High Court rules on the application of Section 4(f) of the ITA

In the recent grounds of decision in the case of Keysight Technologies Malaysia Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (Civil Appeal WA-14-4-03/2021), the High Court held that the sale of intellectual property from the taxpayer to its related company was revenue in nature and taxable under Section 4(f) of the Income Tax Act 1967(“ITA”). 

This case is perhaps the first written grounds in Malaysia regarding the application and interpretation Section 4(f) of the ITA. Whether right or wrong, the decision does deserve special attention on the application of Section 4(f) in the Malaysian judiciary. The case is now pending before the Court of Appeal.

Facts: 

The taxpayer was incorporated under the name Hewlett-Packard Microwave Products (M) Sdn Bhd in 1998. The taxpayer changed its name to Agilent Technologies Microwave Products (M) Sdn Bhd and again to Keysight Technologies Malaysia Sdn Bhd in 1999 and 2014 respectively, following two spin-offs by the taxpayer’s group of companies. 

The taxpayer had pioneer incentive status and was mainly in the business of manufacturing and marketing activities. Incidental to its principal activities, the taxpayer had developed technological know-how. 

In 2008, the taxpayer ceased to be a full-fledged manufacturer and converted into a contract manufacturer under a Manufacturing Services Agreement dated 1.3.2008 between the taxpayer and Agilent Technologies International s.a.r.l. At the same time, the taxpayer had sold, transferred and assigned all beneficial rights of protected and unprotected knowhow including manufacturing processes and intangible property rights (“Intellectual Property”) to Agilent Technologies Inc according to an Intellectual Property Transfer Agreement dated 1.3.2008 between the taxpayer and Agilent Technologies Inc. Agilent Technologies Inc paid the taxpayer RM821,615,000 in exchange for the Intellectual Property. 

This RM821 million was the subject of litigation. The Inland Revenue Board (“IRB”) had raised a notice of assessment for the Year of Assessment (“YA”) 2008 with penalty amounting to RM311 million. The main question was whether the sum of RM 821 million was taxable under Section 4(f) of the ITA. 

The Respondent was of the view that the sum of RM 821 million should be subjected to tax under Section 4(f) of the ITA for the following reasons: 

1. The transfer of technical knowhow was not an outright sale as the evidence should that the taxpayer was still using the technical knowhow in the manufacturing of its product after 1.03.2008; and

2. The gain on the transfer of technical knowhow for the payment on the loss of income was related to the change of the Appellant’s function from a full-fledged manufacturer to a contract manufacturer, which resulted in a reduction of profit margin for the taxpayer after the change of the function. 

The taxpayer appealed on the following grounds: 

1. The time bar under Section 91(1) of the ITA does not apply as the assessment was made 5 years after the expiration of the YA 2008 and the IRB had failed to establish negligence on the part of the taxpayer under Section 91(3) of the ITA;

2.The proceeds from the sale of the Intellectual Property are not revenue in nature and hence ought not to be taxed under the ITA; and

3.The IRB ought not to impose a penalty under Section 113(2) of the ITA.

The taxpayer was unsuccessful in its appeal before the Special Commissioners of Income Tax (“SCIT”) and they appealed to the High Court.

Decision

The Learned High Court Judge dismissed the appeal and upheld the decision of the Special Commissioners of Income Tax. 

If the 23-page judgment is too long for you to read, the TLDR is that the Learned High Court Judge found there was no outright sale of the Intellectual Property. It was reasonable for the IRB to raise the assessment under Section 4(f) of the ITA, impose a penalty under Section 111(2) of the ITA and that there was negligence by the taxpayer under Section 91(3) of the ITA.

The Learned High Court’s reason, as spanned across 12 out of the 23 pages of the grounds of judgment, focused on one finding of fact – there was no outright sale of the IP rights by the taxpayer. Amongst others, the taxpayer relied on 3 areas to prove that there was a transfer of IP rights:

1. Clause 3.4 of the Intellectual Property Transfer Agreement dated 1.3.2008 

“3.4 Except as expressly provided in this agreement and to the fullest extent permitted by law, assignor hereby disclaims any and all warranties, express or implied, with respect to the technology, including but not limited to, any implied warranties or merchantability, fitness for a particular purpose, or non-infringement, and the parties agree that the technology is being transferred “as is”.”. 

2. Clause 7.1 of the Manufacturing Service Agreement 

“7.1     Intellectual Property Rights Contractor hereby acknowledges that the Company or its licensor it the owner, or authorized licensee, of all rights in and to all of the Intellectual Property Rights, and Contractor shall acquire no rights whatsoever in or to any of such Intellectual Property Rights, except as specifically provided in this Agreement. Contractor shall not take any action that might impair in any way right or interest of Company in or to any of the Intellectual Property Rights”. 

3. Note 17(b) of the Statutory Financial Statements for the financial year ended 31.10.2008 which disclosed the sum of RM821,615,000 as “Transfer out of technical knowhow to a related corporation”. 

According to the Learned High Court Judge, the taxpayer’s witness had failed to support that there had been a transfer of intellectual property when put under cross-examination. 

“Respondent: … Can you show the court the documents which finally the IP rights has been registered in the name of Agilent Technology?

Appellant witness: I don’t have them.” 

This was also one of the grounds on which the Special Commissioners of Income Tax in coming to the finding that there was no outright sale: 

“We agree with the Respondent’s Submission… (the Appellant had failed) to support the claim that the gain from the transfer of technical knowhow (i.e. the marketing and manufacturing intangibles) by the Appellant to Agilent Technologies International totalling of RM821,615,000.00 is an outright sale.”

Commentary

1. Was there an outright sale of the IP rights? 

I’m not going to delve into the nitty-gritty, but the taxpayer submitted that what is being transferred from the taxpayer to Agilent Technologies was “technical know-how”, which is non-registrable or patentable. As such, some rights are only protected by contract. 

From the grounds of judgment, it appears to me that the Learned High Court Judge was not satisfied that there was an outright sale as there was no legal transfer of the IP Rights, but although it agreed that beneficial ownership has passed.

If it is not an outright sale, the question then begs as to the purpose of the sum of RM821 million. For a consideration valued at RM821 million, surely it must be for something valuable? Unfortunately, neither the Special Commissioners of Income Tax nor the Learned High Court Judge dealt with this in detail. However, it is the Respondent’s case that the amount relates to loss of income based on badges of trade as the valuation is the projection of the taxpayer’s net income. The SCIT and the High Court upheld this reasoning; hence I’ll assume this to be their reason. 

2. Is the sum of RM821 million representing the “loss of income” revenue?

Relating to the badges of trade, is “loss of income” one of the badges? Although the categories of the “badges of trade” are not closed, it does not appear that “loss of income” is a clear category. Even if there is no outright sale, the sum is not revenue because the payment is nevertheless depriving the taxpayer of a permanent “loss of income” that it would’ve received if it had continued to own the beneficial ownership of the asset. 

Two cases are worth considering and contrasting here: Burmah Steam Ship Company, Limited v The Commissioners of Inland Revenue 16 TC 67 vs The Glenboig Union Fireclay Co, Ltd v The Commissioners of Inland Revenue 12 TC 427. 

In Glenboig Union, the taxpayer carried on business as manufacturers of fireclay goods and as merchants of raw fireclay. Subsequently, there was a dispute between the taxpayer and the railway company, and the taxpayer was interdicted from working under the railway. The railway company lost in the action, and the House of Lords exercised its statutory powers to require a part of the fireclay to be left unworked on payment of compensation. It was immaterial that the compensation was computed by the loss of expected profit from the inability to but that the compensation was ‘the price paid for sterilising the asset from which otherwise profit might have been obtained’.

Lord Dundas held as follows: 

“In the first place, what we must consider is not the measure by which the amount of compensation was arrived at, but what it was truly paid for, and, as already indicated, I think the compensation was paid for the loss of a capital asset. In the second place, and this is perhaps just another way of stating the same thing, the sum can surely not be described as profits arising from the Appellants’ trade or business; for it arose not from the exercise of that trade but in respect that the Appellants were prevented from dealing in their business with, and earning any profits from, a portion of their mineral estate.”

Lord President (Clyde) also held:

“It was argued that the compensation payable to the Company, being measured by the present value of the profits which the Company might, and in all reasonable probability would, have made if the leasehold had not been interfered with, was really a consideration or substitute But, even so, it is a consideration or substitute, not for profits earned or capable of being earned, but for profits irretrievably lost and incapable of being ever earned. The taxing acts deal with profits made, not with profits lost – with actual, not with hypothetical profits – and it is by the words of the taxing acts that we are bound. As paid to and received by the Company, the compensation was the equivalent of a destroyed portion of one of its fixed assets: I do not think it was a profit which arose from the Company’s trade or business at all.”

In the case of Burmah Steam Ship, the taxpayer bought a vessel and sent it for overhaul. The time stipulated for the overhaul exceeded the agreed timeline, and the taxpayer claimed from the repairers damages based on the estimated profit which would’ve been earned had the vessel. In finding that the compensation was taxable, Lord President Clyde distinguished the case of Glenboig Union and this instant by holding that: 

“Now, in the present case, the injury inflicted on the Appellant by the repairer’s failure to make timeous delivery of the vessel is obviously not an injury to the Appellant’s capital assets. Time sounds in money no doubt, but the loss to the Appellant by the late delivery was in the form of loss of trading opportunities, not in the form of the loss of fixed capital….

It is true that the measure by which the amount of damages or compensation is ascertainable is no criterion of the capital or revenue character of the sum recovered for the purpose of adjusting an Income Tax account of profits and gains (Glenboig Union Fireclay Coy. v Inland Revenue 1, 1921 S.C. 400, 1922 S.C. (H.L.) 112)… In the present case there can be no doubt that, when the Appellant entered into the contract with the repairers, the consequences of a failure by the latter to deliver punctually, which were in the contemplation of both parties at the time, were that the Appellant would be deprived of the opportunity of putting the vessel to immediate profitable use in his business. It was in respect of this deprivation that the damages were recovered. The contemplated “hole” in the Appellant’s profits was unfortunately made, and in my opinion the damages recovered must go, as a matter of sound commercial accounting, to fill that “hole”, and therefore constitute a proper item of profit in the Appellant’s profit and loss account.”

If the compensation given is due to permanent damage to a capital asset, TLDR is capital in nature. In contrast, if the compensation is due to temporary disturbance, it is revenue. If the argument goes along the lines that there was no outright disposal and the compensation is for “loss of income”, it is nevertheless not revenue in nature. Either way, the sum of RM821 million should not be taxed under Section 4(f) of the ITA for the reasons below. 

3. Is the sum of RM821 million taxable under Section 4(f) of the ITA?

It is unfortunate that neither the High Court nor the Special Commissioners of Income Tax dealt with this question in detail and overly focused on whether the taxpayer sold IP rights. Section 4(f), the “catch-all” provision, was meant to be a receptacle into which various revenue receipts wished to be added but did not belong elsewhere. 

In the leading case of Leeming v Jones [1930] 1 K.B. 279, Rowlatt J held that gains falling under Case VI Schedule D, the pari materia of our Section 4(f), must be revenue in nature. In this instant, the taxpayer was invited and agreed to join a syndicate to acquire an option over a rubber estate. The estate was not large enough for re-sale, and the syndicate acquired a further option to purchase an additional estate. The two estates were sold at a profit for which the taxpayer was assessed to tax.

Rowlatt J. held as follow in this instant case: 

“.. and although you may have cases which fall properly within Sch. D and in respect of which case VI. may be usefully applied, yet if you are to apply Case VI. it must be in respect of something to which Sch. D applies; it must be something in the nature of profits or gains in contradistinction to capital, and I think that the words which are used by Atkin L.J. in Cooper v. Stubbs (1), to which I have already referred, are of assistance here, for he made it plain that he regarded Case VI.”

His Lordship further expanded on what would not be caught under Case VI:

“We have to bear in mind what I think Rowlatt J. has rightly said in Ryall v. Hoare (2): “Two kinds of emolument may be excluded from Case VI. First, anything in the nature of capital accretion is excluded as being outside the scope and meaning of these Acts confirmed by the usage of a century. For this reason, a casual profit made on an isolated purchase and sale, unless merged with similar transactions in the carrying on of a trade or business is not liable to tax. ‘Profits or gains’ in Case VI. refer to the interest or fruit as opposed to the principal or root of the tree.”

Leeming v Jones had referred to and distinguished the previous case of Cooper v. Stubbs [1925] 2 K. B. 753. Cooper had earlier alluded to the possibility of taxation of capital accreditation under Case VI. Still, subsequent cases interpreted this as giving rise to trading rather than miscellaneous income depending if the activity was speculation or organised as a trade.

“I think both the judgments in Cooper v. Stubbs (1) which are relied upon clearly indicate that the learned judges in dealing with Case VI. were definitely holding that there must be some profits or gains in the nature of revenue, as contradistinguished from a profit arising upon capital.”

Based on the analysis above, for an income to fall under Section 4(f) of the ITA, the income must be first and foremost revenue in nature. It is the fruit rather than the tree. For a corporation mainly involved in the manufacturing industry and had developed technical production know-how, that technical know-how should be a capital asset of the corporation. Hence, the subsequent disposal is capital in nature. 

3. Inconsistencies in the application of the law

Say that the income is taxable under Section 4(f) of the ITA, the IRB should’ve made appropriate adjustments according to the taxpayer deductions under the ITA. The deductible expenses, in this case, would be labour, research and development expenses and miscellaneous in developing the technical know-how. However, the IRB did not allow deductions, and neither did the SCIT and the High Court similarly hold, which to my mind, is flawed. 

Furthermore, the IRB reasons that because the taxpayer had continued to use the Intellectual Property which it had sold in the course of business, the income is revenue don’t equate well. The principle that is well settled is that the IRB doesn’t have the power to command how taxpayers ought to carry out their business (Port Dickson Power). Hence, if the sale was superficial, it ought to make the necessary adjustments under Section 140A of the ITA, which would be reflective of arm’s length transactions. The utilisation of Section 4(f) of the ITA was, to my mind, inappropriate in this case. 

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High Court held Exceptional Input Tax Claims are made when GST Forms are submitted

Recently, the High Court held in a judicial review application in relation to an Exceptional Input Tax Claim (“Claim”) made under the Goods and Service Tax Regulations 2014 (“Regulations”) and Goods and Services Tax Act (“Act”) that an Exceptional Input Tax Claim which requires the Director General of Excise and Customs’ (“DGEC”) approval is deemed to be made when the GST Return Form is submitted. The DGEC had rejected the Taxpayer’s Claim by reason that the Claim was time-barred due to enactment of the Goods and Services Tax Repeal Act 2018 (“Repeal Act”).

The Repeal Act mandated all Goods and Services Tax (“GST”) input tax claims to be made before 29 December 2018 (“Prescribed Date”). However, the DGEC failed to appreciate that the Taxpayer was at all times acting in according with instructions directed from the DGEC and the Claim was made within time when the Taxpayer submitted its GST Return Form in September 2019 i.e. before the Prescribed Date.

Upon hearing the respective parties’ submissions, the High Court ordered that the Taxpayer’s Claim be allowed.

Background facts

The Taxpayer is in the business of property development. In 2017, the Taxpayer had purchased a piece of land for RM 91 million wherein RM 5 million was incurred as GST. In July 2018, the Taxpayer sold the land and, as required by the Act, registered to be a GST-registered person.

The Taxpayer proceeded to make the Claim under Regulation 46 of the Regulations. Regulation 46 allows a taxpayer to make an input tax claim in relation to GST incurred before a taxpayer was a GST-registered person. However, such claim would require the pre-approval of the DGEC. Accordingly, the Taxpayer made an application to obtain approval in July 2018.

The Repeal Act came into force on 1.9.2018 which, amongst others, mandated all unclaimed input tax claims to be made before 29.12.2018 (“Prescribed Date”). At the behest of the DGEC, the Taxpayer made its first and only GST return in September 2018 without stating the Claim.

Approval by the DGEC was finally given in March 2019. The Taxpayer then made the Claim vide an Amended GST return (“Amended Return”) as instructed by the DGEC. However, the DGEC subsequently rejected the Taxpayer’s Claim on grounds that the Claim was time-barred as it was made after the Prescribed Date and that the Amended GST return does not fulfill the conditions of Regulation 46 i.e. an Amended Return was not the first return as required under Regulation 46.

Aggrieved by the DGEC’s rejection, the Taxpayer filed this judicial review to seek relief.

Decision of the High Court

The Taxpayer’s main thrust of argument is that the Claim was protected under the Interpretations Act 1967 and 1948 and Regulation 4 of the Regulations. It was submitted that when the Taxpayer had made an application to make the Claim and submitted the GST Return before the Prescribed Date, the Taxpayer had an accrued right which is well protected under statutes and seminal case laws. In the premise, the DGEC ought to be precluded from hiding behind the veil of the Repeal Act to exculpate itself of liability.

Furthermore, in absence of clear and unambiguous language, laws are presumed to be interpreted prospectively and not retrospectively. Reliance was made on the case of La Salle Brothers v Ketua Pengarah Hasil Dalam Negeri [2018] 1 MLJ 376 where the court held:

“But the amendment Act A471 did not also expressly provide that Part I of the Interpretation Acts 1948 and 1967 (Act 388) which includes the said s 30 of the Act shall not apply… As there is a doubt the ambiguity must be construed in favour of the tax payer as the said exemption from tax has not been removed by sufficiently clear words to achieve that purpose.”

Since there were no words to exclude, extinguish or affect claims which were made pending the DGEC’s approval, such claims ought to be considered as “accrued rights” established when the taxpayers made the GST Return Form. Insofar as the Taxpayer recognised it’s rights and pursued it within time, it ought not be prejudiced by the delay DGEC’s approval.

Secondly, it was also evident from contemporaneous correspondences that the Taxpayer was acting strictly according to the DGEC directions in that the Taxpayer ought not to state the Claim in the GST Return unless and until approval was obtained. It is then irrational and unreasonable for the DGEC to reject the Amended Return which was made after approval was given.

Furthermore, the DGEC had represented to the Taxpayer that the raison d’être of the Claim is that DGEC’s approval was necessary. The blithered fixation on the Prescribed Date without taking into consideration the DGEC’s own representations had therefore violated the Taxpayer’s legitimate expectation when rejecting the Taxpayer’s Claim after approval was granted. Legitimate expectation had been recognised by the Malaysian Courts to be a right protected under the law as held in Majlis Perbandaran Pulau Pinang v Syarikat Bekerjasama-sama Serbaguna Sungai Gelugor Dengan Tanggungan:

“Given the duty of a public body not to fetter its discretion under what circumstances will a legitimate expectation be protected in the face of a change in policy. Clearly, the change of policy must be ‘a lawful exercise of discretion”

The High Court agreed with the Taxpayer and ordered the DGEC to allow the Claim.

Comments

This case affirms the cardinal principle that statutes are presumed to be interpreted prospectively and does not affect anything act done and rights accrued before the implementation of any repeal or amendment.

Furthermore, this decision would hold tax authorities responsible for their own words to maintain public confidence in the government. Instructions ordered by tax authorities of its own volution would now be prevented from canvassing arguments to the opposite effect.

Tax and Covid-19 Part 3

As countries all around the world are slowly opening up their economies amidst declining Covid-19 infection rates, economies nevertheless already have irreparable damage done. At the time of writing, more than 100 hotels have closed down nationwide and well-known names such as MPH, Microsoft and Speedy are scaling down operations.

This post is part of the “Tax and Covid-19” series which serves to provide informative expository of the Covid-19 pandemic on taxpayers affairs. Part 1 addresses potential issues arising from Covid-19 related expenses and Part 2 relates to incentives under the PENJANA scheme. Part 3 now intends to explore the topic of the tax treatment of certain types of income.

** Please note that the deadline for submission of personal tax for YA 2019 is 30 June 2020. Please do file your taxes 🙂

1. Income from the release of bad debt

In challenging times, companies may not have the financial ability to repay sums owed to creditors and occasionally, as a sign of goodwill or due to special relationship between the debtor and creditor, the creditor may write off the debt owed. Whether or not writing off bad debt is a deductible expense had been discussed in Part 1 here, whilst now we deal with the tax treatment of the debt in the hands of the recipient.

As a matter of general principle, release of bad debts is taxable in the hands of the recipient. In dealing with the question of whether the debt ought to be taxed, taxpayers are guided by the principles in Section 34(2) of the Income Tax Act 1967 (“the Act”) which provides that a release of bad debts are to be taxed when:-

1. 1. 1. 1. The taxpayer had taken a tax deduction under Section 33 of the Act against the taxpayer’s business income; or
         2. The taxpayer had claimed capital allowances under Section 42 and Schedule 3 of the Act.

Where the release of bad debts does not fall into either of the categories above, the release of bad debt is arguably not taxable in the hands of the recipient.

In the case of Felda Trading Sdn Bhd v. KPHDN (“Felda Trading”), the court held that the release of bad debt owing to the holding company was taxable because it was “gains or profits from a business” under Section 4(a) of the Act. In this case, the holding company lent money to the taxpayer to settle debts owing to trade creditors and therefore the Special Commissioners of Income Tax (“SCIT”) considered it to be “gains or profits from a business”.

With respect, the Special Commissioners’ decision is flawed because the governing provision used to bring the release of debt was Section 4(a) and not Section 34(2).

As mentioned above, the governing provision to tax release of debt is canvassed in Section 34(2) of the Act. It is further stressed that this is the only section which addresses the release of debt. Therefore, in applying the interpretation principle of generalia specialibus non derogant, the Special Commissioners ought to have applied Section 34(2) instead of Section 4(a). Further reading on the matter can be found here (spoiler: the decision would’ve been different.)

However, in Bandar Nusajaya Development v KPHDN, the Court of Appeal agreed that the waiver of interest expense for loans taken by the taxpayer against its non-business income was not taxable. The Court relied on, inter alia, the fact that Section 30(4) was the only section which addresses the release of debts and the said section did not envisage that a release of debts against the taxpayer’s non-business income is taxable.

Although the Federal Court subsequently overturned the decision on point of judicial review and had the matter was referred back to the SCIT, this point of law still stands.

2. Income from compensation payments

Whilst Part 1 of the series discusses whether early termination payments/compensations payments are deductible, we now turn to whether they are taxable.

Compensation payments received in the course of business are taxable. Examples include compensation payments made to terminate a business contract prematurely, damages for any breaches of contract or damages to replace profits are revenue in nature and are taxable. In contrast, compensation made due to destruction of a profit-making apparatus and sale of rights are capital.

In the landmark case of Van den Bergh v Clark (“Van den Bergh”), compensation payments made to terminate a contract was held to be capital in nature. The taxpayer, in this case, was in the business of manufacturing margarine and similar products. The taxpayer entered into an agreement with a Dutch competitor to work in friendly alliance, inter alia, to share profits, not to compete, territories and ancillary matters. Payments to each other under the contract was treated as revenue for income tax purposes at all material times. Owing to war and other difficulties, the parties were in dispute over the alleged payment ought to be made. The Dutch company wanted to terminate the contract but the taxpayer, who was in disadvantaged, refused to terminate unless £450,000 was paid. The Dutch company paid the sums on the condition, amongst others, that the sums represent final payment of all outstanding claims and there would be no counterclaim.

The taxpayer was assessed on the £450,000 received in income tax. The General Commissioners found that the sums were in relation to “pooling arrangements” and must be brought in for the purpose of arriving at the balance of taxable profits and gains. On appeal to the House of Lords, the sums were held to be capital in nature.

The House of Lords took note of the following:

1. 1. 1. 1. 1. The taxpayers were giving up their rights under the agreements for thirteen years ahead. The agreements were not ordinary commercial contracts made in the course of carrying on their trade but the agreements related to the whole structure of the taxpayer’s profit-making apparatus.
            2. The contract controlled how the taxpayers conducted their business.
            3. The contracts provided the means of making profits, but by themselves did not yield profits. The profits arose from manufacturing and dealing in margarine.

In Malaysia, we have imported Van Den Bergh in the case of MSE Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri and Toxicol Sdn Bhd v KPHDN (“Toxicol”). The latter, being higher in authority, will be discussed.

In Toxicol, the taxpayer entered into a contract with Kualiti Alam Sdn Bhd where Toxicol was to be a special purpose vehicle whose only obligation is to carry out obligations under the contract and is not allowed trade with any other businesses. There was a change in UEM management which frustrated the taxpayer and thereafter, entered a novation agreement to transfer all its rights to a transferee. In return, Toxicol was paid a sum of RM23mil. The bone of contention was whether the RM23mil was revenue or capital in nature.

In holding that the compensation payment was capital in nature, the court held that the novation agreement fundamentally crippled the whole structure as Toxicol could not be involved in Waste Management anymore as it was incorporated solely for the purposes of Waste Management. The taxpayer was also not in the business of selling contracts. The novation contract essentially destroyed the taxpayer’s profit-making apparatus and hence was capital in nature.

Therefore, the cases illustrated the fundamental understanding that if the compensation payments were made pursuant to the termination of a contract which materially affects the taxpayer’s profit-making structure, it is capital. Where the taxpayer is able to absorb the shock of termination, it is incident to the taxpayer’s business only had a minor impact, it is arguably revenue.

On the employment side of things, compensation payment for termination of service contracts is taxable. However, Para 15 Schedule 6 of the Act gives an exemption of RM10,000 for each completed year of service with the company or companies in the same group.

3. Income from government subsidies

Under the PRIHATIN Stimulus+ Package, the federal government introduced the wage subsidy program to encourage companies to retain employees and assist in overhead costs burden. The subsidy comes within the purview of the Income Tax (Exemption) (No. 22) Order 2006 (P.U.(A) 207/2006) (“the Order”) which exempts from tax subsidies given from the government but corresponding deduction/capital allowance for expenses incurred are allowed.

Although the application seems straight forward, taxpayers are reminded to always comply with the requirements to qualify for the wage subsidy and maintain adequate documentation.

Till date, the only case which dealt with the Order substantially is Chantika Kelang Beras Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri. In this instant case, the taxpayer was in the business of rice miller. The taxpayer received a subsidy from the Ministry of Agriculture & Agro-Based Industry Malaysia for rice and paddy seedling. However, the taxpayer mistakenly declared the subsidy as part of the taxpayer’s income. The taxpayer then applied for relief under Section 131(1) of the Act but was denied.

In agreeing with the IRB, the SCIT and the High Court took the view that the taxpayer was not the targeted group as the subsidy was given to paddy farmers to purchase good quality paddy seedlings at a subsidised priced rice at ceiling price. Rice millers were therefore not part of the targeted audience.

On appeal to the Court of Appeal (no written judgment), the decision was overturned. There was no room for intendment that the Order did not apply to the taxpayer because it was not a condition contained within the provision of the subsidy that it was intended for paddy farmers only. The MOA will pay the subsidy after inspecting the taxpayer’s premises to confirm that it met their conditions. Only when the MOA was satisfied that the taxpayer met their conditions and would the subsidy be released.

Therefore, taxpayers are reminded to maintain adequate documentary evidence of the factors which would affect their claim under the Wage Subsidy Program such as the number of employees, the amount of income of each employee and the (mandatory) at least 50% fall in revenue.

Conclusion

The debate of whether an income is revenue or capital in nature is subjective and is often highly dependent on the facts of the case. To prevent ambiguity, parties should record the intentions of the party at time the contract was made in clear and unequivocal language (Lower Perak Cooperative Housing Society Bhd v KPHDN).

Tax and Covid-19 Part 2

(This post will be updated as more clarification comes to light)

On 7 June 2020, the Prime Minister of Malaysia had announced that the Conditional Movement Control Order (“CMCO”) will come to an end on 9 June 2020 and be replaced with Recovery Movement Control Order (“RMCO”) which is set to take effect from 10 June 2020 to 31 August 2020. During his speech, the Prime Minister addressed the public’s concerns about reopening the economy and also introduced various measures to stimulate the economy with the introduction of the National Economic Recovery Plan (otherwise known as “PENJANA”) which encapsulates the Government’s initiatives in 6 words: Resolve, Resilience, Restart, Recovery, Revitalise and Reform.

This Article aims to provide a summary of the tax initiatives under PENJANA from the corporate income tax, personal income tax, stamp duty, real property gains tax, indirect tax and other incentives perspective.

1. Corporate Income Tax

(1) Special Reinvestment Allowance (“SRA”)

Under Schedule 7A of the Income Tax Act 1967 (“the Act”), only manufacturing companies and selected agricultural activities are eligible to claim for Reinvestment Allowance (“RA”). Furthermore, the Act provides that a company may claim for RA only for up to 15 consecutive Year of Assessment (“YA”).

Under PENJANA:

Where the company’s eligibility to claim RA has expired, the company can continue to claim SRA for up to 2 YAs. However, it is unclear whether the SRA would be the same rate as the RA and whether there are any further conditions to comply.

(2) Deduction and capital allowance for expenses incurred in relation to prevention of Covid-19

The Government had previously announced in the first stimulus package that taxpayers are allowed to claim tax deductions or capital allowances in relation to expenses incurred on Covid-19 prevention measures such as personal protective equipment (“PPE”), thermal scanners and testings.

Under PENJANA:

This seems to be a repetition of the same incentive to ease the cost burden of adopting measures under the SOPs issued by the Ministry of Health

(3) Incentives to adopt Flexible Work Arrangements (FWA)

As social distancing measures are encouraged, the government aims to further incentivise companies to have in place FWA to prevent a gathering of large number of employees.

Currently, under the Income Tax (Deduction for Consultation and Training Costs for the Implementation of Flexible Work Arrangements) Rule 2015 allows taxpayers to claim double tax deductions for consultation fees and costs of training in implementing or enhancing FWAs for up to 3 consecutive YA and a cap of RM500,000 per year subject to approval by Talent Corp.

Under PENJANA:

Tax deduction for FWA will begin from 1 June 2020 onwards. Further clarification on the type of expenses and corresponding conditions will be required.

(4) Small and Medium Enterprise (“SME”) tax incentives

Under PENJANA:

Where an SME commences operation between 1 July 2020 to 31 December 2021, a special annual income tax rebate of up to RM20,000 will be given for up to 3 YAs.

(Please refer to stamp duty relief available to SME below)

(5) Incentives to encourage employment

Under PENJANA:

To further encourage employment, the Government had announced the following tax incentives:

1. 1. 1. Employment of youth for apprenticeships: RM600 per month for up to 6 months
      2. Employment of person >40 years old and been unemployed for 6 months: RM800 per month for up to 6 months
      3. Employment of persons >40 years old or persons with special abilities: RM1,000 per month for up to 6 months
      4. Employees retrenched but are not covered under the Employment Insurance Scheme: one-off RM4,000 training allowance.

(6) Other incentives

Under PENJANA:

The Government further announced the extension of various incentives currently already in place but due to expire soon.

1. 1. 1. Special tax deduction for rental reduction for business premises rented to SMEs of at least 30% to be extended to 30 September 2020.
      2. Accelerated capital allowance of 40% for ICT equipment to be extended to 31 December 2021.
      3. Special tax deduction for renovation and refurbishment expenses of business premises up to RM300k to be extended to 31 December 2021.
      4. Extension of the Wage Subsidy Program to be extended for a further 3 months.

2. Personal Income Tax

(1) Personal income tax reliefs for purchase of handphone, notebook and tablet

At present, individuals may claim income tax relief of up to RM2,500 for lifestyle expenses such as the purchase of books, personal computer, smartphone or tablet (not for business use), sports equipment, gym membership payment and monthly bill for internet subscription

Under PENJANA:

1. 1. 1. From 1 July 2020 onwards, individuals who receive a handphone, notebook or tablet can claim personal income tax relief of up to RM5,000.

1. 1. 1. Similarly, individuals can claim further claim a tax exemption of RM2,500 for purchase of handphone, notebook and tablet.

Further clarification is required whether a claim under the PENJANA tax incentive operates exclusively to the current tax relief or in addition i.e. can a person claim for a total of RM5,000 for purchase of 2 tablets?

(2) Personal income tax relief for childcare

At present, individuals can claim an income tax relief of up to RM2,000 for child care expenses at a registered child care centre/kindergarten for a child aged 6 years and below

Under PENJANA:

The income tax relief is increased to RM3,000 for YA 2020 to 2021.

The child care centre must be registered with the Department of Social Welfare or the Ministry fo Education.

(3) Personal tax relief for travelling expenses

Previously, a special personal income tax relief of up to RM1,000 allowed for resident individuals for expenses incurred domestic travelling between 1 March 2020 to 31 August 2020.The expenses eligible for tax relief are accommodation fees with registered accommodation providers and entrance tickets to tourist attractions spots.

Under PENJANA:

The period is extended to 31 December 2021.

3. Stamp Duty

(1) Special stamp duty exemption for instruments executed in connection with Mergers and Acquisition for SMEs.

Under PENJANA:

For any instruments executed between 1 July 2010 and 30 June 2021 by SMEs, there will be a stamp duty exemption if it is for the purpose of mergers and acquisitions.

(2) Stamp duty exemption for instruments executed in connection with the purchase of residential properties

Under PENJANA:

With the reintroduction of the Home Ownership Campaign, a stamp duty exemption will be given for the purchase of residential properties between the value of RM300k to RM2.5million ON THE CONDITION THAT at least a 10% discount is given by the developer & the instrument was executed between 1 June 2020 to 31 December 2021.

The stamp duty exemption given is:

1. 1. 1. Instrument of transfer: Restricted to the first RM1million of the property price
      2. Loan agreement: Full stamp duty exemption

4. Real Property Gains Tax (“RPGT”) Exemption

At present, taxpayers are subject to an RPGT at the rate of between 5 – 30% depending on the period in which the taxpayer acquires and subsequently disposes of the property.

Under PENJANA:

Taxpayers are exempted from RPGT for properties disposed between the period of 1 June 2020 to 31 December 2021 for up to 3 units of residential property.

Note: caution must be taken as the exemption appears to apply only where the disposal of real property is subjected to RPGT and not income tax. Where the disposal of real property is subject to income tax instead, the exemption may not apply.

5. Indirect Tax

(1) Tourism tax exemption

Currently, a tourism tax of RM10 is charged on foreign travellers on a per room per night basis.

Under PENJANA:

Hotels are exempted from charging the tourism tax between 1 July 2020 to 30 June 2021.

(2) Sales tax exemption on automotive vehicles

Under the Sales Tax (Rates of Tax) Order 2018, a sales tax of 10% is imposed on the sale price of locally assembled cars and final price of imported cars.

Under PENJANA:

A full sales tax exemption (100%) on locally assembled passenger vehicles and a 50% sales tax exemption for imported passenger vehicles purchased between the period 15 June 2020 to 31 December 2020.

(3) Service tax exemption

At present, hotel operators are exempted from imposing service tax on accommodation and related services for the period 1 March 2020 to 31 August 2020.

Under PENJANA:

The service tax exemption is to be extended up to 30 June 2021.

(4) Export duty exemption

Currently, an export duty of between 0-30% is imposed on the export of crude palm oil, crude palm kernel oil and refined bleached deodorised palm kernel oil. The Government had previously announced that the export duty for crude palm oil had been reduced to 0% for June from 4.5% in May.

Under PENJANA:

There will be a full export duty exemption on the export of the aforementioned commodities between the period 1 July 2020 to 31 December 2020.

(5) Remission of penalties for late payment of Sales and Service Tax

The Royal Malaysia Customs Departments had previously announced that any penalty imposed on late payment of Sales and Service Tax due at the end of the month between the period of March to May will be fully remitted if the payment is received on or before 30 June 2020 for the taxable period ending 29 February 2020, 31 March 2020 and 30 April 2020.

Under PENJANA:

There will be a 50% remission on penalty for late remission of Sales and Service Tax due and payable between the period 1 July 2020 to 31 September 2020, which correlates to the taxable period ending 30 June, 31 July and 30 August 2020. 

However, further clarification is required for the taxable period ending 31 May and tax due on 30 June whether any remission on penalty for late payment is given. 

6. Other incentives

(1) Incentives to encourage Foreign Direct Investments (“FDI”)

At present, there are various incentives available in addition to the Promotion of Investments Act 1986 where companies with a Pioneer status may enjoy a full income tax exemption of the statutory income for a period of up to 10 years.

Under PENJANA:

Foreign companies can enjoy a full income tax exemption of 0% if they relocate their manufacturing business operations into Malaysia and make new investments in the manufacturing industry. Depending on the amount of the FDI made, this will affect the corresponding period in which the company can enjoy the income tax exemption:

1. 1. 1. For FDI between RM300mil to RM500mil: 10 years
      2. For FDI above RM 500mil: 15 years

Applications must be made to the Malaysia Investment Development Authority (MIDA) for approval between 1 July 2020 to 31 December 2021. The company must shift and commence manufacturing operation within 1 year after approval.

(2) Relocation of manufacturing operations by Malaysian companies

Under PENJANA:

If a resident company moves its manufacturing operations from overseas into Malaysia, the resident company would be eligible to claim a 100% investment tax allowance for a period of up to 5 years, subject to approval by MIDA.

Applications can be made between 1 July 2020 and 31 December 2021.

Tax and Covid-19 Part 1

As the Covid-19 pandemic’s effect on the global economy is predicted to last for another year, taxpayers may be forced to take extraordinary measures in handling their business affairs during these extraordinary times. When making any financial decisions, taxpayers should take note that there may be tax repercussions arising from these decisions.

鉴于新型冠状病毒肺炎疫情蔓延而在国际经济上所造成的停滞不前的情况预测将持续至下一年，纳税人或被迫在这个异乎寻常地时间里采取特殊的措施。在做任何商业决定时，纳税人应意识到商业政策是否会对税务实务造成影响。 

This article aims to lay out some applicable principles of deductibility of different types of expenses that a taxpayer may incur during this period. The types of expenses to be explored are compensation for early termination, bad debts, compensation for retrenchment, subsidy received by the government and donations.

此文章旨在说明纳税人在这期间或将产生的一些费用的相关税务扣除制度。其中会进一步探讨的费用包括提前终止合约赔偿金、坏账、遣散费、政府给予的工资补贴计划以及捐献。

Under Section 33(1) of the Income Tax Act 1967 (“the Act”), the conditions in order to qualify for a tax deduction are:

1. The expense was incurred in the basis period; and
2. The expense is wholly and exclusively for the production of the taxpayer’s gross income.

根据所得税法1967 第33（1）条，获得扣税的条件如下：

1. 该费用在此准基期限招致；以及
2. 该费用是完全以及专门用于产生收入。

However, Section 39 of the Act provides that notwithstanding an expense fulfils the conditions under Section 33(1), no deduction is allowed. For example, Section 39(1)(c) provides that expenses incurred which are capital in nature are not tax-deductible.

无论如何，第39条说明就算有些费用满足第33（1）条的条件，该费用不允许扣税。例如，第39（1）（c）条陈述资本支出是不允许扣税。

1.Deductibility of compensation expense for early termination

1。扣除提前终止合约赔偿金

Parties seeking to put a contract to an end unilaterally may be required to compensate the counterparty for early termination. Before Covid-19, parties may have entered a contract in the course of trade with the vision that the contract would be profitable. If the contract now proves to be more a liability than an income source, any compensation payments made to terminate the contract generally ranks for a deduction.

假设合同当事人想单方提前终止合约，该合同当事人也许必须赔偿对方。在新型冠状病毒肺炎疫情爆发，合同当事人也许预期该合作会产生利润。如果该合同是明显的无法企及反而成了一个累赘, 为了提前终止合约所导致的赔偿金是可以扣除的。

However, if the early termination compensation is capital in nature, it is not tax-deductible. For example in CH & Co (Perak) Sdn Bhd v DGIR, the taxpayer had claimed a deduction for compensation expense to compensate the ground floor tenant for trade fixtures and fittings and loss of business as the taxpayer had a prospective tenant who wanted to lease the entire building for 14 years. The court found that the compensation was a capital expense. The reason for the court’s finding was twofold:

1. 1. 1. The termination was to remove of a disadvantageous asset; and
      2. To make the building more advantageous and beneficial.

然而如果此赔偿金是资本支出，该赔偿金是不可扣除的。在CH & Co (Perak) Sdn Bhd v DGIR，该纳税人扣除了支付给在一楼的租户与所有固定装置和可拆除设备以及营业亏损所造成的赔偿金。为了提前解约的原因是因为有另一位准租户有意租用纳税人所属的楼宇长达14 年。法庭裁定该支出是中资本支出因为

1. 1. 纳税人终止合约是为了去除不利的资产；以及
   2. 为了使楼宇更有利和增加吸引力。

Generally, if the termination gave the taxpayer an enduring benefit, compensation for the early termination may not be deductible. Courts will scrutinize the surrounding circumstances and events that led to termination to determine the purpose of compensation payment and thereafter decide if it is revenue or capital in nature.

如果终止合约给予该纳税人持久的利益，所交付的赔偿金是不可扣除的。法庭在决定该赔偿金是资本支出还是公司营运费时会根据周围情况和提前终止合约的目的进行评估。

2. Deductibility of bad debt

2. 坏账的税务扣除

As demand for goods and services slumps amidst economic uncertainty, many companies may be in a precarious position where they are unable to pay creditors for goods. If parties have a cordial business relationship, it is common to write off debts as a sign of goodwill. However, in doing so, creditors inevitably expose themselves to the risk of being challenged that the bad debt expense is not deductible.

随着经济衰退以及消费者对货物与服务的需求逐渐下降，许多企业或许会因为面对现金流量的问题而至无法支付债权人。若双方是拥有和谐的关系，注销该债务是个常见的现象。然而，在注销债务时，债权人也许会面临被税务局挑战该坏账是不可扣除的。

It is trite law that when taxpayers take a deduction for bad debt incurred, he would need to demonstrate that there were efforts to recover the debt and any waiver of debts were based on sound commercial reasoning. The Public Ruling 1/2002 (“Public Ruling”) defines bad debt as “a debt that is considered not recoverable after appropriate steps have been taken to recover it”. The Public Ruling also suggests that reasonable steps taken to recover debts include debt restructuring scheme, legal action or reminder notices. Therefore, reasons such as “goodwill” or “personal relationships” will likely be insufficient.

当纳税人要扣除坏账时，他必须证明他已采取适当努力以追回债务以及任何坏账是基于合理的商业理性。在税务局所发布的公共裁决 1/2002 （“公共裁决”）对于坏账的定义是 “采取合理的步骤后还是无法追回的债务”。公共裁决也提出为了追债的合理步骤包括了债务重组计划，采取法律行动以及提醒同知。因此，理由犹如 “信誉“和”人际关系” 是不足以获取税务扣除。

Based on our body of case law, the Malaysian courts had held along the same tune as the Public Ruling. Taxpayers must take reasonable steps to recover sums owed such as timely legal action, referring matters to dispute resolution and/ or settlement agreements.

根据我国的判例法, 马来西亚法院的裁定和公共裁决是一致的。纳税人应采取适当的步骤来追回债务例如尽快采取法律诉讼，提交仲裁或和解协议。

3. Deductibility of compensation expense for retrenchment of employees

3.税务扣除员工裁员的赔偿金

In efforts to reduce cost, companies may be forced to undergo a retrenchment exercise in endeavours to keep afloat. According to the respective employment contracts, the company may be required to pay compensation to the employees for loss of employment. Taxpayers would need to evaluate whether such payments are deductible or otherwise.

为了减低营业费用，企业或许会为了保持营业而被迫进行裁员行动。根据各自的劳动合同，该企业必须根据合约条件给予赔偿金。纳税人必须鉴定任何赔偿金是否可税前扣除。

If compensation payments paid to employees are part of the taxpayer’s strategy to reduce cost and sustain business continuity, the payments are deductible. In Kulim Rubber Plantations v DGIR, the Federal Court held that where a taxpayer makes a payment “in order to get rid of … a servant whose continuance in service is undesirable in the company’s interest”, it should be treated as a revenue payment and a deductible expense. Accordingly, compensation payments made to employees pursuant to a restructuring exercise are deductible if the purpose is to keep the company in operation.

如果裁员行动是为了减低营业费用和业务可以持续性发展，相关的赔偿金时可在税前扣除的。在 Kulim Rubber Plantations v DGIR，联邦法院已裁定如果纳税人支付赔偿金“为了摆脱…… 一个从公司的利益的角度想不理想的员工” 该赔偿金是属于公司营运费用和可扣除的。因此，如果裁员的目的是为了确保公司可以继续营业， 因企业重组所致的赔偿金是可扣除如果。

However, if the compensation payments are made due to the cessation of business, such payments are not deductible. The rationale is due to the fact that these payments were not made in the production of the taxpayer’s gross income but were made to put an end to the business. The court in Ampat Tin Dredging Ltd v DGIR held that it was not sufficient that the expense incurred is related to the production of income, but it must be wholly and exclusively incurred in the production of income. In this case, the retrenchment due to closure of business was found to have nothing to with the production of gross income.

然而，如果该赔偿金是为了停业而造成的，该赔偿金是不可扣除。原理是因为这赔偿并不是用于产生收入而招致的费用，而是为了停业的费用。法院已在 Ampat Tin Dredging Ltd v DGIR 指出任何费用不仅必须和产生收入有关系，该费用必须是完全以及专门的产生收入。在该案例里，为了停业而裁员所支付的赔偿金和产生收入毫无关系。

Taxpayers are advised to maintain contemporaneous documentation by stating the purpose and reason of any compensation payment made. Where retrenchment benefits were made to save the taxpayer from extinction, it would qualify for a tax deduction as expenses incurred in the production of gross income.

纳税人应当存同期文档并且注明赔偿金的目的以及理由。如果该裁员赔偿金是为了避免企业倒闭，该费用是属于用于取得所得收入的费用方可在税前扣除的。

4. Deductibility of employee wages under the govt grant

4. 政府雇员工资补助的税前扣除

On 6 April 2020, the Prime Minister of Malaysia had announced the Additional PRIHATIN SME Economic Stimulus Package (“PRIHATIN SME+”) in efforts to stimulate the Malaysian economy with emphasis placed on maintaining the sustainability of SMEs. In Malaysia, SMEs accounted for more than 98.5% of all business establishments but compared to larger multinationals, they are often strapped for cash and have lower liquidity ratios. With that in mind, the PRIHATIN SME+ had, amongst others, offered a wage subsidy program to assist in maintaining the job security of its employees and reduce the burden on expenses (“Program”).

于 4 月 6 日，马来西亚首相宣布了经济振兴中小企配套（增加版）（“配套”）来协助企业可持续发展。在马来西亚，中小企业占了所有企业的98.5% ，可是与大型企业相比，中小企业通常拥有较为紧张的现金周转压力而且拥较低的流动性比率。考虑到这方面的苦扰，政府在配套里介绍了万众期待的工资补贴计划目以提供雇员的保障以及减低企业开支的消费。

The Program would fall within the scope of the Income Tax (exemption) (No.22) Order 2006 (P.U.(A) 207/2006) (“Exemption Order”). Under the Exemption Order, where eligible persons receive income in the form of a grant or subsidy from the State or Federal Government, such sums received are exempted from tax. In light of the foregoing, the subsidy received by an SME company having fulfilled necessary conditions would be tax-exempted.

该配套应在所得税法令（豁免） （第。22） 2006 (P.U.(A) 207/2006) (“豁免法令”）。在该豁免法令，当有资格的纳税人获得由州政府或联邦政府给予的补助或补贴形式的收入，该收入是免税的的。正因如此，中小企业从配套里收到的工资补贴是，在满足了所有的条件后，将是免税的的。

However, expenses spent using the sums received under the Program is also not deductible. Therefore, if the taxpayer received RM50,000 under the Program, expenses incurred for its employees’ wages to the value of RM50,000 is not deductible.

然而，任何使用了配套中的补贴所支付的的费用是不可扣除的。因此，假设纳税人在配套中领取了RM50，000的补贴，相等于RM50，000 的雇员工资是不可扣除的。

Taxpayers should be aware that Clause 4 of the Exemption Order imposes an obligation to maintain separate accounts for income received as a grant or subsidy. With this in mind, taxpayers must maintain appropriate records detailing the amount of subsidy received under the Program and amount of deduction claimed in respect of expenses on employee wages.

纳税人应意识到豁免法令的第4条规定获得补助者必须在企业账户中另行记录所领取的补助或补贴。因此，纳税人应该保持适当的记录仔细说明纳税人从配套中收到的补贴以及相关的雇员工资费用。

5. Deduction for donation to Covid-19 fund

5. 捐献给冠病基金的税前扣除

In endeavours to raise funds to combat the pandemic, the Malaysian Government has announced that donations to the Covid-19 fund will qualify for a tax deduction. Taxpayers may choose to donate by cash or in-kind to the Covid-19 fund set up by the Prime Ministry Department and Ministry of Health (“Tabung Covid-19”), Organisations with Section 44(6) status or other approved community and charitable projects. The Act has various provisions which allow for deduction hence taxpayers must accurately identify which provision is relevant to their form of donation.

为了筹募基金助于对抗新型冠状病毒肺炎疫情，马来西亚政府已宣布任何为捐给了冠病基金可税前扣除。纳税人可选择以金钱还是以实物的方式捐款给首相署和卫生部的冠病基金，所得税法 第44（6）条认可的任何组织或合格机构将享受减免。所得税法拥有多个相关的条规所以纳税人必须准确的鉴定哪条与他们捐款形式一致。

Scenario 1: Cash donations made to Tabung Covid-19

• • • Treatment: Section 34(6)(h) OR Section 44(6)
    • Condition: Approval required if claiming under Section 34(6)(h)

Scenario 2: Donation in kind to Tabung Covid-19

• • • Treatment: Section 34(6)(h)
    • Condition: Approval required

Scenario 3: Cash donation to Organisations with Section 44(6) status

• • • Treatment: Section 44(6)

Scenario 4: Donation in cash or in-kind to approved community and charitable projects

• • • Treatment: Section 34(6)(h)
    • Condition: Approval required

范例 1：现金捐款给冠病基金

• • • 待遇: 第 34(6)(h) 条规 或 44(6) 条规
    • 条件: 如果是 第34(6)(h) 条内，纳税者必须获得批准

范例 2：实物捐赠给冠病基金

• • • 待遇: 第 34(6)(h) 条规
    • 条件: 纳税者必须获得批准

范例 3：现金捐款给第44（6）条认可的组织

• • • • 待遇: 第 44(6) 条规

范例 4：现金或实物捐赠给合格机构

• • • 待遇: 第 34(6)(h) 条规
    • 条件: 纳税者必须获得批准

Conclusion

Taxpayers would need to reassess whether expenses incurred makes commercial sense, revenue or capital in nature or disallowed for deduction under the Act. Although case laws have been helpful in clarifying rules on deductibility such as which expenses are revenue and capital in nature, the question of whether tax deduction is allowed is often a question of fact as cases on the same facts but with different purposes may have different tax implications.

结论

纳税人应该慎重考虑任何费用的商业合理性，是公司营运费还是资本支出或是否在所得税法里的条规是不被允许扣除的。虽然判例法有助于誊清扣除原则例如费用是否是资本费用，但是某个费用是否可扣除经常是事实问题因为同一个开销可因不同的目的而对所得税务有不同的影响。

Note: If there is any inconsistency between the English and Chinese versions, the English version shall for all intent and purposes prevail. 

特别注明：英文版和中文版上倘出任何歧义，概以英文版本为准。上述仅供阅读参考。

Working as a tax consultant in a Big 4

Ever since I have started working in KPMG Tax back in September 2018, I’ve gotten quite a fair bit of questions from my learned friends of legal background about working how is it like working in a professional service firm as opposed to working in a law firm.

Joined with me in this write-up for the first ever joint blog post is Tan Ai Jin who works at Deloitte as a tax consultant as well. Ai Jin and I are both law graduates who are currently pursuing the commercial route but the difference is that Ai Jin is in the Transfer Pricing whereas I am in Corporate Tax.

Disclaimer: The views and opinions expressed in this post are personal and those of the authors and the authors only. They do not in any way reflect the views and opinions of the people, institutions or organizations that the authors may or may not be associated with in a professional or personal capacity.

1. Aren’t you a lawyer? Why are you working there?

Sophia (KPMG, Corporate Tax): I think Ai Jin and myself are in agreement that this is the most asked question during our first few weeks in office. I think I am the only non-accounting graduate on my whole floor.

The reason behind why I’ve decided to work here is very much driven by a personal desire to explore other career opportunities beyond the Bar Granted this practice may not be as commonplace in Malaysia, there is an upward trend in this practice with an increasing amount of my friends taking a go in a professional service firm. (Also because I was precluded from taking the CLP exam due to a misunderstanding about LSE’s course structure.)

Ai Jin (Deloitte, Transfer Pricing): My first exposure to tax was a module I took in my final year of university which touched on tax evasion and avoidance. I was quite drawn to the subject and was keen to learn more, given I have no prior knowledge of tax, which led me to choose tax as my assignment topic. This was exciting for me because I enjoyed the process of learning something completely new, particularly after 2 years of more traditional law modules.

From my research, I read quite a bit that people who work in the field of tax often have a law background. Having not much interest to continue with the BPTC, I considered the option of furthering my learning of tax through a Masters but decided I would need work experience first.

2. Do you have any prior experience in Tax?

Sophia (KPMG, Corporate Tax): My personal experience of working in tax dates back to July 2015 when I interned in Tax Department in Lee Hishammuddin Allen & Gledhill. I took a tax module and an accounting module in my degree so that really helped a lot. Upon graduation, I interned in the PwC Malaysia under Tax Reporting Strategy.

Ai Jin (Deloitte, Transfer Pricing): In my final year of university in the UK, I had a brief stint volunteering for a lady who inherited a cottage and wanted to utilise it as temporary housing for refugees. Mine and the other volunteer’s role was to research for tax implications and the feasibility of running her idea as a charity or business. I guess this helped cement my impression of tax and gave me confidence that there is a place for law graduates in tax.

3. So, what do you do as a Tax Consultant?

Sophia (KPMG, Corporate Tax): For easy reference, I shall insert an excerpt from the KPMG careers website:

The Corporate tax department is separated into 2 indistinct groups: Tax compliance and Tax advisory. Why I say “indistinct” is because you’ll end up doing both. However, most likely than not, you will be doing the work of either one group more than the other. For me, I hold a dual portfolio of being in both Tax compliance and Tax advisory in Corporate Tax.

Tax Compliance: Part of my day-to-day routine involves the computation of the company’s tax returns. Filing of tax returns requires constant referral to the Income Tax Act, have a strong foundation of the rules of deductibility of expenses and claiming tax incentives adequately.

Another bulk of work of my tax compliance is reflected under point 2 and 3 which relate to managing our corporate client’s tax affairs. Depending on the size and the business of the company, there are various issues you might need to iron out with the Malaysian Inland Revenue Board (MIRB) such as the return of overpayment of taxes of the clients, enquiry of the tax affairs as well as other queries and unclear points of law.

I would say that tax compliance work is quite individualistic because each consultant is responsible for their own client listing. The only person responsible for you is the Manager-In-Charge for the client. There is a senior for guidance but you are expected to be independent, know what you need to know and do what you need to do.

Tax Advisory: As for Tax Advisory, my work is pretty ad-hoc because it depends as and when I am required to assist. To put it simply (and to prevent infringing any rules of confidentiality with KPMG), it is to inform clients about the tax implications of any corporate restructuring, due diligence, M&A or other exercises they intend to undertake. For example, if a German company intends to set up a company in Malaysia, we can help in informing the various tax incentives in Malaysia available for that industry or we can also brief them on what happens if they intend to take over a Malaysian company and conduct a due diligence exercise.

Ai Jin (Deloitte, Transfer Pricing): Without getting too technical, the bulk of my task involves drafting transfer pricing reports for companies which fulfil the revenue and related party transaction threshold. (For more information on related party transactions, read up on Sophia’s post about it here.) The report need not be submitted with the tax return but should be available upon IRB’s request.

I see the transfer pricing report as a ‘health check’ of sorts. It contains details of the holding company, description of the company’s business nature and the purpose each function serves within the company in relation to their controlled transactions, and the risk assumed by the functions. We then use transfer pricing methods to assess the company’s profit margins and benchmark it against comparable companies. This process involves a lot of information exchange between the client as we need to thoroughly understand the company’s business to draft a comprehensive report.

When the company is making a loss and their profit margins do not mark up to the comparable companies, it could lead to being selected by IRB for audit. We generate margin analysis to justify the company’s result, which could be due to various reasons, ie. fluctuating market conditions, expansion of business, or one-off extraordinary losses. The audit process is arduous and has high stakes because if either party is unsatisfied with the outcome, it could mean settling the case in court which is far more taxing (pun intended).

There are areas of transfer pricing like Country-by-Country Reporting, Master File and transfer pricing disputes which are covered under Advanced Pricing Agreement and Mutual Agreement Procedures as well.

4. What are some distinct points of your work that is only found in your company?

Sophia (KPMG, Corporate Tax): For one, KPMG is next to 1 Utama which is a big plus when it comes to deciding what to have for lunch. Secondly, parking is relatively cheaper. Thirdly, and on a more serious note, KPMG does a lot of classroom training which entails a great deal of personal interaction and adequately prepare employees to perform more confidently. I had a month half training before I actually started doing any work. We also have very regular updates whenever different matters arise i.e. National Budget, Tax Townhall, changes in Tax treatment and others.

Ai Jin (Deloitte, Transfer Pricing): I appreciate the diversity of the workforce in the company. Just my department alone, we have different Service Groups to cater to specific markets ie. Japan, Korea, and China Service Groups respectively have a native speaker to manage the cases and facilitate our communication with the clients. I belong in the Japan Service Group and was able to handle cases involving Japanese conglomerates which is quite a unique market.

Adding to the diversity, we also have more than 8 different nationalities in the department to share their expertise and tasty treats from their respective hometowns!

5. Lastly, do you enjoy doing what you’re doing?

Sophia (KPMG, Corporate Tax): During my past 6 months stint, I can say with conviction that I’ve learnt a lot in my time at as it had kindly offered me a clearer picture of a tax consultant job to help me with my future career choices. I’m sure millennials will be entering that quarter life crisis where you’re unsure of what you want to do and don’t know if you’re going to continue. I’d say give it a shot because you’ll never know it until you try it.

Granted it is (very) difficult to be working with many amazing talents and severely lacking on the relevant skills and knowledge as the person beside me, it gives you that added advantage of being able to learn at expedited speed because if you’re the smartest person in the room, you’re obviously in the wrong room.

Ai Jin (Deloitte, Transfer Pricing): I think I have a long way to go before I can be completely confident and satisfied with my experience. It is especially difficult having to pick up accounting principles as I carry out the job without any (I mean zero, zilch, I didn’t even take accounting for SPM) foundation on accounting and finance. I also felt a bit alone in my struggles compared to my peers who are chambering and getting to practise what they learned in law school. Getting to meet people like Sophia in a similar predicament was really inspiring and encouraging.

So I always tell myself I’m in this path with a reason and will continue to stay in it for as long as I can go. Besides, I enjoy challenging myself outside my comfort zone and looking back to appreciate the progress I have made. It’s cheesy but I’ll end with a poem which inspired me:

“So wear your strongest posture now

And see your hardest times

As more than just

The times you fell,

But a range of mountains

You learned to climb.”

Case update: IRB’s right to apportion expenses

The general rule governing the deductibility of expenses is encapsulated under section 33(1) of the Income Tax Act 1967 (“the Act”) which reads (emphasis as highlighted):

Therefore, the below conditions must be fulfilled (unless otherwise provided in the Act) to allow a deduction for an expense:

1. The expenses must be wholly and exclusively incurred in the basis year
2. It must be wholly and exclusively incurred in the production of gross income

The contention arises where there is more than one motive for the purpose of the said expense i.e. an incidental benefit or ulterior purpose. The question is then for the trier of fact to decide that whethe the expense should be (1) wholly disallowed or (2) apportioned or (3) wholly allowed.

In DGIR v Kok Fai Yin Co Sdn Bhd, the amount was wholly allowed.

Background facts:

The DGIR was of the view that the directors’ fees paid to 3 directors of the company were unreasonably excessive and proceeded to only allow a portion of the directors’ fees expense and added back the remaining in the computation of gross income.

DGIR’s stance was that the directors’ fees were not “wholly and exclusively” incurred in the production of gross income hence the apportionment. (it’s a shame the facts did not provide how much was added back and the evidence and basis  by the IRB to prove what was they think ‘reasonable’ because there is a wide spectrum of the amount a directors’ can be paid.)

The question before the High court was whether this apportionment was justified.

Decision:

Upholding the decision of the SCIT and dismissing the DGIR appeal, the court held that DGIR had no power to Section 33 of the Act did not empower the DGIR to consider and determine what reasonable fees should have been paid to the directors by the Taxpayer and to disallow the excess from deduction under that section.

Comparing local laws to that of the UK, Section 33 does not encapsulate the word “wholly, exclusively and necessarily incurred”. The latter would empower the tax authorities to have authority and determine whether the said expense was necessarily incurred.

 

However, in the recent case of KPHDN v Kompleks Tanjung Malim Sdn Bhd, the High Court held that the tax authorities were justified in apportioning the quit rent expense.

Background facts:

The company was at all material times solely involve in the business of oil plantation only. Their only source of income was from the sale of fresh fruit bunches harvested from their land.

The Company applied to convert the said land from “agriculture land” to “commercial land” in 1993. As a result of the approval, the quit rent for the land where the oil palms were planted increased from RM200k in YA 2005 to RM1 mil in YA 2006, 2007 and 2011.

The IRB conducted a tax audit and disallowed a portion (around RM800k) on the basis that the whole amount of RM1mil was not incurred in the production of gross income of the company because, being an oil palm plantation company, there was no reason why the company should apply to convert the land from “agricultural” status to “commercial” status.

The SCIT followed Kok Fai Yin and agreed that the IRB had no power to apportion the single expense into allowable and non-allowable portions, hence this appeal to the High Court.

Decision:

Deciding Order by the SCIT was set aside and appeal allowed. The High Court held that the IRB was right in the apportionment. The reasonings are as follows:

1/ The SCIT made a finding of fact that the reason for conversion was solely to enhance the capital value of the land. Therefore, it had nothing to do with the company’s oil palm production business. The court said that this was akin to the payment of franchising fees where the expense was incurred for the right to commence business instead of production of gross income.

2/ This case can be distinguished from Kok Fai Yin on the basis that there is no disagreement directors fees are wholly and exclusively incurred in the production of gross income of the company. The only contention that they had was that it was unreasonably high. The question for the court here was whether the additional RM800k in quit rent expense should be allowed for a deduction where it had nothing to do with the company’s business. The question on point of law is different.

3/ The Company can still continue its oil palm business without the conversion hence it could not be said to be “wholly and exclusively” incurred in the production of gross income.

 

UPDATE: the Court of Appeal reverses the decision of the High Court in July 2019 and hence upholding the position of Kok Fai Yin where the IRB has no power to dictate how parties are to conduct their business. Therefore, although the conversion of the land from agriculture to commercial has no relevance to the taxpayer’s business of oil plantation, such expense is still deductible because the land on where the oil palm are planted is used in the production of gross income of the company.

Conclusion:

When determining whether an expense is wholly and exclusively incurred in the production of gross income, one must look at not only whether it is relevant to the company’s business but also the relationship with section 33.

Personally, I think that the decision in Kok Fai Yin is correct because directors’ fees is an arbitrary topic, mainly decided by contract between the director and the company and therefore not a matter that the IRB should interfere. I am curious as to how IRB could allow million ringgit directors’ fees in listed companies and why instead conducted this additional assessment on a private company.

Either way, IRB doesn’t lose out on tax received because the directors’ fees would be taxable at the director’s end under individual tax.

In Tanjung Malim case, I do think that there is some rationale behind the apportionment but I am interested to know how this plays on if there are other factors into play ie inflation and government intervention. Would the quit rent payment still be capped at Rm200k?

Another point I can think of which supports the High Court decision is that due to the fact that land is not part of the company’s trading stock, there really is no real purpose in increasing the value of the land. Compared to CP Sdn Bhd v KPHDN, valuation fees incurred for the purpose of (in addition to comply with MFRS) determining how much the land could be sold in the future form part of the company’s trading stock, as it was a property development company, is deductible. A highly valued land could fetch a higher price and when sold, higher gross income. In Tanjung Malim case, this does not seem to be the case as it’s trading stock is not the land, which would be subjected to Real Property Gains tax instead of income tax when sold hence not incurred in the production of gross income.

However, since it was held in Kok Fai Yin that section 33 does not give the IRB power to determine directors’ expenses but the same section allowed IRB to determine quit rent payment, which one prevails? As said in Kok Fai Yin, only where there is a word “necessarily” thereafter then the tax authorities could determine the apportionment of expenses. In absence of past records, can it be wholly deductible i.e. if someone purchased Tanjung Malim’s “commercial land” but continued the business of oil palm plantation, is that company also only allowed to claim RM200k tax deduction? Some clarification would be needed in order to have a clear conclusion of the limits of authority of IRB and powers given under section 33.

 

Is waiver of debts taxable?

 

 

Companies write off bad debts for a multitude of reason: the debtor has gone bankrupt or is under liquidation, disproportional effort to recover the money owed or just simply to recover as much as possible and get on with life. For the debtor, there are 2 ways that this write off might affect them: it can be taxable and it can also not be taxable.

The difference is what makes a write off debt to be taxable is normally if it is revenue in nature and trade-related whilst it is not if the reverse applies. Under Section 30(4) Income Tax Act 1967, where a taxpayer had previously claimed a tax deduction or capital allowance and the amount of debt is then released, it would be treated as being part of the debtor’s gross income and hence taxable in the Year of Assessment in which the debt was forgiven. Similarly, if the taxpayer had not claimed a tax deduction or capital allowance previously, the release of debt should not be brought to tax.

1. FT v MIRB 

In FT v MIRB, the waiver of loan was taxable as an income. The loan given was used to fund the operational expenses of the company and hence when it was waived, it should have been rightly brought to tax, which the taxpayer failed to do. Salient facts of the case are as below:

• FT was given a loan totalling RM30mil by the holding company in 2004.
• The money was used up within minutes to pay off the trade creditors.
• In 2006, the holding company agreed to waive the debt.
• The purpose for the loan was stated as to be “utilised exclusively … for the purpose of financing the accounts payable of the company”

The contention made by FT was that it should not be considered as s4(a) as it is not a gain or income as it was used to pay off the creditors, it was a form of support to the subsidiary, it had recorded the man as contribution to capital and thus had been credited into the Appellant’s capital reserve and not subject to tax.

The IRB questioned that the loan was contributed as capital because there was no increase in the FT’s share capital and that the loan is a gain because it was used to fulfil FT’s business obligations and is, therefore, part of its business gains and profits under s4(a) ITA.

Held: it was taxable. It was found that the loan was never intended to be treated as capital or to be converted and is written off as operating expense by the holding company. When the loan was waived, FT’s obligation to repay the loan did not arise any more and thus following the House of Lords decision in HM Inspector of Taxes v Lincolnshire Sugar Co Ltd, the loan ought to be rightly taken into account when computing the adjusted income.

The loan was also not a gift which was unconnected with FT’s business activity but was part of the income-producing activity and hence part of its operating expenses.

• Comment: Personally, I find it quite bizarre why the IRB did not pursue the case under section 30(4) which is a more specific provision for taxing waiver of debts but went under the general provision of s4(a) as gains and profits. Nevertheless, the case decision is in line with the spirit of the Income Tax Act that waiver of debt from a business source income is taxable in the year that it was waived. To prevent this, taxpayers should distinguish on the facts by properly documenting the purpose of the loan and capitalising the said loan.

 

2. KPHDN v Bandar Nusajaya Development

However, a contrasting outcome is seen in KPHDN v Bandar Nusajaya Development which went up all the way to Court of Appeal on point of tax law but to Federal Court on point of judicial review (Federal Court generally do not entertain to tax cases). In this case, the IRB sought to have the waiver of debt to be taxed under section 22(2)(a) instead of section 4(a) as falling under “any sums receivable or deemed to have been received”.

In Bandar Nusajaya, the holding company provided a loan to the taxpayer in which the taxpayer took a deduction for the interest against two types of income: business and non-business pursuant to section 33(1). However, the holding company then waived the interest expense payable and as such, the taxpayer brought a part of it to income tax pursuant to section 30(4) but did not bring RM181 million as it was of the view that it did not fall under section 30(4). Section 30(4)(a) reads: “Where a deduction has been made under subsection 33(1) in computing the adjusted income of the relevant person… the amount released shall be treated as gross income of the relevant person from that business for the relevant period.” The question was whether section 22(2)(a) enabled the IRB to compel the RM181 million to be taxed despite the fact that it was waived against its non-business income.

A heated debate was what interpretation should’ve been taken when interpreting Section 22(2)(a). Section 22(2)(a) reads: “the gross income … shall include any … insurance, indemnity, recoupment, recovery, reimbursement or otherwise” The IRB claimed that the word “otherwise” is wide enough to capture the waiver of debt in the non-business income of the taxpayer. However, the taxpayer contested the IRB’s understanding of the word “receivable” and “otherwise”. It contended, amongst other disagreements, that the word “receivable” included a debt which was, in common sense, not something to be “receivable” and the word “otherwise” was limited to payments of similar nature as the words used before it.

On the first point of whether a debt is something “receivable”, both the High Court and Court of Appeal answered in the negative. They referred to the natural definition of the “receivable” as “capable of receiving” (Oxford English Dictionary) or “awaiting receipt of payment (accounts receivable)” (Black’s Law Dictionary). It should mirror the characteristics of an income that “comes in” and not something that is saved from (Tenant v Smith). The common treatment of when a creditor waives a debt, the Court of Appeal agreed and a purposive approach ought not to have been taken which will render the section superfluous and redundant and Parliament does not pass law in vain.

On the point of whether the word “otherwise” is wide enough to claw back the RM181 million to income tax, the High Court and Court of Appeal agreed that it isn’t. The High Court held that the word “otherwise’ must be confined to things of the same kind as the preceding words. In the case of section 22(2)(a), the preceding words shared a common character connoting a receipt, something “receivable”. On the other hand, a release of debt is a discharge of an obligation. The case relied upon the IRB for the interpretation of the word “otherwise” was also inconsequential in the present case. In Norliana bte Sulaiman (the cited case by IRB), the word “otherwise” under Section 114 of the CPC was preceded by only the word “caution”. In the present case, the word “otherwise’ is preceded by five other words which can form a genus. Therefore, otherwise should also be understood in light of the words before it and not standalone to be a “capture all” net. (It should be noted that the Federal Court overturned the decision on the basis that the taxpayer ought to have commenced from the Special Commissioners of Income Tax and not by way of judicial review.)

• Comment: A holding that I find to be particularly compelling by the High Court was that “there is no other section that deals with the release of debt in the ITA”. I find this to be slightly at odds with the previous case above which proceeded the taxing of debt under section 4(a). Although it would not produce a different outcome, it would’ve been clearer had IRB been more consistent in their approach.

However, tax being tax, it’s not the most easily understandable subject in the world. It was noted that the IRB has also acknowledged that section 30(4) is not relevant to the present factual circumstances and as such, proceeded to bring it to tax under another section. I wouldn’t call this a frivolous demand but rather a taxing statute, being one that imposes an obligation, must be understood in its plain and natural meaning. Furthermore, Section 30(4) is a specific provision which ought to take precedence over a general provision like section 4(a) or section 22.

 

Conclusion

I personally find these cases to be very useful in shedding light on the issue of whether a waiver of debt is considered as a form of income in the books of the debtor. It also reinforces the underlying understanding that only a release of debt in the business income of the taxpayer, and not in the capital account/ capital reserve or non-business income, is taxable. Section 33 allows deduction of expense wholly and exclusively incurred in the production of gross income, it does not specify that it must specifically be income from a source of business. Therefore, a deduction pursuant to section 33 but subsequently forgiven in the non-business income of another is not taxable.

Budget 2019 Malaysia for the Malaysian Millenials

Last Friday, 2 November 2018, marks the first national Budget by the new government ever since the independence of Malaysia. As much as this is a historic and monumental event it is, it is also a day which would affect 32 million people coupled with a balancing act to solve the growing national debt hence many eyes and pressure are on this Budget. With the Budget being revealed, there were many mixed reactions as some were surprised with certain changes being made whilst others were disappointed.

This is an overview of some points in the Budget 2019 that may or may not affect you as a Malaysian Millennials.

1. RM100 unlimited travel pass

There was a study done by Cent-GPS on a study of the MRT which highlights the problems about public transport namely that the locations were not strategic, cost relating to travel using the MRT is too high which discourages consumers from switching from their private cars as a mode of transport.

I strongly welcome this initiative by the government to encourage people to take the public transport more and ease the traffic on the roads. The current status quo is that the opportunity cost of driving instead of commuting to work is not significant enough for people to abandon their cars and squeeze themselves into the tight train carriage for an hour’s ride. With this, the citizens can have more disposable income to spend with approximate RM200 savings on transportation and also it would lighten the traffic on the road.

However, the government would need to increase the number of trains available during peak time as from personal experience, it is currently insufficient to meet demand. To meet the expected surge in demand next year, more trains is urgently necessary to have the desired effect or any positive effect at all.

Note: there are several reports where the Transport Ministry intends to team up with Grab to solve the “last mile” problem but nothing solid has been given so far.

2. PTPTN

PTPTN has its own fair share of criticism by the nation especially on the topic of loan default. According to NST, only half of loan PTPTN are repaying their loans and the total outstanding debt is around RM39 billion. The government has time and time again tried to incentivise PTPTN repayment but the needle has not shifted significantly.

Finance Minister YB Tuan Lim Guan Eng had announced that the deferment of the PTPTN loans until borrowers earn RM4000 and above is too much of a strain on the country’s financial burden and as such, a scheduled deduction of 2% – 15% would go towards repayment of their debt when they earn more than RM1000.

Additionally, no more discounts staring 2019 will be given to PTPTN borrowers. However, discounts will be given to B40 households who have successfully obtained first class honours as compared from the previous government’s regime where students were exempted from repaying their PTPTN loans upon earning first-class honours for their bachelor’s degree, upon meeting certain conditions.

3. First House Buyers

The government endeavours to encourage Malaysians to purchase their first home and to curb the problem of overhang in residential properties and thus several initiatives have been launched as a means of solution.

First, there is a 100% stamp duty exemption for properties up to RM300k on the instrument of transfer and loan agreement. For properties above RM300k but below RM500k*, the 100% stamp duty exemption is limited to the first RM300k of home price on the instrument of transfer and loan agreement. For properties above RM300k but below RM1mil, the 100% stamp duty exemption will only apply on the instrument of transfer.

* Purchase of first residential home from housing developers.

Additionally, the government has launched the FundMyHome, the peer-to-peer (P2) home financing exchange platforms. This is a crowdfunding platform which serves as an alternative source of financing for first-time home buyers. Under this scheme, the purchaser will be able to acquire a property whilst paying only 20% of the price of the property and the remaining 80% will be borne by potential investors, mainly financial institutions. In this case, the purchaser need not source for a loan from the beginning since it is understandably difficult should the purchaser lack the financial capabilities to do obtain one. However, after 5 years, the property is either sold off and the proceeds are divided according to a prescribed ratio or the purchaser can then obtain a loan to service the remaining amount. (There is an interesting discussion on this circulating social media here where it highlights problems about this system.)

4. Sugar Tax

We Malaysians consume large amounts of sugar daily without most of us even knowing. From the morning’s Teh Tarik to break time’s kueh to dessert’s cendol, it’s no wonder that in 2017, Malaysia was dubbed most obese in the region. It is reported that one in two Malaysians is overweight or obese.

Starting April 2019, a new excise tax known as “sugar tax” of RM0.40 per litre will be imposed on sugar-sweetened beverages. This will be on beverages that contain sugar exceeding 5g per 100ml, as well as juices that contain more than 12g per 100 ml.

My only concern about this is inflation and that demand for sugar-sweetened beverages in Malaysia is very inelastic but we’ll see how this plays out.

5. Digital Tax

I’ve talked about Digital Tax in a brief in a blog post earlier here. Basically, it’s a tax on services provided online which escapes most countries’ taxation regulatory framework. To ensure the competitive level of local players, governments across the globe have trying to tax this intangible economy that exists in the clouds.

It is proposed that the current Sales and Service Tax regime would be extended to include imported services such as digital advertising (Facebook advertisement and Google advertising), online streaming platforms (Netflix and Spotify) and downloaded software. For consumers, service tax imported by individuals will be effective 1.01.2020 whilst it is a year earlier for Malaysian businesses.

6. Minimum wage

Let’s just say that if you’ve graduated from a tertiary education and is currently earning more than RM3000, congratulations! You’re already well above the median of Malaysian employees which was last recorded at RM2160 in May 2018. That means, there are plenty of those who are earning well below RM2160 and at the national minimum wage.

In the Budget 2019, the government proposes to increase the national minimum wage to be raised to RM1,100 nationwide effective 1 Jan 2019. This is an increase of 10% from the previous administration. This is a measure by the government to reduce the income gap which has doubled for the B40s and T20s between 1995 and 2016. It was reported by The Star that households earning less than RM2000 will only have RM67 in savings after paying for daily expenses just to get by.

In my humble opinion, this is a good step to reduce income inequality by increasing B40s income at a rate faster than income level increase, I’m slightly sceptical about the fact that the amount applies nationwide which ignores the different cost of livings and also the fact that this will contribute to more inflation for 2019.

7. Personal Tax relief

Starting from the Year of Assessment 2019, Budget 2019 proposes that the combined tax relief for EPF contributions and life insurance premium/ Takaful contributions would be increased by RM1,000 to RM7000. However, the relief is now broken down and separated into 2 distinct amounts whereby a maximum of RM4,000 is given for EPF and RM3,000 for Takaful & Life insurance premiums. This would result in a lower tax relief where the individual does not make any Takaful/ Life insurance premium.

 

Personal comments:

YB Lim Guan Eng first described the Budget 2019 as one being of “sacrifice” and it does appear to be so to a certain extent. There are some tax hikes, for example, the Real Property Gains Tax, Digital Tax and Sugar Tax but overall, the Budget seems promising but hopefully, we will see a better Debt-GDP ratio next year. The only concern I have is that it may have a snowball effect which results in a high inflation next year due to rising business cost.

Understanding RPGT

Most of us at some point in life would like to own a house(s). Most of us would also have moved house at some point in our life now. However, do you really know what are some of the tax implications of moving houses and selling off the previous residence?

 

Real Property Gains Tax (RPGT) in Malaysia is a tax levied upon disposal of a real property, mainly to do with land, paid to the IRB. Since it is paid upon disposal, it is applicable to the vendor of the transaction.

1. Introduction

Under section 3 of the RPGT Act 1976, it states that

Real property is defined as “any land situated in Malaysia” and any interest, option or other rights in or over such land”. If you have any knowledge of the National Land Code, this includes leases, licenses and charges where you have “disposed” of them.

Depending on when you sell the piece of land, you will be charged different RPGT rates:

Cr: MahWengKwai & Associates

2. How is RPGT calculated?

In arriving the tax payable upon disposal, the following three-step equations are used.

Step 1: Chargeable Gain = Disposal Price – Purchase Price – Miscellaneous Charges

Step 2: Net Chargeable Gain = Chargeable Gain – Exemption waiver (RM10k or 10% of chargeable gain, whichever is higher)

Step 3: RPGT payable = Net Chargeable Gain x RPGT Rate

3. Items exempted from RPGT

Since RPGT is charged upon a gain from disposal, it is important to first determine when the acquisition and disposal actually happened, at what consideration both events were completed and whether a loss or gain was made. This is to prevent any fraud/ tax evasion because parties may purposefully conduct the transaction at below market value price to make what is actually a profitable transaction to a loss-making one and for the party to claim allowable losses. There are a few instances where you can get RPGT exemptions or deductions.

(a) Allowable loss is defined as under section 7 subsection (4)

And subsection (b) deals with where you have no gains to be reduced, it will be brought forward to subsequent years until the allowable loss has been fully absorbed, even if it was done 5 years after acquisition.

(b) Incidental cost: The RPGT Act 1976 allows certain incidental costs of the acquisition of the property and disposal of the property to be taken into account. This is where expenditure wholly and exclusively incurred by the disposer for the purposes of the acquisition or the disposal such as legal fees for the acquisition and disposal of the property and estate agency fees.

(c) No gain no loss: You also do not need to pay RPGT where acquisition cost equals disposal cost at which you are in a no gain no loss situation.

(d) Private residence: Accordingly, every citizen in Malaysia (and also PR residence) is entitled to a “once in a lifetime” exemption on disposal of a private residence. A private residence is a building or part of a building in Malaysia owned by an individual and occupied or certified fit for occupation as a place of residence.

Only residence/ persons are able to claim for this exemption. This does not apply to companies holding private residence.

(e) Transfer of property between family members as gifts

Transfer of real property as gifts between parent/ children, husband/ wife or grandparents/ child is also exempted.

For the donor, if he is a Malaysian citizen, he is deemed to have received no gain and suffered no losses.

For the receiver, if the gift is made within five years after the date of acquisition by the donor, the recipient shall be deemed to acquire the asset at an acquisition price equal to the acquisition price paid by the donor plus the permitted expenses incurred by the donor.

4. How is RPGT paid?

Upon disposal of a property, it is the duty on the part of the acquirer’s lawyers to retain and remit 3% of the purchase price from the deposit to the Inland Revenue Board (IRB) within 60 days upon disposal. If the 3% is found to be higher than the tax payable, the IRB will refund; If the 3% is lower than the tax payable, the vendor might be charged an additional penalty of 10% of the amount outstanding upon failure to furnish the outstanding amount within time.

It might be noteworthy to add that owing to the Finance Act 2017, the amount to be retained by the acquirer had increased from 3% to 7% of the purchase price where the vendor is not a Malaysian citizen nor a permanent resident.

Where a transaction is conducted consists not wholly in money, the acquirer shall either retain the whole of the money or a sum not exceeding 3% of the total value of consideration, whichever is lower.

Conclusion:

After listening to a podcast on RPGT on BFM89.9, it is noted that RPGT contributes only 0.7% of the total revenue received by the government. That being said, it is reported that Capital Gains Tax will not include gains on shares in Budget 2018. This is to keep Bursa Malaysia competitive and attractive for investors thus the only Capital Gains Tax in Malaysia is only on Real Property at the moment.

To be honest, I am very much surprised by how little RPGT contributes to the government’s revenue considering that land prices can be very steep at times. I think this is the reason why there are many case law on even if people hold real property for more than 5 years, they may be charged the income tax rate of 24% as oppose to RPGT rate of 5% because they are deemed to be trading properties instead of investing. Note that the IRB does not consider 5 years to be a substantially long period for an investment. So take note of this if you plan to invest in real property in the future or else you might end up having to pay more than you think.