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Luxury Apartment Developer Fails to Prove Gains are Capital, Taxed as Trading Income Instead


High Court Malaya, Kuala Lumpur

10 August 2022

This was an appeal by Beverly Tower Development Sdn Bhd against the decision of the Special Commissioners of Income Tax ("SCIT"), which held that the gains from the disposal of 50 apartment units were trading receipts subject to income tax.

Background Facts

Beverly Tower was a property developer. It developed a luxury apartment project consisting of two towers, Tower A and Tower B. Between 2003-2009, it sold 587 units and declared the gains under the Income Tax Act 1967 ("ITA").

However, 50 units remained unsold.

In 2010, Beverly Tower sold these 50 units to LaBelle Capital Ltd and declared the gains under the Real Property Gains Tax Act 1976 ("RPGTA").

Issues in Dispute

Whether the gains from the 50 units were trading receipts subject to income tax or capital receipts subject to RPGTA.

Taxpayer's Contention

The 50 units were investment properties held for rental income.

Therefore, the gains were capital gains subject to RPGTA.

The applicant argued that the SCIT had failed to consider documentary evidence and testimonies of its witnesses that it is a dual-purpose company whose principal activities consist of property development and investment holding. It can be understood that this contention is based on the objects of the appellant as stated in its M&A.

The appellant contends that the documentary evidence and testimonies of its witnesses before the SCIT clearly show that the appellant had consistently intended and held the 50 apartment units as its investment properties and the 50 apartment units were never part of the stock in trade, disposed of as investment properties and were not part of a trading activity.

Inland Revenue Board's Contention

The 50 units formed part of the trading stock. The gains were taxable under ITA as business income.

Revenue Law

The court discussed the relevant legal principles to determine if gains are capital or trading.

This includes looking at the taxpayer's intention at the time of acquisition, the "badges of trade", and whether there was a change in intention or withdrawal of trading stock.

Court's Finding and Conclusion

The Court of Appeal in ALF Properties Sdn Bhd v. Ketua Pengarah Jabatan Hasil Dalam Negeri [2005] had held that to come to a safe conclusion in determining the taxpayer’s principal activity, the SCIT has to go into the activities of the taxpayer whether in the past or the present to find out whether the activities are one of the stated objects of the taxpayer, in the words of Raja Azian Shah FCJ (as His Majesty then was) in I Investment Ltd v. Comptroller-General Of Inland Revenue [1975], “one must look at what business it actualiy carries on and not what business it professes to carry on...” The court upheld the SCIT's decision and ruled favouring the IRB.

The court found no evidence that the 50 units were intended for investment from the outset.

They formed part of the trading stock without compliance with the stock withdrawal rules.

Hence, the gains were taxable under ITA.

Advice to Businesses and Tax Practitioners

Taxpayers need to maintain clear documentation on intention and ensure compliance with stock withdrawal rules to treat property gains as capital in nature.

Failing which, even a single or isolated transaction may be taxed as trading income based on the overall facts.

198.1 Beverly Tower Development Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri
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