sdn Bhd v DGIR. 8

The Computation With this amendment, IHC is not allowed to have its income from the holding of investment as business income. It thus only has s 4(c) dividend income, s 4(c) interest income, s 4(d) rental income and s 4(f) other income. No capital allowance or current year loss is available to IHC. Any unabsorbed loss carried forward

 

Chart 1

income tax

Case Study

1

Gross income Management fees Investment income (includes exempt income)

RM

RM

RM

40,000

60,000

40,000

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.

The new IHC concept continues to suffer the

deduction constraint. It severely restricts the deduction of overhead expenses incurred in IHC.

s 60F, since the inception into the Act from YA 1993, has restricted the deduction of permitted expenses into the following statutory formula:

A x

B

4C

or

5%

x

B

Which ever is the lower

Where A is the total of the permitted expenses

incurred for that basis period reduced by any receipt of a similar kind; “Permitted expenses” means expenses incurred by an investment holding company

in respect of –

Presumption of being IHC

s 60F(1B) was inserted into the Act, and sets down the IHC presumption application. Once a company has been established as an IHC between the tax

authorities and the company, it shall be presumed the company continues as an IHC for all subsequent YAs unless the contrary is proven. The company under the self-assessment regime

may have to use the YA2005 tax computation to gauge whether it falls into the IHC category in YA2006. Proper tax planning is discussed below and

is required to ensure it is not IHC.

Management Alert

The newly-amended IHC concept requires that at least 80% of its gross income (including exempt income)

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, telephone charges, printing and stationery cost and postage; and

treated as s 4(f) income. (Refer to Chart 1) Management may exercise its discretion to either 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 deductible under s 33(1).

being labelled as IHC. If a company falls under IHC, management fees would be treated as s 4(f) income

B

is the gross income consisting of dividend,

interest and rent chargeable to tax for that basis period; and

and no capital allowance and current year business loss are accorded.

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. C = B + exempt dividends + gains made from the realisation of investment.

holding of investments and not less than 80% of its gross income (whether exempt or not) 13 is 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 maximum expenses that are deductible are only 25% of A. 9 The fraction of permitted expenses are deducted from the aggregate income to arrive at the total income of IHC. 10

‘holding of a trading stock’ is never easy. It has to be examined with its peculiar facts. To be an IHC, it has to be ‘holding of an investment’ and this sets the demarcation line.

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IHC is a company incorporated with the primary object to invest its share capital or borrow funds in

shares, real properties, unit trust, bonds and deposits

in order to derive dividend, rental or interest income.

The issue of whether an activity constitutes ‘making

an investment’ or ‘carrying on business’ is a question of law, to be decided by the law lords. Generally,

a business is said to exist if there is repetition of

transactions, short period of holding, profit intention and carrying out business using a profit-making structure.

A company incorporated with its objective of

investment dealing, which actively buys or disposes

shares or landed properties for profit is prima facie carrying on business. In an economic downturn, such a company may withhold from acquiring its trading stock and can never be treated as IHC even

if it derives dividend or rental income at the time of quiescence.

In J.P. Harrison (Waford) Ltd v Griffiths 14

Danckwerts J. opined: 15

“When you find that there is a trading company and it acquires the shares in question for the purpose of making a profit out of those shares, and it makes profit by getting an enhanced price on resale or by getting an advantage out of the temporary possession of the shares in the form of dividend, to my mind it is dealing in the shares in the course of its trade and not in any other capacity whatever.”

Raja Azlan Shah FJ in I Investment Ltd v Comptroller General of Inland Revenue 16 held that a company carrying on a business does not necessarily always have high-frequency transactions as the business cycle can go up and down. The lordship held 17 :

“If a company was formed to carry on business, and in fact it carried it on, I think, it cannot matter that its activities had been an isolated one… A company’s business may have been quiescent for a number of reasons. For example, following a business set-back, consolidating its business waiting for the ripe opportunity to occur…If the company still carries it on, then I think the company is carrying on business.”

Where a company is incorporated with a business object to provide management services, trading or carrying on manufacturing, its excess funds may be utilised to derive investment income. Such companies cannot be termed as IHC even though 80% of the gross income is from investment income. The primary objective that it never intended to be an IHC is conclusive evidence that must be accepted by the tax authorities. The determination is based on circumstances and degree, a question of fact to be decided and argued at the Special Commissioners’ level upon further appeal. Likewise, in a securitisation exercise, a special purpose vehicle (SPV) company which is incorporated to issue bonds to finance the construction project of its holding company will release its bond proceeds in trunk batches while the excess funds will be placed in the money market. Although it derives interest income from the money market and pays the bond interest to its investors, it can never be held as IHC. The SPV is carrying on business. The series of transactions, continuity and repetition of funds placement and paying interest over a period of time to bondholders are strong evidence pointing towards business. That the interval between the investment of funds in the money market and the payment of

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interest to bondholders may be short or long is never a criteria to decide the issue of carrying on a business. In American Leaf Blending Co Sdn Bhd v DGIR 18 Lord Diplock remarked 19 :

‘The carrying on of ‘business’, no doubt, usually calls for some activity on the part of whoever carries it on, though, depending on the nature of the business, the activity may be intermittent with long intervals of quiescence in between.’

In conclusion, we have to examine the first object of the memorandum of association of a company to determine its true objective, whether it is making an investment or professing to carry on business. The acid test is to look at the nature, purpose and substance of the transaction and, in doing so, one may have to go beyond technicalities. Lord Justice Clark acknowledged the difficulty in California Copper Syndicate v Harris 20 :

“What is the line which separates the two classes of cases [investment or business] may be difficult to define, and each case must be considered according to its facts; the question to be determined being - is the sum of gain that has been made a mere enhancement of value by realising a security, or is it a gain made in an operation of business in carrying out a scheme for profit making!”

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

otherwise. The assessment shall stand unless and until the taxpayer satisfies the tax authorities, the special commissioners or the court that such an additional assessment is wrong. It is most important for the taxpayer to keep proper accounts in connection with the investment or business activities as required by s 82 of the Act. Lack of documentary evidence is an important factor which no doubt would influence the tax authorities in drawing the adverse inference that the company is an IHC.

Conclusion It is felt that the Act should not discriminate an investment holding company from other companies such as investment dealing, manufacturing, trading or service companies. It is an accepted legal principle that the mere setting up of a company points to its business intention because of its implied continuity 21 . That would be a strong presumption that it intends to do business. In addition, the neutrality of tax treatment has to be preserved to ensure the tax system is fair to all taxpayers. The latest amendment to IHC may result in companies spending unnecessary cash resources to engineer tax avoidance schemes to frustrate the operation of s 60F. Legal battles in the long run merely reduce the competitiveness of a firm and result in less tax revenue to the country.

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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.

income tax
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Listed Investment Holding Company

- The new outlook post Finance Act 2005

Introduction The investment holding company (IHC) is presumed as deriving investment income since the inception in the Income Tax Act 1967 (the Act) in 199 1 . In 00, the eminent tax judge Faiza Tamby Chik J in Fernrite Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 2 held that the IHC is instead carrying on business, which opened the eyes of tax professionals and tax authorities. To ensure certainty in the self-assessment regime, the Finance Act 00 3 legislates a new Section 60FA to govern listed IHCs. It takes effect from year of assessment 006 and in subsequent years. Prior to YA 006, the tax treatment of an IHC is the same, irrespective of whether it is quoted on Bursa Malaysia or not. This article examines the provision, explains the tax treatment and highlights the contentious issues in this new legislation.

whose activities consist mainly in the holding of investments and not less than 80% of its gross income (whether exempt or not) 5 is derived therefrom.’ A listed IHC is given preferential tax treatment as its income from holding of investments can be classified as business source. This is not available to unquoted IHCs. Dividend, interest or rental for a year of assessment (YA) derived by resident-listed IHCs shall be treated as a single business source, assessable under s 4(a) 6 . All expenses relating to that source will be deducted against the gross income in arriving at adjusted income.

s 4(a) Gross income – dividend, interest, rental Less: expenses Adjusted income

xx

(x)

xx

The Law The definition of a listed IHC is the same as an unquoted IHC 4 . IHC is defined to mean ‘a company

Overhead expenses such as directors’ fees, wages, salaries and allowances, management fees, secretarial, audit and accounting fees, telephone

income tax

 

Listed

Non-

Company with s 4(a) source

Chart 1

IHC

Listed IHC

 

1. Availability of business sources

Yes

No

Yes

 

2. Number of sources

1

3

1

3. Current year business loss

No

N/A

Yes

4. Unabsorbed CA c/f

No

N/A

Yes

5. Utilised unabsorbed CA and loss b/f from YA 2005

Yes

N/A

Yes

6. Deduction of overhead expenses

Fully

Restricted

Fully

Chart 2

Case Study

1

RM

RM

RM

Management fees Investment income (includes exempt income)

40,000

60,000

40,000

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 and rent are fully deductible against the gross income 7 . Although the newly-inserted provisions s 60FA(2) and (3) in the Act recognise the source as being a business source, the deduction however is very much restricted. If there is no gross income, the deduction of expenses shall be disregarded. Likewise, if the deduction of expenses exceeds gross income from the business source, the excess shall be disregarded too. Unlike the normal treatment of business source, current year loss and unabsorbed loss accorded in s 43(2) and 44 are denied in listed IHC. Capital allowances on plant, machinery, and industrial building are available for deduction against adjusted income to arrive at statutory income. The excess capital allowance in a YA however is not allowed to be carried forward and is thus permanently lost. Unlike the normal treatment of business source, unabsorbed capital allowances accorded in para 75 of schedule 3 of the Act are denied in listed IHCs. A comparison of the listed IHC, non-listed IHC and

a company with a business income is as follows:

(Refer to Chart 1)

Presumption of being IHC

s 60FA(4) was inserted into the Act and it sets down

the application of the IHC presumption test. Once a company has been established as an IHC between the tax authorities and the company, it shall be presumed

the company continues as an IHC for all subsequent YAs unless the contrary is proven. The company under the self-assessment regime may have to use the YA2005 tax computation to gauge whether it falls under IHC in YA2006. The proper tax planning discussed below is required to ensure it is not an IHC.

Management Alert The newly-amended IHC concept requires at least 80% of its gross income (including exempt income) be derived from holding of investments 8 . Although exempt income is not taxed, it is however used to examine whether a company is an IHC 9 . Once this condition is fulfilled, the company is an IHC . (Refer to Chart 2) Management may exercise its discretion to either increase management fees or reduce investment income in YA 2006 and subsequent years to avoid being labelled as IHC. If a company falls under IHC, current year business loss is not accorded and unabsorbed capital allowance is permanently lost. If a listed IHC has no management fees, then it would be an IHC in YA 2006 and subsequent YAs.

Example 1 Ice Ly Bhd is a listed company on Bursa Malaysia deriving rental income from 10 shophouses and a shopping complex in Kuala Lumpur. It falls under IHC as defined in s 60F(2) as at least 80% of its

income tax
income tax

income is derived from the holding of investments. Rental income is a business source. However, no current year loss available, and unabsorbed capital allowances cannot be carried forward to YA 2007.

Example Using Example 1, rental income is a s 4(d) source if Ice Ly Bhd is a non-listed company although it is an IHC. It is further subject to the restriction of permitted expenses as stated in s 60F(1) in arriving at the total income 10 .

Transitional Provision s 18 of the Finance Act 2005 is a specific transition provision allowing listed IHC to continue setting off unabsorbed capital allowances and unabsorbed business loss brought forward from YA 2005 in YA 2006 and subsequent years until it is fully utilised. Current year loss and excess capital allowances arising in YA 2006 and subsequent years are not allowed to be carried forward to future YA, and are thus permanently lost.

Endnotes

Conclusion It is an accepted legal principle that the mere setting up of a company points to its business intention because of its implied continuity . That would be a strong presumption that it intends to do business. This is accepted and recognised in a listed IHC as seen in s 60FA of the Act. It is felt that the Act should not deny the availability of current year loss and the carrying forward of its unutilised capital allowances and business loss to future YAs. The neutrality of tax treatment has to be preserved to ensure the tax system is fair to all taxpayers. This is to prevent taxpayers channelling their resources to embark on tax avoidance schemes to frustrate the operation of s 60FA, which in the long term will not benefit all parties.

1.

Finance Act 1993 (Act 497/1993).

2.

[2005] 2 AMR 743.

3.

Act 644/2005.

4.

s

60F(2) amended by s 16 Act 644/2005.

5.

The previous legislation refers to the IHC as a company whose activities consist wholly in the making of investment and whose income is derived therefrom.

6.

s

60FA(2).

7.

In

the situation of a non-listed IHC, such expenses are commonly known as permitted expenses. It is subject to a deduction based on

statutory formula, A x B/4C or 5% of B, whichever is the lower. See Choong Kwai Fatt, Advanced Malaysian Taxation - Principal and Practice, 2005 7th ed at pp 98 - 100.

a

8.

s

60F(2) amended by Act 644/2005.

9.

For examples of exempt income, see Choong Kwai Fatt, Malaysian Taxation – Principles and Practice 2005 11th Ed, pp 7, 181

-

182 and 193 - 194.

10.

See Choong Kwai Fatt, Advanced Malaysian Taxation - Principal and Practice, 2005 7th ed at pp 98 - 100.

11.

was first propounded by Lord Diplock in American Leaf Blending v DGIR [1979 - 1966] AMTC 903, and accepted and applied in the subsequent case of I investment v CGIR. [1937 - 1978] AMTC 721.

It

income tax

income tax

Provision or Accrued Expenses?

An analysis of the Court of Appeal’s decision in Exxon Chemical (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 1

Introduction The deduction of revenue expenses must satisfy the prerequisite test of s of the Income Tax Act 1967 , being ‘wholly and exclusively’;

’incurred’; and ‘in the production of income’. It is

a well-settled principle that ‘accrued expense’ is tax deductible, being an amount incurred, while ‘provision of an expense’ is not tax deductible. However, the demarcation of these two scopes

is a legal point, often disputed between tax

authorities and taxpayer. On 4 November 00, the Court of Appeal delivered the celebrated judgement of Exxon Chemical (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri, shedding light on these two issues and also laying down the rule of interpretation of a tax act.

The facts The taxpayer set up a retirement and resignation benefits scheme for its employees who have worked for at least 11 years. Such qualified employees have an accrued and vested right to receive a lump sum payment when they retire or resign or upon termination from service other than termination for cause. At the end of each financial year, if such qualified employees demand these retirement benefits when leaving employment, the taxpayer is under a legal obligation to pay. The taxpayer makes accrual each year and the amount accrued has been charged as an expense in its profit and loss accounts. The retirement amount which has been set aside is not credited to an external provident fund but is instead administered entirely by the taxpayer. The issue is whether such an annual sum set aside is an accrual expense or a mere provision of an expense. The tax authorities are of the view that there exists uncertainty in the realisation of the payments to its employees; therefore, the amounts set aside annually are mere estimates, a contingent sum which

is mere ‘provision’ and not allowed as tax deduction.

This found favour with the Special Commissioners and the High Court. Being dissatisfied, the taxpayer appealed to the Court of Appeal as to the correctness of the law of the lower court.

The leading judgement of Gopal Sri Ram JCA in Exxon Chemical (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri. The crux of the dispute is whether the monies set aside each year for this retirement plan is

‘incurred’ (accrued expense) or ‘not incurred’ (a mere contingency or provision of an expense) in the year concerned. Gopal Sri Ram JCA delivered the landmark decision, applying the ratio decidenci of Lord Brightman in the Hong Kong Privy Council decisions of CIR v Lo & Lo 3 that “an expense incurred” is not confined to a disbursement, and must at least include

a sum which there is an obligation to pay, that is to say an accrued liability which is undischarged. In short, the scope of ‘incurred’ comprises of ‘paid, payable or becoming payable’ so long as it includes

a sum which the taxpayer is under an obligation

to pay. Once an expense is established to be an accrued liability, it will be admissible in the year as an ‘expenses incurred’ and tax deducted. In this case, the Court of Appeal acknowledged that despite there existing some form of uncertainty that the amount due to the employee may be forfeited due to misconduct, it would however not negate the expense from being ‘incurred’. If a qualified employee demanded the payment at the end of the year, the taxpayer cannot resist the claim. An expense to be incurred is not confined narrowly to mean only disbursement in that year. The Justice Gopal Sri Ram JCA held 4 :

“The fact that the appellant’s employees did not actually receive the money in a given year does not matter. For, had any of those who

income tax
income tax

were eligible to receive the benefit claimed it, then it would have been impossible for the appellant to have lawfully resisted the claim. The fact that the employees thought it fit not to make a claim but to defer it does not make the obligation to pay an expense that is incurred by the appellant non-existence.”

The Court of Appeal reversed the High Court decision and held that the sum was incurred in the respective years and thus tax deductible.

The rule of interpretation of taxing statute The Court of Appeal had an opportunity to re-establish the legal principles on interpretation of the taxing statue. Gopal Sri Ram JCA succinctly laid down the following propositions:

(1) The maxim in revenue law: no clear provision, no tax. (2) If there is any doubt then it must be resolved in the taxpayer’s favour. (3) Those parts in a revenue statue that favour the taxpayer must be read liberally. (4) A provision in a taxing statue must be read strictly against revenue and not in its favour.

It is interesting to note that the tax authorities urged the Court of Appeal to strictly interpret the meaning of ‘incurred’ by applying the strict interpretation principle as propounded by Rowlatt J in Cape Brandy Syndicate v CIR 5 .

“…One has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption so to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used.”

This however was not accepted by the Court of Appeal. The lordship held 6 :

“Learned counsel for revenue submitted… that

s 33(1), being a taxing statue, should be given

a strict construction and hence the words

“expenses wholly and exclusively incurred” should receive a narrow interpretation. The oft quoted judgement of Rowlatt J in Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 1 KB 64 was prayed in aid of this submission. With respect, I am unable to agree with these arguments…

…the principles that a provision in a taxing

statue must be read strictly is one that is to be applied against revenue and not in its favour. This maxim in revenue law is this: no clear provision; no tax. If there is any doubt then

it must be resolved in the taxpayer’s favour. See, National Land Finance Co-operation Society Ltd v Director General of Inland

Revenue [1979-1996] AMTC 1565. The

corollary of that proposition is that those parts

in a revenue statute that favour the taxpayer

must be read liberally. What learned counsel for revenue is asking us to do is to go the other way. That would be standing the true principle on its head.”

The reliance on overseas tax precedents Malaysia being a developing country has not many local precedent tax cases to guide the legal judiciaries, taxpayer and tax authorities. It is thus important to seek guidance from overseas tax precedents to borrow the wisdom of renowned judges to ensure justice is done. Overseas cases especially Privy Council, House of Lords, and Supreme Court decisions must be given great weight. Gopal Sri Ram referred to the judgement of Chang Min Tat FJ in

income tax
income tax

Director General of Inland Revenue v Kulim Rubber Plantations Ltd [1979-1996] AMTC 1052 7 :

“The court has laid down in Khalid Panjang & Ors v PP (No 2) [1964] MLJ 108 the principle that a Privy Council decision on appeal from another country is binding on it and the other courts of this country if the appeal is on a provision of law in pari material with a provision of the local law. The decision in Lasala v Lasala [1979] 2 All ER 1146, that the Privy Council would consider itself bound by a decision of the House of Lords. Insofar as the decisions of other courts in these and other countries are concerned, we have always treated these judgements as of only 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)”

In conclusion, these decisions are highly persuasive and will serve as a guide to all interested parties on tax matters.

Conclusion The decision of Exxon Chemical (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri is a welcome note. It helps to reduce the cost of doing business in each year and increases the competitiveness of a company in the global market. It is hoped that taxpayers seeking justice are not deterred even if they are defeated at both Special Commissioners and High Court level. One must keep pursuing justice to the doors of the Court of Appeal to seek a final verdict:

victory or defeat. This is what we call courage and professionalism.

 

Endnotes

1.

[2005] 6 AMR 773.

2.

The Act.

3.

[1984] 1 WLR 986

4.

Ibid at p 779.

5.

[1912] 1 KB 64 at p 71.

6.

Ibid at p 778.

7.

Ibid at p 779.

The Criteria For Determination Of Income Tax Or Real Property Gains Tax In The Case

The Criteria For Determination Of Income Tax Or Real Property Gains Tax In The Case Of Land Appropriation From Investment To Trading Asset

Introduction The disposal of Malaysian landed properties, being either land, residential units, commercial buildings or shop houses, may be subject to either Income Tax or Real Property Gains Tax (RPGT). In the Malaysian tax regime, there can never be double taxation on the same transaction 1 . The demarcation of these two taxes is not always an easy one. It is determined based on the merits of each case and in the event of a dispute, the final decision rests on the judiciary where their Lordships are guided by the precedent tax cases . Income tax shall take precedence over RPGT on the gains or profits arising from the disposal of landed

properties if such gains are said to be Malaysian- derived income from a trade transaction or an act tantamount to an adventure in the nature of trade, both of which are defined as business income under s 2 of the Income Tax Act 1967 (the Act). On the other hand, gains from the disposal of landed properties which have been held as long-term investment are treated as capital receipts under the Act and are tax-free. In such an instance, Real Property Gains Tax (RPGT) will be imposed . The test to ascertain whether landed properties are held as trading asset under business source or as investment asset under investment source is by applying the ‘badges of trade’ criterion which has been evolved and developed by the various tax courts’ decisions 4 .

RPGT

RPGT

In cases where a landed property has changed its status from trading asset under business source to investment asset under investment source or vice versa, an apportionment of the profit between income tax and RPGT has to be carried out which is never an easy task to do. The Court of Appeal acknowledged such difficulty in Mount Pleasure Corporation Sdn Bhd v Director General of Inland Revenue 5 . This article aims to analyse the Court Of Appeal’s decision and derive from the judicial wisdom, guidelines for taxpayers in future or similar circumstances.

The distinction between Income Tax and RPGT Where a landed property is disposed, RPGT is the preferred choice for the taxpayer as the tax rate is much lower than that computed under income tax. However, in the case of a company, such capital gains derived from the disposal are not available to be paid out as dividends to shareholders. On the

other hand, if such gains are subject to income tax, resident individual shareholders having a marginal income tax rate below 28% will, under the imputation

tax credit system, be able to obtain a tax refund from the tax credit on taxable dividend income received from the company 6 . The burden of proof on whether a landed property

is to be regarded as a long-term investment or as

a trading asset lies on the taxpayer 7 . In ABC v The

Comptroller of Income Tax 8 , it was held by the High Court that the taxpayer had the onus not only to show that the assessment was wrong but also what must be done to put it right. Documentation such as sale and purchase agreements, financial position of the company, board meetings’ minutes, accounting classifications and percentage of loan finance is required to substantiate a long-term investment motive. The table below gives a comparison between income tax and real property gains tax:

YA 006

Income Tax

 

RPGT

 

Individual

Company

 

Individual

Company

Rate

Scaled rate from 0% - 28%

Flat rate of 20% or

Disposal

   

within

28%

2

years

30%

30%

 

3

years

20%

20%

4

years

15%

15%

5

years

5%

5%

Exceed

5

years

0%

5%

Availability of s 108 account (to frank dividend)

N/A

Yes

 

N/A

N/A

Basis year of assessment

Current

Current

 

Current

Current

calendar year

financial year

calendar year

calendar year

Utilization of unabsorbed capital allowances or unabsorbed business loss

Yes

Yes

 

No

No

Utilization of RPGT loss relief b/f

No

No

 

Yes

Yes

RPGT
RPGT

RPGT

Diagram 1 Asset appropriation from investment asset to trading asset of the business

 

Market value of appropriation

B

 

less:

Original cost Chargeable gain for RPGT

(x)

 

xx

(capital appreciation)

 

Gross income from the sale of land

xx

 

less:

Cost of trading stock Market value of appropriation Adjusted income for income tax

(B)

 

xx

The case of appropriation of landed property from investment asset to trading stock

When a property developer sells a landed property

it is holding as a trading asset, the sale which is

considered to be carried out in the ordinary course of business is subject to income tax. However, in certain circumstances, the developer may also hold land as a long-term investment. In such a case, the disposal of such land is considered capital gains which are not subject to income tax but subject to Real Property Gains Tax. The question of whether the profit realized from the sale of the land is to be considered as an investment or business profit is to be determined according to the merits of each case. To qualify as an investment profit, the intention of acquiring the property for the purpose of investment must be shown to have existed at the time of purchase of the land 9 . Documents and circumstantial evidence ought to be provided to affirm a long-term investment motive. Such evidence may include receipts of rental income from the land, minutes of board meetings, relevant material witnesses, availability of funds at the time of acquisition of the land to carry out planned projects such as the

building of a cinema, golf course, etc. When land is originally acquired as an investment asset, the question of appropriation will arise if the property developer later wishes to develop it by applying land conversion and subdividing the

property into smaller units for sale at a profit. In such

a case, the land is said to have been appropriated

from investment asset to trading asset. The change of intention from investment to trading involves a shift of asset from one category to another. This

change must be clearly reflected in the company’s documentations and accounts. A valuation of the land from a reputable real estate firm is a must to ascertain the market value of the land at the time of the appropriation. The regime of taxation is then moved from RPGT to income tax. The market value of the land at the time of appropriation will be regarded as the cost of the business. The intention of appropriation must be supported by accounting classification of the land from non current asset (fixed asset) to current asset. Precision is required. The market value is a cost to the business; it is tax deductible from the gross income and from the sale proceeds of the land. In this regard, Lee Hun Hoe CJ (Borneo) held in Federal Court’s decision, Director General of Inland Revenue v LCW 10 :

“When respondent (taxpayer) converted his capital assets into stock in trade and started dealing in them the taxable profit on the sales must be determined by deducting from the sale proceeds the market value of the assets at the date of conversion into stock in trade since that is the cost of his business and not the original cost to him.”

The capital appreciation between the original cost and the market value at the time of appropriation has nothing to do with the property developer’s business. Such sum above its original cost is a chargeable gain assessable under the RPGT Act 1976. (Refer to Diagram 1)

The relationship between the market value and cost of land to the business Business income
The relationship between the market value and cost of land to the business Business income

The relationship between the market value and cost of land to the business Business income is assessable under s 4(a) of the Act. When a property developer transfers the land from investment asset and brings it to its business, the cost of land to the business is the market value of such land at the time of appropriation. s 35(3)(a) of the Act sets the basis for the valuation of trading stock in relation to a business. It provides:

The value of any particular item of the stock at the end of the relevant period shall be taken to be:

not limit the meaning of cost to be the amount

actually incurred or paid. The true value of the cost to the business is the market value at the time of appropriation and not the original cost. The cost price to the relevant person for the business can include the market value at the time of appropriation when the asset has changed its status from investment asset to trading asset. The comprehension of this cost and market value principle requires some accounting background as s 35(3)(a) is

a codification from the accepted accounting standard,

Financial Reporting Standard 102, which is applicable

(i)

an amount equal to its market value at that time;

if the relevant person so elects and that item

in

all business. Suffian, LP, in Director General of

(ii)

or

Inland Revenue v LCW acknowledged the difficulty of interpretation of s 35(3)(a) as the Lord President

“… the provisions of the Income Tax Act

is physically tangible, an amount equal to the total cost to him of acquiring that item (or any materials used in its manufacture, preparation or construction) and bringing it to its condition and

found revenue law ‘a very technical branch of law.’ Suffian, LP, held 11 :

location at that time:

1967

are not all that clear, which is not a bit

Provided that in the case of any item of the stock consisting of immovable properties, stock, shares, or marketable securities, the value thereof at the end of the relevant period shall be taken to be an amount equal to its cost price to that relevant person or its market value at that time, whichever is the lower.

The proviso to s 35(3)(a) refers to “its cost price to that relevant person”. As s 35 relates to business source, “relevant person” must therefore refer to a person in relation to his business. The cost price referred to by the proviso would mean the cost to the business of that person, that is to say, the market value of the land at the time of appropriation. Investment source and business source have to be dealt in the Act separately. A cost to the investment asset is not the same as the cost to the trading stock of the business. s 35(3)(a)(ii) uses the word ‘cost’ for stock valuation. One should

surprising considering that we are dealing with ”

a very technical branch of the law

Burden of proof is on the taxpayer The appropriation of landed property from investment to trading stock will result in substantial tax savings as the RPGT rate on the chargeable gain (see diagram 1) will be lower as compared to the income tax rate of 28%. As such, companies would seek to qualify for the lower RPGT rate. The tax authorities would, however, require full and satisfactory evidence before it would allow appropriation of landed property from investment to trading stock which would qualify the developer for the lower RPGT tax. The intention as to whether an

acquisition of land is for investment or trading purpose

is determined by proven facts 12 . Documents and

accounting records must be provided to show that:

(1) The intention of the land acquisition is for long- term investment,

RPGT
RPGT

RPGT

“… the provisions of the Income Tax Act 1967

is not a bit surprising considering that we are dealing with a very technical branch of the law ”

are not all that clear, which

(2)

The date of appropriation from investment asset to the trading stock is clearly reflected by

The tax authorities argued otherwise. It contended that:

documents such as minutes of board meetings, valuation of the market value of the land at the time of appropriation, accounting classification, furnishing of material witnesses, etc.

(i)

The land was acquired in 1971 with the intention to develop to sell. Thus the question of asset appropriation cannot arise because the land was a trading stock in 1971.

Non-compliance to either one of the above is fatal.

Mount Pleasure Corporation Sdn Bhd v The

obtain Real Property Gains Tax savings and citing the

(i)

(ii)

The cost to the business is the original cost as at 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 to demonstrate the balance of probabilities in compliance to (1) and (2).

Director General of Inland Revenue In the above case, Mount Pleasure Corporation Sdn Bhd acquired five plots of land in Penang, Malaysia, for RM570,000 in 1971. On 12 April 1972, the company submitted a layout plan to the local council to construct a hotel complex and a theater club which included the operation of a casino. However, its proposal to operate a casino on the property was rejected by the local council. Six years later in 1979, the company resubmitted a new layout plan to develop a housing and commercial project on the

The Special Commissioners headed by Augustine Paul 13 rejected the initial intention of the company of having the casino as a valid investment intention. There was no license granted to the company to operate a casino at the time of acquisition of the land in 1971. In Malaysia, the operation of a casino required a special license that was wholly beyond the control of the taxpayer. The casino project was something severely

circumscribed and its implementation indefinite at that point in time. The Commissioners held that such an intention of obtaining a casino license cannot amount to an intention acceptable in law as an investment intention 14 . The Company failed in the onus of proof to establish its investment intention as:

land – minus the casino. This was approved in March

(a)

No witness was called to give evidence to

No evidence was adduced to demonstrate that

The Memorandum of Association of the company

1979 by the local council. The company, wanting to

case of Director General of Inland Revenue v LCW,

(b)

establish that the property was bought as an investment.

contended that:

the proposed development of the hotel complex, theater club and casino was for the company’s

 

The land was acquired for investment with the initial intention to develop the property as a hotel complex and a theater club including a casino. It was being retained as a fixed asset;

(c)

own use or personal enjoyment.

did not authorize the company to purchase land

(ii)

The Company had to change its initial intention when its application to operate a casino at Mount Pleasure was rejected;

for purposes of investment except with surplus funds which it did not have.

(iii)

The land therefore should be valued at the market value in 1979 when it was appropriated to trading stock.

The Special Commissioners found the following facts which were fatal to the company: (Refer to Diagram 2)

RPGT

Badges of Trade

The proved facts

1.Company’s object

The Company’s primary role as a property developer raises prima facie inference that it was carrying on the business of land dealings. The current disposal of the property was not much different from its previous four dealings.

 
 

2. Frequency of disposal

The company had in all five dealings in properties. Habitual dealing in land is tantamount to trading, an act carried out in the ordinary course of business.

3. Organization of special skills

The company was highly organized in its operations. It had staff and methods to sell properties and owned skills in building works in 1972.

4. Income generating

The holding of land for 10 years before development yielded no income and the company adduced no evidence that it was purchased for personal enjoyment or investment 15 .

Diagram 2

The Special Commissioners applying the badges of trade criteria above held that the company was carrying on a business of land dealing either as a land developer or as a real estate merchant. The company also failed to comply with the ‘precision requirement’ on asset appropriation. It claimed that the property was transferred as stock- in-trade in 1978. However, the accounts continued treating the property as fixed assets up to 1982. No explanation was offered by the company for this discrepancy. The evidence adduced by the company fell short of the required precision. It is an established truism that land cannot be both trading stock and investment asset at the same time. Land may change from investment asset to trading stock or vice versa because the intention may be changed. The appropriation of land from one category to another required precision, supported by accounting evidence. This was enshrined in Simmons v IRC 16 where Lord Wilbeforce held 17 :

“Intentions may be changed. What was first an investment may be put into the trading stock, and I suppose, vice versa. If findings of this kind are to be made precision is required, since a shift of an asset from one category to another will involve changes in the company’s accounts, and possibly, a

liability to tax 18 .”

The issue of asset appropriation only arises if the land has been acquired with the original intention of permanent investment. Thereafter the company may change its intention from investment to trading. The shift of land from one category to another requires the determination of market value at the time of transfer. However in this case, there was no appropriation of the land as it was purchased as a trading asset in 1971. The Special Commissioners concluded that the cost of the land in 1971 was the cost to the business and the case of Director General of Inland Revenue v LCW had no relevant application as there was no asset appropriation in Mount Pleasure’s case. The High Court (Nik Hashim J) affirmed the decision. Being dissatisfied, the taxpayer appealed to the Court of Appeal.

The Court of Appeal’s decision The panel of judges comprised Mokhtar Sidin, Abdul Aziz b Mohamad JCA and Raus Sharif J. Abdul Aziz b Mohamad JCA expressed his difficulty in comprehending the correlation of the dispute of stock value in 1971 and 1978 in relation to the additional assessment in Year of Assessment (YA) 1984. His Lordship too concurred with Suffian LP in LCW’s

RPGT
RPGT

decision that revenue law was a very technical branch of the Law. Abdul Aziz JCA commented 19 :

“I therefore have not been able to understand why the formulation of the question, as far as it

1984.”

remained at the 1971 original cost. Such cost will be brought forward to YA 1984, deductible from the sale proceeds of land in YA 1984. It should be noted that the proviso in s 35(3) permits the valuation of closing stock for immovable property to be either

reflects the appellant’s contention, suggests that

(1)

Cost or

the at end value of the property should be its

(2)

Market value

market value when the property was appropriated to stock in trade in 1978, since 1978 can have nothing to do with the basis period for the YA

Whichever is the lower. The crux of the dispute between the taxpayer and tax authorities is as to the meaning of ‘cost’ of land brought in to the business. In accounting terminology,

bears no relevance in this case as it refers to closing

In this case, the land was developed in 1979 but the disposal of the land and its buildings took place in 1984. Thus, income tax liability arose only in 1984. The crux of the issue was the ‘cost’ of the land. If the land was an investment asset acquired in 1971, then

the dispute is on the opening stock and not on closing stock value. The market value of the land in YA 1984

stock. In relation to YA 1984 on the value of opening stock, the ‘cost’ stipulated in s 35(3) will be either

the issue of appropriation will arise in 1978 when it was shifted to business. Market value of the land in

(a)

Original cost in 1971 (if there is no shift of asset), or

1978 is then the ‘cost’ to the business. This ‘cost’ will be brought forward to YA 1984, deductible from the

(b)

Market value in 1978 (a shift of asset from investment to business)

sale proceeds of land and buildings in YA 1984. On the other hand, if the land asset was a trading stock in 1971, then the issue of asset appropriation cannot arise as there is no shift of asset from one category to another. Even though the company developed the land in 1979, the cost of the land

If investment intention can be established in 1971, it would result in asset appropriation from investment category to business category in 1978. The gains from the capital appreciation of investment are capital gains and market value in 1978 will be the trading

RPGT
RPGT

stock cost to the business. In the income tax regime of taxation, capital gains from investment assets are not within the scope of taxation, i.e. they are tax free. Only the profits from the disposal of trading assets are taxed. Whether an asset was originally acquired for investment or trading has tremendous impact on the tax paid by the company in YA 1984. If the taxpayer was able to base the cost of the trading stock on the market value in 1978, a higher amount will be deducted from the sale proceeds of land, and the tax in YA 1984 will be substantially reduced. Addul Aziz JCA expressed his difficulty in understanding the significance of investment asset and trading asset on the amount of tax to be paid by the taxpayer. His Lordship said 20 :

“I have not been able to understand how the value is affected according to whether the stock was originally acquired for investment or trading. Even if, as contended by the appellants, the holdings were acquired in 1971 for investment and in 1979 were appropriated to stock, I am not able to see that that would make their stand…correct…”

Although Abdul Aziz JCA had difficulty in understanding the income tax law, which is a very technical branch of law, he nonetheless accepted the findings of the Special Commissioners and held that they were right in their decision and affirmed that the High Court was right in dismissing the taxpayer’s appeal.

Raus Sharif J sitting at the Court of Appeal acknowledged the Special Commissioners’ jurisdiction as the final judges with regard to the question of facts. Such facts cannot be overruled or supplemented by the courts. The determination by badges of trade has to be based on proven facts. The taxpayer failed to adduce evidence that the land was acquired for investment as no witness was called to give evidence. Neither did it have a license to operate a casino. Its intention of obtaining the casino license cannot amount to an intention in law. Since the onus is on the taxpayer to establish evidence and it failed to do so, the assessment must stand. Raus Sharif J accepted in totality the findings of the Special Commissioners that the taxpayer was carrying on a business of land dealing either as a land developer or real estate merchant. Mokhtar Sidin JCA concurred with the decision of Raus Sharif J.

Conclusion Mount Pleasure’s case reaffirms the importance of the law of evidence in the winning of an appeal. The onus of proof rests on the taxpayer and the assessment of proof is on the balance of probability. Both the High Court and Court of Appeal emphasized that the taxpayer failed to discharge its burden by calling no witnesses or adducing any supporting documentary evidence. The taxpayer has to maintain complete and adequate accounting records on the transaction to sustain its intention. This is all the more important when it encounters tax audit in a self assessment regime. The tax planning opportunity given in LCW’s case only bears fruit if the investment intention was established and the precision test complied with.

RPGT
RPGT

Endnotes

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.

RPGT

RPGT

The Tax Authorities’ power to revoke an assessment made under Real Property Gains Tax and switch to Income Tax

Introduction Where there is a disposal of landed properties in Malaysia, the gains or profits may be taxed under either Income Tax or Real Property Gains Tax (RPGT). Income tax will take precedence over RPGT as RPGT is only applied if a transaction is non-taxable by or is exempted from income tax 1 . There is no double taxation on the same transaction under the Malaysian tax regime. Generally, the disposal of real property which has been held as a long-term investment or asset inherited from the family will be subject to RPGT. On the other hand, real property acquired by a taxpayer in the capacity of a property developer or land trader or as a person who is deemed to have embarked in land transactions as an adventure in the nature of trade will be assessed as income tax 2 . The question on whether the disposal of real property is subject to income tax or RPGT has to be considered on the merits of each case, based on proven facts by applying the badges of trade criteria, a test evolved through the tax court decisions 3 . When a gain on disposal of real property is to be assessed under RPGT, the tax administration procedures require a taxpayer to file the Form CKHT 1 within 30 days to the IRB assessment branch upon disposal, together with the sale and purchase agreement and relevant documents or receipts, requesting the tax authorities to issue an assessment on RPGT. Unlike income tax, the RPGT regime is not placed under self assessment. Upon receiving the Form CKHT 1, the tax authorities will examine the circumstances of the case and, if necessary, ask for additional information or particulars to decide whether the land in question had

been held by the taxpayer as a long-term investment.

A notice of RPGT assessment will be issued once

the tax authorities are satisfied that the transaction comes under RPGT. In such a case, RPGT has to be paid within 30 days from such notice and a certificate

of clearance will be issued upon the payment of

RPGT. The taxpayer is said to have discharged his RPGT obligation under the RPGT Act 1976 and the assessment cycle comes to an end. The question that is being examined here is whether the tax authorities are empowered to withdraw their assessment in subsequent years and reassess the taxpayer under income tax, thus substituting the RPGT assessment with income tax assessment. The High Court in MR Properties Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 4 had an opportunity to look into this issue and answered in the affirmative. This article examines the legal points and provides readers with an insight into the court’s decision.

The law Currently, there are no provisions in the RPGT Act 1976 or the Income Tax Act 1967 to govern the switch from RPGT to income tax or vice versa. Both the Acts only permit the tax authorities to issue notice

of additional assessments within the same Act if the

taxes are found to be inadequate 5 . One has to resort

to the established legal principles and the rule of

interpretation for guidance on this issue.

It is a truism that interpretation has generally to be construed in favour of the taxpayer when there

is ambiguity as seen in the recent Court of Appeal’s

decision in Exxon Chemical (Malaysia) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 6 . Furthermore revenue law is a very technical branch of law as has

RPGT
RPGT

been openly acknowledged in the recent Court of Appeal’s decision in Mount Pleasure Corporation Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri 7 and in the Federal Court’s decision in Director General of Inland Revenue v LCW 8 . In the case of MR Properties, the contention is that the tax authorities had every opportunity to examine the circumstances of the land sale and to call for additional particulars or witnesses to assist them in determining whether the gains from the sale should be subject to income tax or RPGT. The taxpayer is given an understanding that it is a RPGT case upon receiving the RPGT assessment and is led to the conclusion that the decision is final upon paying the tax and receiving the certificate of clearance. The matter is concluded as the taxpayer has discharged its tax obligation as required under RPGT Act 1976. Can the tax authorities retract the RPGT assessment on the grounds that it has made a mistake? The taxpayer may argue that the tax authorities are barred from making the switch as the tax had already been paid and the matter concluded. The tax authorities however may contend that the principle of estoppel does not apply in revenue law cases. It has been seen in Government of Malaysia v Sarawak Properties Sdn Bhd 9 that an estoppel cannot be brought against the IRB in the case of a tax officer entering into an agreement purporting to conclude tax and related questions for future years or conclude any expression of option or adopt any course of action. Any agreement made would be ultra vires to the rights of the tax authorities and the Government. The collection of tax is to be used to finance the administration of the government and development projects for the people. The interest of the public is to be taken into account and safeguarded. If the

transaction should have been taxed under income tax, then the earlier imposition of RGPT has to be withdrawn in the interest of the public. The court has to strike a balance between the interests of the taxpayer and the public as pointed out by Gunn Chit Tuan CJ in the Supreme Court’s decision in National Land Finance Co-operative v Director General of Inland Revenue where His Lordship held 10 :

“We realize that revenue from taxation is essential to enable government to administer the country and the courts should help in the collection of taxes whilst remaining fair to taxpayers.”

The question is whether it is fair to expose the taxpayer to two regimes of taxation even though eventually only one tax is imposed on the gains on disposal of land. The Special Commissioners headed by Augustine Paul 11 and Raus Sharif J in the High Court adopted a commendable and pragmatic approach. They allowed the tax authorities to switch the assessment from RPGT to income tax to safeguard the public interest and at the same time permitted the taxpayer to adduce evidence to justify a long-term investment motive so that the RPGT assessment may remained. The interest of all parties was served to ensure that justice was done.

MR Properties Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri The taxpayer was carrying on the business of a property developer in Kuala Lumpur with a paid-up capital of RM2. On 10 April 1984, the company acquired 589 acres of land for RM19 million. It

RPGT
RPGT

subsequently sold 368 acres of the land on 10 August 1990 for a sum of RM29 million.

The gain from the sale is as follows:

Sale proceeds of land Less: Cost of land

The tax liability for RPGT @ 5% The tax liability for income tax @ 28%

RM million

29

(14)

15

1

4

It can be observed that the difference between income tax and RPGT on the sale of the land is a considerable sum of RM3 million. The taxpayer contended that as the land was a long-term investment it filed in Form CKHT 1 for the gain to be assessed as RPGT. It pointed out that the tax authorities had accepted the submission and levied a RPGT of RM1 million on 2 May 1992. The taxpayer paid the tax and obtained the certificate of clearance in accordance with the RPGT Act 1976. The tax administration cycle was completed. However, on 9 August 1993 the tax authorities cancelled the RPGT assessment and substituted an income tax assessment of RM4.2 million for the year of assessment 1991. The legal issue was whether the tax authorities were empowered to switch an assessment from RPGT to income tax after the taxpayer had already been assessed to RPGT and paid the tax that was levied.

The Special Commissioners’ and High Court’s decisions The taxpayer argued that there was no statutory power given to the tax authorities to discharge the RPGT assessment and switch to income tax assessment. It contended that the RPGT assessment

should be considered final once the tax had been imposed and duly paid. However, the tax authorities said they had the power to review the RPGT assessment and substitute with income tax upon findings that the gain from the sale of the land was of income in nature. It pointed out that the principle of estoppel did not apply to revenue law. The Special Commissioners were asked to decide whether a RPGT assessment which had already been concluded and tax paid could be discharged and income tax imposed instead. The Commissioners’ answer was in the affirmative following the precedent set in the Court of Appeal’s decision in Bye v Coren 12 where it was held that the tax authorities were not precluded from raising an assessment under income tax after the finalization of capital gains tax. In Malaysia, RPGT is a limited version of capital gains tax. The Commissioners held that accordingly the tax authorities have the power to switch from RPGT to income tax. Raus Sharif J in the High Court accepted this rule of law in its totality. The Special Commissioners’ decision was affirmed. His Lordship felt that the tax authorities were empowered to review, revise and discharge an assessment on the grounds that no RPGT was payable. Since the sale of land was income in nature, the tax authorities were empowered to raise the assessment under income tax. His Lordship opined 13 :

“The respondent (tax authorities) is not precluded from raising the assessment

under income tax after reviewing the earlier assessment made under the RPGT. To me, the respondent has the power to review or revise an assessment which include vacating an assessment on the ground that no RPGT

is payable on the gains

Thus,

I am unable to

RPGT
RPGT

accept the contention of the appellant that the assessment to income tax by the respondent is null and void.”

(i)

The land was earlier bought by the company with 99% financing from a loan. The nominal value of RM2 capital has an adverse inference that the company has the intention to hold the land as long-term investment.

MR Properties’ post script The court decision in MR properties is a good one. It is a fundamental principle in taxation that every taxpayer should pay his fair portion of tax in accordance with the law. The existing legislations allow a taxpayer a time frame of six years to seek

Income tax or RPGT

(ii)

The intention at the time of purchase was to build houses in line with the company’s business as a property developer. The company failed to show that the land was a capital asset and not a trading stock.

amendments to tax levied on the ground of errors or mistakes. By the same token the tax authorities should also in the interest of the public be allowed to

(iii)

The company had applied for conversion of the land and had done substantial preliminary work to carry out the housing project.

amend their tax levy if they were to find that they have made a mistake.

(iv)

The land had been treated in the company’s accounting record as property development.

The taxpayer on the other hand has not been denied justice as he is given the opportunity to adduce evidence to prove that the land was an

(v)

The company had sold land previously and from the number of such transactions could be regarded or seen as a land dealer.

investment asset and which should thus be assessed to RPGT. The burden of proof that an asset was a long-term investment lies on the taxpayer.

(vi)

The land was disposed like in the normal trade or business of a property developer with high organizational skills.

Documentations such as board meetings’ minutes and percentage of loan finance are required to substantiate a long-term investment. In MR Properties’ case, it is felt that there was no breach of natural justice.

The Special Commissioners headed by Augustine Paul found that the land sold by MR Properties was a trading stock of the company and not an investment asset as claimed. In arriving at this conclusion, the Commissioners applied the badges of trade criteria. They found the following badges or marks of trade with regard to the purchase and sale of the land in question:

Conclusion There is no rule of law preventing the tax authorities from switching from RPGT to income tax. At the same time the taxpayer is not prevented from adducing evidence to prove his case for the gain from the sale of the land to be assessed to RPGT. It is felt that so long as fair play is given to both parties, justice will prevail.

RPGT
RPGT

“We realize that revenue from taxation is essential to enable government to administer the country and the courts should help in the collection of taxes whilst remaining fair to taxpayers.”

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.

income tax
income tax

The scope of an ‘Executor’ and his/ her liability to income tax

– To sign or not to sign the Income Tax Form B for the deceased person?

Introduction Income tax liability does not cease eventhough the taxpayer has passed away. The Income Tax Act 1967 (the Act) empowers the tax authorities to recover any outstanding taxes and its penalty from the executor 1 . In 006, the Federal Court was asked to spell out the parameters of an executor in the decision of Kerajaan Malaysia v Yong Siew Choon 2 where it was held that the meaning of “executor” includes a legal representative, which is the spouse of the deceased taxpayer irrespective of whether a

being the share of profits paid to the deceased. An additional sum of RM280,000 was paid to the wife of the deceased. The wife completed the Form B for her deceased husband as legal representative. Under the paragraphs which required her to state the deceased husband’s share of the partnership income/loss, she had written as ‘refer to the legal firm’s file’. The tax authorities then issued the notice of assessment for YA 1984 and 1985 covering the following basis periods:

grant of probate has been obtained or there are

YA

Basis Period

no assets to be distributed to the beneficiaries.

1984

01.01.1983 – 31.12.1983

1985

01.01.1984 – 12.01.1984

The facts The deceased was a partner in a legal firm and had settled his income tax liability up to year of assessment (YA) 1983. He passed away on 12 January 1984 leaving behind his wife and his son. The wife of the deceased did not apply for the grant of probate or for letters of administration as the deceased did not leave any assets to be distributed. The tax authorities issued the income tax return Form B under the name of the deceased for YA 1984 and 1985 as there was income from the legal firm

The total income tax payable amounted to approximately RM251,878. She however did not pay the tax that had become payable on the grounds that she was not the executor and it was not her responsibility to make the payment to the tax authorities. The tax authorities imposed penalties on the non-payment of tax, making the total due to the government amount to RM290,919 3 . The Government was determined to collect the outstanding income taxes and penalties from the

income tax

income tax

deceased via the wife. This can only be done provided the wife is the executor of the deceased as provided in s 74 of the Act. When the wife of the deceased failed to settle the tax and penalty, the tax authorities commenced recovery proceedings against the wife in her capacity as executor by virtue of ss 106 and 142 of the Act. The wife contended that she was never an executor as no grant of probate was extracted. Therefore, it was not her responsibility to make the payment to the tax authorities. The crux of the issue is whether the wife can be held as an executor under the Act given the fact that she did not apply for the grant of probate or for letters of administration as the deceased did not leave any assets to be distributed. The only act she had done for the deceased was to file the income tax returns forms for the YA 1984 and 1985.

The arguments The wife testified that she was a housewife with no income whatsoever. After the demise of her husband, she did not petition for any grant of probate or for letters of administration as the deceased did not leave any assets at all. The wife contended that she did not in any way administer or manage the estate of the deceased because there was nothing for her to administer. She argued that the income tax and penalties of RM290,919 for her husband were never her responsibility because she was not indebted to the tax authorities. The tax authorities contended otherwise. They found that the wife who had signed the Form B for the deceased, must have acted as a legal representative, falling squarely within the definition of “executor” as defined in s 2 of the Act. Section 2 reads as follows:

“Executor’ means the executor, administrator or other person administering or managing the estate of a deceased person.”

The filing of Form B on behalf of the deceased person and the signature of the wife on those forms are fatal. It denotes that she is administering or managing the estate of a deceased person and is an executor under the Act. She can be sued and is responsible for the deceased husband’s tax.

The High Court’s decision RK Nathan J at the High Court rejected the taxpayer’s argument that a legal representative can only exist when there are assets to administer. His Lordship was

of the opinion that a legal representative unfolds itself immediately upon the death of the person concerned, until such time as a grant of probate or letters of administration are obtained. Therefore, the wife is the executor notwithstanding that no grant of probate or letters of administration had been applied for. RK Nathan J opined:

“I have no hesitation in holding that the

defendant clearly fell into the third category of a person defined as executor, namely as a person administering or managing the estate of the deceased person.”

The High Court held that despite the fact that the wife of the deceased did not apply for a grant of probate or letters of administration, she was clearly administrating the estate of her deceased husband when she signed the Form B for the YA 1984 and 1985. Thus, she falls within the meaning of executor. Judgment was entered against the wife of the deceased in the sum of RM290,919.

RK Nathan J held:

“To my mind the definition in s 2 of the Act clearly encompasses persons under the category of the defendant. Although she had neither taken probate nor letters of administration, she was clearly administrating the estate of her deceased husband when she signed the Form B for the years 1984 and It is clear therefore that until probate

or grant of legal administration is obtained, the person most acceptable to manage the estate of the deceased until such time as the grant

is obtained is the legal representative. In this

case it is the wife. She contends that since there was nothing left in the estate, she had nothing to administer and therefore, she could

not be the legal representative. The position of

a legal representative does not impose itself

only when there are assets to administer. That position unfolds itself immediately upon the death of the person concerned, until such time as probate or legal administration is obtained.”

In conclusion, the signing of the respective income tax returns form for the deceased person was held to be an act administering the estate of the deceased. She was then termed as legal representative, falling

income tax
income tax

into the third category of the executor. She is liable to the tax and penalties claimed by the tax authorities. Being dissatisfied, the wife appealed to the Court of Appeal.

The Court of Appeal’s decision In the Court of Appeal, Gopal Sri Ram JCA acknowledged the tax authorities’ intention to implead the estate of the deceased with a view to recovering the tax from it and not from the widow’s personal assets. However, his Lordship found that such recovery action against the estate of a deceased person is governed by Order 15 r 6A of the Rules of High Court 1980 where it requires the extraction of letters of representation as the pre-requisite. This however was not fulfilled. The rule of substantive law requires an action to be commenced only after letters of representation have been extracted. It is only in an action against the duly appointed legal representative of the estate of a deceased that a judgment may be obtained that may be enforced against the assets of the estate. Failure to comply with this fundamental requirement thus rendered the recovery by the Government an illegality and therefore a nullity. The case was dismissed and it was held that the wife was not liable to the amount sued. The case was even now.

The tax authorities, being dissatisfied, appealed to the Federal Court.

The Federal Court’s decision The Federal Court was asked to determine the following point of law:

“Whether in view of the provisions of the Income Tax Act 1967, Order 15 r 6A of the Rules of the High Court 1980 is applicable to an action or proceeding raised under s 106 of the Income Tax Act 1967 in relation to an assessment in the name of an executor as defined in the Act.”

Augustine Paul FCJ delivering the judgment of the Federal Court however held that the Order 15 r 6A of the Rules of High Court has no application to the proceedings for the recovery of tax in the light of ss 64 and 74 of the Act. Section 64 of the Act sets out the liability of an executor as being the person assessable and chargeable to tax in the case of an estate of a deceased person. Therefore, proceedings can be commenced against an executor for the recovery of income tax due and payable. Under Section 2 of the Act::

income tax

income tax

“Executor means the executor, administrator or other person administering or managing the estate of the deceased person.”

His Lordship examined the scope of executor as defined in s 2 of the Act and concluded that the definition encompassed two groups of persons being an executor. The first group is the person who has obtained the grant of probate or letters of administration of a deceased person. These persons are legally appointed. The second group refers to the person “administering or managing the estate of the deceased person” which must refer to those who are not legally appointed. The wife falls into the latter group and was therefore an executor and liable to tax.

Augustine Paul FCJ held 4

“It follows that reference in ss 64 and 74 of the Act to an ‘executor’ includes a person who is administrating or managing the estate of a deceased person. Such a person is assessable and chargeable to tax and is therefore a person who can be sued in law. The corollary is that Order 15 r 6A will have no application to proceedings under the Act against such a person. The extension of the scope of Order 15 r 6A by the Court of Appeal to proceedings under the Act cannot therefore be sustained. The answer to the question posed to us must therefore be in the negative.”

The final victory goes to the tax authorities. The tax recovery from the deceased wife is valid in law as she is the executor as defined under the Act.

Yong Siew Choon post script It is the finding of the High Court that the wife of the deceased taxpayer is the person administering the estate of the deceased when she signed the Form B for YA 1984 and 1985 as legal representative. RK Nathan J opined:

Endnotes

“The agreed documents in the CABD show that it was the defendant who had completed and signed Form B, being the “Return of income by an individual” for years of assessment 1984 and 1985. She had declared herself on signing the said forms as the wife of Abdul Hamid bin Tun Azmi (deceased). … To my mind, the definition in s 2 clearly encompasses persons under the category of the defendant. Although she had neither taken probate nor letters of administration, she was clearly administrating the estate of her deceased husband when she signed the Form B for the years 1984 and

1985.”

Reading the above passage, does it mean that if she did not sign the Form B, she would have escaped the tax liability of RM290,918? The answer is Yes and No. It is felt that if the deceased taxpayer has distributed his wealth to his beneficiaries before his death for a bona fide consideration, then the tax authorities have no recourse from the beneficiaries. However, if there is ample circumstantial evidence that the deceased taxpayer has distributed his wealth during his lifetime solely to avoid his income tax responsibility, the tax authorities can have recourse from those beneficiaries notwithstanding that none of them signed the Form B on behalf of the deceased and were not executors under the Act.

Conclusion Yong Siew Choon’s decision is a landmark authority in tax recovery matters relating to deceased persons. It defines the scope and responsibility of an executor under the Act. Its complexity is shown through the various opinions expressed by the learned judges of the High Court, Court of Appeal and Federal Court. The comprehension of this decision has a great impact on succession planning. So now, to sign or not to sign that Form B?

1. See ss 64 and 74 of the Act.

2. [2006] 2 AMR 93.

3. Section 103 of the Act empowers the tax authorities to impose a late payment of penalty of 10 + 5 %.

4. Ibid at p 107.

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