Income Tax or RPGT??

In recent news reported by SinChew.com.my on 30 October 2016, a tax payer from Penang was received a letter from Inland Revenue Board, refer that he was “excess” performed property transactions in the past few years. Therefore he has to pay business tax instead of RPGT. Therefore, he has to bear the 45% spread (profit) fines/ penalty, cost him more than RM100K.

According to the Tax Bureau spokesman mentioned, the council will based on 4 major factors to determine whether the transaction is more of an adventure in the nature of trade (Income Tax) or mere realisation of investments (RPGT)

4 major factors:
♦ Frequency of transactions – Sale of 3 or more real estate within 2 years
♦ Nature of trade
♦ Financing models
♦ Profit

For those who were wrongly performed the tax submission (eg. should pay business tax instead of RPGT), will be charged a fine of up to 45% of the spread tax bureau.

Please be remind that, there are 2 laws that govern the taxation of property transactions in Malaysia. They are:
• Income Tax Act 1967 (“ITA”); and
• Real Property Gains Tax Act 1976 (“RPGTA”).

THE BADGES OF TRADE

The Badges of Trade Analysis
1.  Profit-seeking motive ♠ Profit realised < 5 years => Income Nature

♠ Profit realised > 5 years => Capital Nature

2. Nature of property ♠ Yield rental income => Capital Nature

♠ Does not yield any income => Income Nature

3. Mode of finance ♠ Long-term borrowings => Capital Nature

♠ Short-term borrowings => Income Nature

4. Subject matter of the transaction ♠ Acquired in the ordinary course of business => Income Nature

♠ Acquired through market => Income Nature

♠ Inherited/ gift => Capital Nature

♠For personal enjoyment => Capital Nature

♠Income-producing asset => Capital Nature

5. Modification or additional work ♠ Sub-division of land, building plans => Income Nature
6. Frequency of transaction ♠ Many => Income Nature

♠ Isolated => Capital Nature

7. Classification in accounts ♠ Investment property/ fixed asset => Capital Nature

♠ Development property => Income Nature

8. Organisation/ special skills ♠ No special skills => Capital Nature

♠ Skills related to the property industry (Developer, contractor, real estate, etc) => Income Nature

9. Holding period ♠ Short-term ( Income Nature

♠ Long-term (> 5 years) => Capital Nature

10. Circumstances surrounding the sale ♠ Organisation of seller (developer) => Income Nature

♠ Forced sale => Capital Nature

♠ Acquisition by government => Capital Nature

♠ Initiated by buyer => Capital Nature

11. Location ♠ Prime area => Income Nature
12. Method of disposal ♠ Use marketing strategy or advertisement => Income Nature
13. Formation of company ♠ Sdn. Bhd. incorporated => Income Nature
14. Objects clause in the M&A ♠ Property developer, property dealing => Income Nature

♠ Property investment, investment holding => Capital Nature

Details explanation for each factor:

  1. Profit-seeking motive – If there is evidence that the sole object of acquiring an asset was to re-sell it at a profit, without any intention of holding it as an investment, it will be concluded that a trade is being carried on. One of the evidence of this badge is the holding period of the property, ie. the shorter the holding period, the more obvious the intention to resell the property at a profit.
  2. Nature of the property – Properties that yield rental income will provide supporting evidence that the
    property was intended to be held for investment purposes.
  3. Mode of finance – Short-term borrowings such as bank overdraft are meant for short-term financing. Therefore purchase of properties that are 􀃡nanced by short-term borrowings will give the impression that the buyer intends to make a quick buck from the property transaction.
  4. Subject matter of the transaction – The subject matter here is obviously the property and it is a kind of subject matter that is generally traded with and could readily be turned to profits. Mitigating factors against this badge of trade is if the property is held for own residence or yields rental income.
  5. Modification or additional work – Additional work to the property such as submission of building plans,
    conversion of title or even renovation and refurbishment works may point to the fact that you are getting the property ready for resale at a higher value.
  6. Frequency of transactions – Many, repetitive transactions will point to the fact that you’re carrying on a trade.
  7. Classification in the accounts – Classification of the property in the balance sheet of a company will give an indication of what the property is intended to be used for. For example, calling the property ‘investment property’ will give an impression that the property is meant to be held as an investment while classifying it as ‘trading stock’ will give the impression that the property is held for resale as stocks.
  8. Organisation/special skills – Does the seller have special skills in connection with property transactions?
    For example, a developer or real estate agent would be assumed to have special skills in view that dealing in properties is part of their daily business.
  9. Holding period – The longer the holding period before the property is sold, the more it will be perceived that the property was held for investment.
  10. Circumstances surrounding the sale – Was the sale of the property due to financial constraints or compulsory acquired by the government? These situations will point to the fact that the sale was not-initiated by the property owner hence unlikely to be an adventure in the nature of trade, ie. Income Tax.
  11. Location – The sale of a property situated in a prime location was held by the courts to be one of the badges of trade, in a local court case.
  12. Method of disposal – Was the intended sale of the property done using a systematic marketing strategy, ie utilisation of property brokers, printing of brochure and pamphlets, etc?
  13. Formation of a company – In the case of American Leaf Blending Co. Sdn Bhd v DGIR, it was held by the court that where a company is incorporated for the purpose of making profits for its shareholders, any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business. Therefore, by having a company to hold your property investment is in itself, a badge of trade.
  14. Objects clause in the Memorandum & Articles of Association of a company – The objects clause specify the types of activities that a company is authorised to carry out. By having objects clause such as property development. dealing in properties or even general trading activities may be detrimental to the company, for properties which are intended to be held for investments.

The more badges of trade that the IRB can pin on a property transaction, the more likely that the transaction will be subject to Income Tax.

 

Source from: Richard Oon

Comparison Between Income Tax and Real Property Gain Tax

Income Tax Rate For YA 2016

Individual Tax Company Tax
Graduated rates from 0% to 28% 19% on the first RM500K of the chargeable income

24% on the subsequent balance of chargeable income

Note: For companies with paid up share capital not exceeding RM2.5 million at the beginning of the basis period.

Real Property Gain Tax Rate For YA 2016

Disposal Period Individual Rate (Citizen/ PR) Individual Rate (Non-citizen) Company Rate
For disposals within 3 years 30% 30% 30%
For disposals in the 4th year 20% 30% 20%
For disposals in the 5th year 15% 30% 15%
For disposals in the 6th year and subsequent years 0% 5% 5%