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When Trading Meets Investing: Tax Implications for Companies on Land Sale Profit

Updated: Aug 15, 2023


The tax treatment of gains from the disposal of land has been a grey area subject to dispute between taxpayers and tax authorities.


A recent income tax case of KPSB V Ketua Pengarah Hasil Dalam Negeri revolved around this issue and provides important guidance for companies on maintaining proper documentation and compliance when dealing with land sales.


This article summarises the key facts, provisions, arguments, decisions and implications from the case for businesses disposing of land and claiming capital gains tax.


The case illustrates the need for companies to clearly establish the investment intent and purpose at the time of land acquisition, and to maintain consistent tax positions and records through the ownership period until disposal, in order to successfully claim eligibility for capital gains tax on land disposals instead of income tax.

Background Facts:

  • In 1994, the taxpayer company KPSB acquired a piece of land in Kuala Lumpur ("the Land") from an individual owner.

  • Before disposing of the Land to KPSB, the original owner had applied to change the land category from general cultivation to residential and subdivide the titles. This was only completed in 2001.

  • In 2013, KPSB disposed of the Land comprising 12 titles to its related company ABC Sdn Bhd.

  • IRBM imposed an additional assessment on KPSB in 2014 on gains from Land disposal under Income Tax Act 1967 (ITA).

General Provisions:

  • Under Section 4(a) of the ITA, gains from the disposal of land are subject to income tax.

  • Under the Real Property Gains Tax Act 1976 (RPGT), gains from the disposal of chargeable assets held for 5+ years are taxed under RPGT.

Taxpayer's Contention:

  • The gains were capital gains subject to RPGT, as the Land was acquired for investment purposes based on company resolution and accounting treatment.

  • No modifications were done to the Land in the 19 years held, except the changes by the original owner.

IRBM's Contention:

  • KPSB had the intention to trade when acquiring the Land in 1994 as the original owner had applied for land use change.

  • The Land's commercial value and sale between related parties showed trading intention.

Special Commissioners of Income Tax Decision:

The Special Commissioner of Income Tax allowed KPSB's appeal and held the gains were subject to RPGT.


Conclusion for Businesses:

  • Companies need to clearly document investment purposes when acquiring land and maintain that treatment.

  • Where land is sold between related parties, should have justifiable commercial reasons.

  • Capital gains tax may apply even if no modifications are done during ownership if facts show trading intention.

  • Proper contemporaneous documentation is important to demonstrate investment intent and position taken for tax purposes.

The case highlights the importance of documenting investment purposes and maintaining consistent tax treatment for land disposals to be eligible for capital gains tax.


Note:

  • The IRB (Inland Revenue Board) has the right to appeal against the decision of the Special Commissioner of Income Tax within 21 days from the date the decision is given.

  • The decision of the Special Commissioner of Income Tax was read by Mrs Nik Serene binti Nik Hashim on behalf of Dr Syahliza binti Warnoh, whose contract has ended.

Reference:
191. KPSB v KPHDN
.pdf
Download PDF • 203KB

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