Part 3 Tax Planning for Property Developers TST Consultants Sdn Bhd 1
Tax Planning for Property Developer A. Purchase the land or Purchase the share? (Beware the capital reserve and deferred Tax) B. Disposal of property stock or company share? C. Purchase of land under individual or company at the outset? D. Individual landowner involves in development? TST Consultants Sdn Bhd 2
A. Purchase the land or Purchase the share? Acquisition Developer acquired land for RM10m Developer acquired share for RM10m (land cost show book value of RM3m) Add: Development expenditure Development property Progress billing Land RM 10,000,000 50,000,000 60,000,000 70,000,000 Share RM 3,000,000 50,000,000 53,000,000 70,000,000 Gross profit 10,000,000 17,000,000* Purchase of share shown a higher profit and higher tax Disadvantage to purchase share TST Consultants Sdn Bhd 3
B. Disposal of property stock or share 1/1/11 Developer A acquired land Developer A acquired share RM3,000,000 31/12/12 Incurred property development expenses Total property development cost 31/12/12 Disposal of property stock/share to Developer B Upon obtaining the development order Profit from disposal of property stock/share Less: operating expenses Chargeable income 31/12/12 Tax payable =500,000 x 20%+800,000 x 25% Not taxable on share transfer (IRB charge RPGT?*) Refer to BH V. KPHDN Stock 3,000,000 500,000 3,500,000 5,000,000 1,500,000 200,000 1,300,000 300,000 Share 3,000,000 500,000 3,500,000 5,000,000 1,500,000 200,000 1,300,000 Nil* TST Consultants Sdn Bhd 4
BH V. KPHDN (2003) Fact: TP acquired a total amount of 75,000 shares in a property developer company & subsequently sold the shares to another company Issue: Whether the sales of shares by TP are subject to RPGT Act Held: HC held that asset of the property developer company comprising land was not real property but stock in trade. Therefore not a chargeable asset under RPGT Act CA reversed the decision of HC and held that disposal of shares is subject to RPGT Act TST Consultants Sdn Bhd 5
C. Tax Planning for developer Cost & Benefit Purchase the vacant land under individual name Then transfer to a Company A for RM20M Individual Company A Purchase the vacant land under personal name Transfer the vacant land to a Company Opportunity cost: Transfer the land to a company: Paid addition Stamp duty (say, 3% on RM20M) Other incidental cost 10,000,000 600,000 400,000 20,000,000 Land cost 11,000,000 20,000,000 Opportunity Benefit (say, 25% of 9,000,000) 2,250,000 TST Consultants Sdn Bhd 6
Transfers between individual and his company DGIR V LCW (1975) principle Transfer is at Market value (not cost price) Example: From Cost price 10 M to Market value 20 M Opportunity benefit is RM2,250,000 Chargeable gains is RM9,000,000@30%;20%;15% & Nil Opportunity benefit RPGT Tax/Saving Yr 1 to 3 2,250,000 2,700,000 (450,000) Yr 4 2,250,000 1,800,000 450,000 Yr 5 2,250,000 1,350,000 900,000 Yr 6 2,250,000 Nil 2,250,000 TST Consultants Sdn Bhd 7
D. Individual landowner involves in development? Transfer to a development company or Sign a JV agreement Incorporate a Company JV Agreement Stamp duty No stamp duty Market value JV consideration Arm length Two parties negotiation RPGT RPGT TST Consultants Sdn Bhd 8
Q & A TST Consultants Sdn Bhd 9
Part 3.1 Tax Issues Affecting Property Developers TST Consultants Sdn Bhd 10
Part 3.1 Trading or Investment (IT vs RPGT) TST Consultants Sdn Bhd 11
3.1) Trading or Investment (IT vs RPGT) RPGT and IT are mutually exclusive. A tax person can not be subjected to both RPGT and IT at the same time. TST Consultants Sdn Bhd 12
3.1.1. Whether the profit is subject to IT or RGPT? Income Tax (20%-25%) RPGT (0%-30%) Intention ST profit & for resale LT investment Holding Period ST for trade LT for Investment Method of Finance ST O/D LT finance indicate investment Frequency repetitive transactions Not frequent Accounting Evidence Current Asset Fixed Asset Modification of asset e.g. sub-division No modification of asset TST Consultants Sdn Bhd 13
Teruntum Theatre v K P H D N Held that the IRB may reassess the taxpayer IRB is not estopped from withdrawing the RPGT assessment Gains are subject to income tax TST Consultants Sdn Bhd 14
Part 3.2 Compulsorily Acquisition of land TST Consultants Sdn Bhd 15
3.2. Compulsorily Acquisition of land A) RPGT Act Schedule 2, Para.3 (f) special exemption on Transfers due to compulsory acquisition under any law TST Consultants Sdn Bhd 16
B) Case Law Perak construction S/B V KPHDN (2001) Fact: A property development company 1975:acquired land Land was capitalized & shown as fixed asset Company neither a dealer in land or trader in building 1981: Initial acquisition by the Government was withdrew 1982: Development plan submitted but no approval given 1995: government made an acquisition & paid compensation Held: Compulsory acquisition is not subject to income tax, as it is not in ordinary course of trade Compulsory acquisition negated the intention to trade TST Consultants Sdn Bhd 17
Penang Realty Sdn Bhd Vs. KPHDN (2006) Fact: 1956: purchase a plot of land Company was a property developer A portion of the land was compulsorily acquired & compensation paid Held: The element of compulsion vitiates the intention to trade; Not in the ordinary course of business, therefore cannot constitute a sale Therefore not subject to tax TST Consultants Sdn Bhd 18
C) Decision Impact Statement (DGIR s explanatory statement) In 2007: DGIR issued Decision Impact Statement (DIS), outlines their position on Penang Realty s case DIS states the decision in Penang Realty s case was heavily relied upon the Lower Perak case CA did not consider the provision of S24(1)(a) of ITA DIS treating the CA s decision as Per incuriam ( where a statute which would have affected the decision was not brought to the attention of the court. TST Consultants Sdn Bhd 19
D) Income Tax Act 1967 S24(1)(a) of ITA provides that any debt arises in respect of any stock in trade which is compulsorily acquired in the course of carrying on a business, shall be treated as gross income from a business S4 lists the classes of income subjected to income tax S4(a) include gains or profits from a business (relevant to S24) Both S24 (1)(a), S4(a) mentioned the element of business S2 defined business involves element of trade It follows that there must be engaged in trading activities and thus intention to trade is important TST Consultants Sdn Bhd 20
E) Judicial Precedent on Intention to trade Lower Perak Co-operative Housing society Berhad V KPHDN (1994) held that non-commercial motivation may affect the nature of trading transactions that they cease to be normal trading; the element of compulsion vitiates the intention to trade Perak Contruction S/B V. KPHDN (2001) held that the element of compulsion negated intention to trade Penang Realty S/B v KPHDN (2006) (Relied upon the Lower Perak Case) Held that compulsory acquisition cannot constitute sale; element of compulsion vitiates the intention to trade TST Consultants Sdn Bhd 21
F) Arguments IRB: Argue the important of S24 Decision impact statement Opponents: The original intention to trade by acquired assets under stock in trade is relevant Based on the judicial precedent and interpretation on the nature of trading transaction; compulsion vitiated the intention to sales; therefore not subject to income tax DIS issued by IRB is a guide and not a law, unless there is a more specific provision to that effect. TST Consultants Sdn Bhd 22
G) Judicial Review KPHDN V. Pelangi Sdn Bhd (2012) (Federal court) HC held: The Revenue was bound by the decisions in Penang Realty & Lower Perak The Revenue DIS had no legal effect The Revenue decision to charge income tax shall be quashed The tax collected was unlawful, therefore need to refund with 4% interest to TP CA unanimously affirmed HC decision Federal Court unanimously dismissed Revenue application for leave to appeal. See also: KPHDN V. Metacorp Development Sdn Bhd (2013) (Federal court) HC follow the Penang Realty case CA unanimously affirmed the HC decision FC unanimously dismissed Revenue application for leave to appeal TST Consultants Sdn Bhd 23
Budget 2014 Business Income Section 4C (New) S4C(New) Gains or profits from business includes amount receivable from stock in trade parted with by any element of compulsion Effective from YA 2014 TST Consultants Sdn Bhd 24
Business Income: Section 24(1)(aa) (New) Amended Section 24(1)(a) amended Any debt arises in respect of any stock in trade sold in or before the relevant period in the course of carrying on a business Para. 24(1)(aa)(new) Any stock in trade parted with by any element of compulsion including on requisition or compulsory acquisition or in a similar manner, in or before the relevant period Effective from YA 2014 TST Consultants Sdn Bhd 25
Part 3.3 Transfer of Land from Fixed Asset To stock-in-trade TST Consultants Sdn Bhd 26
A) ITA doest not cover the situation. S35(1) & (3) covers only the valuation of trading stock B) Case Law DGIR V LCW (1975) C) RPGT Act S17A Transfer of Assets into Stock TST Consultants Sdn Bhd 27
A) Income Tax Act-Valuation of Stock in trade S35(1) provides the valuation of trading stock the value of the stock in trade of the business at the beginning and at the end of that period shall be taken into account in accordance with the following subsections S35(3)(a) provides that the stock consisting of immovable properties, stocks, shares or marketable securities, the value thereof at the end of the relevant period shall be taken to be an amount equal to its cost price to that relevant person or its market value at that time, whichever is the lower S35(1) & (3) covers only the valuation of trading stock What happen if the asset is transfer during the period? The provision did not cover this situation Example: transfer of fixed asset to stock in trade in the middle of trading period TST Consultants Sdn Bhd 28
B) Case Law DGIR V LCW (1975) Fact: 1953: TP acquired a piece of land & treated as fixed asset TP initial intention is construction of flats for the purpose of rent as investment 1967: TP change his intention from renting out to selling them 1967: Land was transfer from the fixed asset to trading account Issue: Whether there is a trading in land Whether the land transfer be taken as cost or market value Held: Gains from trading of land be subjected to tax as business income Land transfer be taken as market value TST Consultants Sdn Bhd 29
C) RGPT Transfer of Assets into Stock S17A (a) an asset is taken into the trading stock, there shall be deemed to be a disposal of chargeable asset; and S17A(b) the disposal price of the chargeable asset shall be equal to the market value at the asset is taken into the stock TST Consultants Sdn Bhd 30
Part 3.4 Transfer Trading Stock to Fixed Assets TST Consultants Sdn Bhd 31
Income Tax Amount to a withdrawal of stock in trade for his own use S24(2)provides that (a) any stock in trade of a business is withdrawn for his own use (b) any stock in trade of a business is withdrawn without any consideration An amount equal to the market value of that stock in trade shall be treated as gross income TST Consultants Sdn Bhd 32
Example A: Developer A S/B withdrew 5 units unsold housed from stock in trade & transfer to fixed assets and subsequently rental out for rental income S24(2)(a)& (b) will apply The market value of the stock be treated as gross income Rental income is assessed under S4(d) of ITA TST Consultants Sdn Bhd 33
Example B: Developer B S/B completed a project of 300 units of D/S link house The company sold 290 units with 10 units unsold and subsequently rented out for rental S24(2)(a)& (b) will not apply Rental income will be assessed under S4(a) of ITA TST Consultants Sdn Bhd 34
Q & A TST Consultants Sdn Bhd 35