part 3 tax planning for property...

TST Consultants Sdn Bhd 1

Part 3

Tax Planning for Property Developers


Tax Planning for Property Developer

A. Purchase the land or Purchase the share?

(Beware the capital reserve and deferred Tax)

B. Disposal of property stock or company share?

C. Purchase of land under individual or company at the

outset?

D. Individual landowner involves in development?


A. Purchase the land or Purchase the share?

Acquisition Land

RM

Share

RM

Developer acquired land for RM10m

Developer acquired share for RM10m

(land cost show book value of RM3m)

Add: Development expenditure

10,000,000

50,000,000

3,000,000

50,000,000

Development property

Progress billing

60,000,000

70,000,000

53,000,000

70,000,000

Gross profit 10,000,000 17,000,000*

•Purchase of share shown a higher profit and higher tax

•Disadvantage to purchase share


B. Disposal of property stock or share

Stock Share

1/1/11 Developer A acquired land

Developer A acquired share RM3,000,000

3,000,000

3,000,000

31/12/12 Incurred property development expenses

Total property development cost

500,000

3,500,000

500,000

3,500,000

31/12/12 Disposal of property stock/Share to Developer B

Upon obtaining the development order

Profit from disposal of property stock/share

Less: operating expenses

Chargeable income

5,000,000

1,500,000

200,000

1,300,000

5,000,000

1,500,000

200,000

1,300,000

31/12/12 Tax payable =500,000 x 20%+800,000 x 25%

Not taxable on share transfer (IRB charge RPGT?*)

300,000

Nil*

• Refer to BH V. KPHDN


BH V. KPHDN (2003)

Fact:

• TP acquired a total amount of 75,000 shares in a property developer

company & subsequently sold the shares to another company

Issue:

• Whether the sales of shares by TP are subject to RPGT Act

Held:

HC held that asset of the property developer company comprising land

was not real property but stock in trade. Therefore not a chargeable

asset under RPGT Act

CA reversed the decision of HC and held that disposal of shares is

subject to RPGT Act


C. Tax Planning for developer – Cost & Benefit Purchase the vacant land under individual name

Then transfer to a Company A for RM20M

Individual Company A

Purchase the vacant land under personal name

Transfer the vacant land to a Company

Opportunity cost:

Transfer the land to a company:

Paid addition Stamp duty (say, 3% on RM20M)

Other incidental cost

10,000,000

600,000

400,000

20,000,000

Land cost 11,000,000 20,000,000

Opportunity Benefit

(say, 25% of 9,000,000)

2,250,000


Transfers between individual and his company

DGIR V LCW (1975) principle

Transfer is at Market value (not cost price)

Example:

From Cost price 10 M to Market value 20 M

Opportunity benefit is RM2,250,000

Chargeable gains is RM9,000,000@30%;20%;15% & Nil

Opportunity benefit RPGT Tax/Saving

Yr 1 to 3 2,250,000 2,700,000 (450,000)

Yr 4 2,250,000 1,800,000 450,000

Yr 5 2,250,000 1,350,000 900,000

Yr 6 2,250,000 Nil 2,250,000


D. Individual landowner involves in development?• Transfer to a development company or

• Sign a JV agreement

Incorporate a Company JV Agreement

Stamp duty No stamp duty

Market value JV consideration

Arm length Two parties negotiation

RPGT RPGT


Q & A


Part 3.1

Tax Issues Affecting Property Developers


Part 3.1

Trading or Investment (IT vs RPGT)

TST Consultants Sdn Bhd 12TST Consultants Sdn Bhd

3.1) Trading or Investment (IT vs RPGT)

RPGT and IT are mutually exclusive.

A tax person can not be subjected to both

RPGT and IT at the same time.


3.1.1. Whether the profit is subject to IT or RGPT?

Income Tax (20%-25%) RPGT (0%-30%)

Intention ST profit & for resale LT investment

Holding Period ST for trade LT for Investment

Method of Finance ST O/D LT finance indicate investment

Frequency repetitive transactions Not frequent

Accounting Evidence Current Asset Fixed Asset

Modification of asset e.g. sub-division No modification of asset


Teruntum Theatre v K P H D N

Held that the IRB may reassess the taxpayer

IRB is not estopped from withdrawing the RPGT assessment

Gains are subject to income tax


Part 3.2

Compulsorily Acquisition of land


3.2. Compulsorily Acquisition of land

A) RPGT Act

Schedule 2, Para.3 (f) special exemption on

Transfers due to compulsory acquisition under

any law


B) Case Law

Perak construction S/B V KPHDN (2001)

Fact:

• A property development company

• 1975:acquired land

• Land was capitalized & shown as fixed asset

• Company neither a dealer in land or trader in building

• 1981: Initial acquisition by the Government was withdrew

• 1982: Development plan submitted but no approval given

• 1995: government made an acquisition & paid compensation

Held:

• Compulsory acquisition is not subject to income tax, as it is not in

ordinary course of trade

• Compulsory acquisition negated the intention to trade


Penang Realty Sdn Bhd Vs. KPHDN (2006)

Fact:

• 1956: purchase a plot of land

• Company was a property developer

• A portion of the land was compulsorily acquired & compensation paid

Held:

• The element of compulsion vitiates the intention to trade;

• Not in the ordinary course of business, therefore cannot constitute a

sale

• Therefore not subject to tax


C) Decision Impact Statement (DGIR’s explanatory statement)

• In 2007: DGIR issued Decision Impact Statement (DIS),

outlines their position on Penang Realty’s case

• DIS states the decision in Penang Realty’s case was heavily relied

upon the Lower Perak case

• CA did not consider the provision of S24(1)(a) of ITA

• DIS treating the CA’s decision as Per incuriam ( where a statute

which would have affected the decision was not brought to the

attention of the court.


D) Income Tax Act 1967

• S24(1)(a) of ITA provides that any debt arises in respect of any

stock in trade which is compulsorily acquired in the course of

carrying on a business, shall be treated as gross income from a

business

• S4 lists the classes of income subjected to income tax

S4(a) include gains or profits from a business (relevant to S24)

• Both S24 (1)(a), S4(a) mentioned the element of business

S2 defined “business” involves element of trade

It follows that there must be engaged in trading activities and thus

intention to trade is important


E) Judicial Precedent on Intention to trade

• Lower Perak Co-operative Housing society Berhad V KPHDN (1994)

held that non-commercial motivation may affect the nature of trading

transactions that they cease to be normal trading; the element of

compulsion vitiates the intention to trade

• Perak Contruction S/B V. KPHDN (2001)

held that the element of compulsion negated intention to trade

• Penang Realty S/B v KPHDN (2006)

(Relied upon the Lower Perak Case)

Held that compulsory acquisition cannot constitute sale; element of

compulsion vitiates the intention to trade


F) Arguments

IRB:

• Argue the important of S24

• Decision impact statement

Opponents:

• The original intention to trade by acquired assets under “stock in

trade” is relevant

• Based on the judicial precedent and interpretation on the nature

of trading transaction; compulsion vitiated the intention to sales;

therefore not subject to income tax

• DIS issued by IRB is a guide and not a law, unless there is a more

specific provision to that effect.


G) Judicial Review

KPHDN V. Pelangi Sdn Bhd (2012) (Federal court)

HC held:

• The Revenue was bound by the decisions in Penang Realty & Lower Perak

• The Revenue DIS had no legal effect

• The Revenue decision to charge income tax shall be quashed

• The tax collected was unlawful, therefore need to refund with 4% interest to TP

CA unanimously affirmed HC decision

Federal Court unanimously dismissed Revenue application for leave to appeal.

See also: KPHDN V. Metacorp Development Sdn Bhd (2013) (Federal court)

HC follow the Penang Realty case

CA unanimously affirmed the HC decision

FC unanimously dismissed Revenue application for leave to appeal


Budget 2014

Business Income Section 4C (New)

S4C(New)

Gains or profits from business includes amount receivable from stock in

trade parted with by any element of compulsion

Effective from YA 2014


Business Income: Section 24(1)(aa) (New)

Amended

Section 24(1)(a) amended

Any debt arises in respect of any stock in trade sold in or before the relevant

period in the course of carrying on a business

Para. 24(1)(aa)(new)

Any stock in trade parted with by any element of compulsion including on

requisition or compulsory acquisition or in a similar manner, in or before the

relevant period

Effective from YA 2014


Part 3.3

Transfer of Land from Fixed Asset

To stock-in-trade


A) ITA doest not cover the situation.

S35(1) & (3) covers only the valuation of trading stock

B) Case Law

DGIR V LCW (1975)

C) RPGT Act S17A

Transfer of Assets into Stock


A) Income Tax Act-Valuation of Stock in trade

• S35(1) provides the valuation of trading stock

“the value of the stock in trade of the business at the beginning

and at the end of that period shall be taken into account in

accordance with the following subsections”

• S35(3)(a) provides that “the stock consisting of immovable

properties, stocks , 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”

• S35(1) & (3) covers only the valuation of trading stock

• What happen if the asset is transfer during the period? The

provision did not cover this situation

Example: transfer of fixed asset to stock in trade in the middle of

trading period


B) Case Law

DGIR V LCW (1975)

Fact:

• 1953: TP acquired a piece of land & treated as fixed asset

• TP initial intention is construction of flats for the purpose of rent as

investment

• 1967: TP change his intention from renting out to selling them

• 1967: Land was transfer from the fixed asset to trading account

Issue:

• Whether there is a trading in land

• Whether the land transfer be taken as cost or market value

Held:

• Gains from trading of land be subjected to tax as business income

• Land transfer be taken as market value


C) RGPT –Transfer of Assets into Stock

• S17A (a) an asset is taken into the trading stock, there shall be

deemed to be a disposal of chargeable asset; and

• S17A(b) the disposal price of the chargeable asset shall be equal

to the market value at the asset is taken into the stock


Part 3.4

Transfer Trading Stock to Fixed Assets


Income Tax

Amount to a withdrawal of stock in trade for his own use

S24(2)provides that

• (a) any stock in trade of a business is withdrawn for his own use

• (b) any stock in trade of a business is withdrawn without any

consideration

An amount equal to the market value of that stock in trade shall be

treated as gross income


Example A:

• Developer A S/B withdrew 5 units unsold housed from “stock in

trade” & transfer to fixed assets and subsequently rental out for

rental income

• S24(2)(a)& (b) will apply

The market value of the stock be treated as gross income

• Rental income is assessed under S4(d) of ITA


Example B:

• Developer B S/B completed a project of 300 units of D/S link house

• The company sold 290 units with 10 units unsold and subsequently

rented out for rental

• S24(2)(a)& (b) will not apply

• Rental income will be assessed under S4(a) of ITA


Q & A

part 3 tax planning for property...

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