Newsletter-34-2022- Income Tax v RPGT

Our Ref: Newsletter-34-2022 (20.10.2022)

Brief Background of the Case

The appellant was incorporated on 6 April 2001 as a housing developer. On 8 July 2002, the appellant purchased two pieces of commercial land in Jalan Pinang, Kuala Lumpur for RM70,000,000 from Triger Properties (Malaysia) Sdn Bhd to develop the Marc Service Residence project, consisting of two towers (Tower A and Tower B).

These two lands were initially classified as current assets in the balance sheet (F/S as at 31.12.2003), indicating that the principal activity was property development.

Construction commenced in 2004 and was completed in 2007. Tower A sales were launched in 2003, while Tower B sales were launched in 2004. Between YA 2003–2006, the developer sold units and claimed input tax deductions under the property development activity.

In 2008, the developer reclassified 50 unsold units as investment properties and leased them out. In 2010, the 50 units were sold to La Belle Capital Limited, and the gains were declared under Real Property Gains Tax (RPGT).

However, a tax audit conducted in 2016 concluded that the gains from the disposal of the 50 units were subject to Income Tax and not RPGT.

High Court Decision

The High Court upheld the decision of the Special Commissioners of Income Tax (SCIT) that:

• The gain from disposal of the 50 units was subject to Income Tax.
• The 45% penalty imposed was valid.

The key findings included:

1. The project was developed for trading and profit-making purposes, not as a long-term investment.
2. The guaranteed rental return was part of a structured sales strategy to attract buyers.
3. The original intention at acquisition was trading, not investment.
4. Reclassification as investment property did not change the tax nature of the asset.
5. Withdrawal of stock under Section 24(2) ITA 1967 should have been exercised.

Commentary

Property developers who change their intention from “trading properties” to “investment properties” must carefully consider the tax implications. Professional tax advice is strongly recommended.

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