Trading vs Investment: The Fine Line Between Income Tax and Capital Gains Tax for Land Disposals

The characterisation of gains from the sale of land as either income or capital gains has significant tax implications for companies.

A recent tax appeal case of Director General of Inland Revenue (DGIR) v Sin Seng Bee Transport Sdn Bhd dissected this issue in detail, providing crucial guidance for businesses on establishing the proper tax treatment of land disposals through contemporaneous documentation.

This article summarises the key facts, provisions, arguments, decision rationale and takeaways from the case for corporate taxpayers when dealing with land sale profits.

The case demonstrates the vital need for companies to clearly evidence the investment intent and purpose at the time of land acquisition, and consistently maintain that tax position over the ownership period.

Failure to do so could risk tax authorities imposing income tax instead of capital gains tax on the sale proceeds, resulting in substantially higher taxes.

DGIR v Sin Seng Bee Transport Sdn Bhd

Who was involved:

• Appellant: IRBM/Directorate General of Inland Revenue (DGIR)
• Respondent: Taxpayer company Sin Seng Bee Transport Sdn Bhd

What happened:

• Taxpayer company Sin Seng Bee bought a rubber land in 1995 and sold it in 2011
• IRBM imposed income tax on gains from the land disposal under Section 4(a) of the ITA 1967
• Taxpayer contended gains are capital gains subject to RPGT under RPGT Act 1976

Why did it happen:

• IRBM argued the land was acquired to resell at a profit based on badges of trade like frequent land transactions, obtaining planning permission, and admission of intent to sell at higher price
• Taxpayer argued it was held long-term for investment based on purchase in 1995, sale in 2011, fixed asset accounting treatment, and no trade intention

When did events occur:

• 1995: Taxpayer bought the rubber land
• 1996: Obtained planning permission for housing/industrial development
• 2007-2008: Taxpayer did 11 other land sale transactions
• 2011: Taxpayer sold the land
• 2021: Special Commissioners of Income Tax (SCIT) ruled in favor of taxpayer
• 2022: High Court upheld SCIT’s decision

Where did it happen:

• Location of land: Unclear from facts, presumably in Malaysia
• Tax case hearings: SCIT and High Court of Kuala Lumpur

How was the final judgment made:

• High Court dismissed DGIR’s appeal and upheld SCIT’s decision based on long-term investment intention shown by evidence like purchase timing, accounting treatment etc.
• Court ruled land sale gains are capital gains, not income, based on evaluating badges of trade vs taxpayer’s evidence.

Conclusion for businesses:

• Strong documentation of investment purpose and treatment needed for land sales to qualify for capital gains tax
• Even long holding periods may not determine tax treatment if other indicators like planning permission show trade intention
• Contemporaneous documents critical to establish intention and tax position

In summary, the case highlights the importance of documenting investment intent and maintaining consistent tax positions over time to qualify land sale gains as capital gains for tax purposes.

Reference:

192.-DGIR-v-SIn-Seng-Bee-Transport-Sdn-BhdDownload

The DGIR has the right to file an appeal against the decision by the High Court within 30 days from the date of the decision (30-8-2023).

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