Taxatation Law

1.0 Introduction
Taxation is one source of government revenue, there exist two types of taxes which are direct taxes and indirect taxes, direct taxes are those taxes that are imposed directly on products or even personal income tax. Indirect taxes are taxes imposed on good and services. When a direct tax is imposed then both the sellers of the products and the buyer faces the burden of tax. The following sources of income are liable to tax: • gains and profits from a trade, profession and business • gains or profits from an employment (salaries, remunerations, etc.) • dividends, interests or discounts • rents, royalties or premiums • pensions, annuities or other periodic payments • other gains or profits of an income nature

Chargeable income is arrived at after adjusting for allowable expenses incurred in the production of the income, capital allowances and incentives where applicable. Section 34 of the Income Tax Act 1967 allows specific provisions for bad or doubtful debts. However, no deduction for book depreciation is allowed although capital allowances are granted. Unabsorbed business losses may be carried forward indefinitely to offset against business income including companies with pioneer status, provided that the cessation of the period falls on or after 30 September 2005.
2.0 BINASTRA HOLDINGS SDN BHD v KETUA PENGARAH HASIL DALAM NEGERI
[2001] 5 MLJ 481
CIVIL APPEAL NO R2-14-8 OF 2000
HIGH COURT (KUALA LUMPUR)
DECIDED-DATE-1: 7 DECEMBER 2000
FAIZA TAMBY CHIK J

2.1 Overview of the case
PROFIT FROM SALE OF SHARES IN A PROPERTY DEVELOPMENT COMPANY NOT SUBJECT TO REAL PROPERTY GAINS TAX
The taxpayer, Binastra Holding Sdn Bhd (‘the appellant’), had been assessed under para 34A of Sch 2 of the Real Property Gains Tax Act 1976 ( 'RPGTA ') for an amount of RM173,000, inclusive of penalty by the Director General of Inland Revenue (‘DGIR’). The Appellant’s appeals had previously been dismissed by the Special Commissioners of Income Tax. The appellant then appealed to the High Court, which allowed the appeal with cost.

2.2 Facts of the case
Binastra Holding Sdn Bhd (BHSB) is a holding and investment company. In 1996, the taxpayer acquired shares in Sukma Pesona Sdn Bhd (SPSB), a property developer. A piece of land alienated by the Selangor State Government in 1995 was held by SPSB for the purpose of development and sale of housing units. SPSB proceeded with all the necessary activities to undertake the development and the land was classified as stock-in-trade in its accounts. Despite all the preparations, in 1998, the taxpayer had to dispose the shares in Sin Heap Lee Development Sdn Bhd (SHL) as SPSB failed to settle the matter of the access road with SHL, the developer of the neighbouring estate. The Revenue assessed the gains to Real Properties Gain (‘RPGT’) on the basis that the taxpayer acquired and disposed of shares in a Real Property Company(‘RPC’) and such assets were deemed ‘chargeable assets’ under paragraph 34A of Schedule 2 of the Real Properties Gain Act 1976 (‘RPGTA’).
2.3 Issue of the case
The issue before the High Court was, whether the gains by the taxpayer from the disposal of shares in Sukma Pesona Sdn Bhd to Sin Heap Lee Development Sdn Bhd falls within the ambit of the Real Properties Gain Tax Act 1976.

2.4 Arguements 2.4.1 Contentions of the appellant

i. The appellant is not a property speculator which Paragraph 34A was designed to catch.

ii. The appellant is not a real property company within the meaning of Paragraph 34A as stock in trade is not subject to RPGT.

iii. The court must define the deeming provision according to the policy and purpose thereof so as not to arrive at an absurd or unjust decision.

2.4.2 Contentions of the respondent Paragraph 34A of the RPGTA applies to the gains derived from the disposal of shares in the Company.

In arriving at their decision of agreeing to the Revenue’s assessment on the gain arising from the disposal of shares to RPGT, the Special Commissioner of Income Tax (‘SC’) has applied a strict interpretation on the following sections of the RPGTA:-

Paragraph 34A(6), Schedule2

‘real property company’ means -

a) a controlled company which, as at 21 October, 1998, own real property or shares or both the defined value of which is not less than 75% of the value of its total intangible assets; or

b) a controlled company to which subparagraph (a) is not applicable, but which at any date after 21 October, 2002, acquires real properly or shares or both whereby the defined value of real property or shares or both owned at that date is not less than 75% of the value’ of its total tangible assets

Reading the above, a company would become a Real Property Company if it fulfills the following conditions: - (i) it is a controlled company (ii) it owns real property or RPC shares in another company (iii) the market value of (ii) must be at least 75% of its total tangible assets

Paragraph 34A(1), Schedule 2

“An acquisition of shares in real property company (hereinafter referred to in this paragraph as the ‘relevant company’) shall be deemed to be an acquisition of a chargeable asset, and where such shares are disposed of, such disposal shall be deemed to be a disposal of such chargeable assets notwithstanding that at the time of disposal of such shares of the relevant company is not regarded as a real property company”

Definition of ‘real property’ - Section 2

“any land situated in Malaysia and any other interest, option or other rights in or over such land”

Reading the above, no doubt, the land held by SPSB constitutes a real property.

SC’s decision: The rationale

Strictly relying on the above mentioned paragraphs, the SC’s decision would appear to be correct based on the following grounds: -

• SPSB was a controlled company • Land held by SPSB was a real property. One would agree that nowhere in the RPGTA it is mentioned that trading stock is excluded from being regarded as real property • The 75% threshold rule had been met • There was a disposal of RPC shares (i.e. shares in SPSB) from BHSB to SHL • The disposer of RPC shares may be any chargeable person and again, nowhere in the RPGTA excludes a company as a chargeable person for RPGT purposes.

In addition, the SC’s strict interpretation may be in line with what Rowlat J has stated in Cape Brandy Syndicate v IRC (12 TC 35)

….in a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One an only look fairly at the language used.

2.5 Judgement
The taxpayer’s appeal that the disposal of shares was subject to income tax instead of RPGT was allowed by the High Court.

Non-applicability of RPGT

In this case, it was established that the DGIR has wrongly classified the tax upon failure to consider the policy of the RPGTA. The purpose of paragraph 34A was to ensure that individuals do not use companies to acquire land and dispose of the shares to avoid RPGT and this can be found in the Explanatory Statement of Finance Bill 1988 (which Finance Act 1988 introduced the said paragraph 34A in Schedule 2 of the RPGT Act) which states at paragraph 19 as follows:

“Clause 24 (of the finance Act) seeks to introduce a new paragraph 34A of Schedule 2 to the RPCT Act. The amendment is intended to ensure that individuals do not use companies to acquire land and then dispose of shares in such companies thereby avoiding payment of real property gains tax. The amendment applies only to controlled companies holding real property directly or indirectly as a major asset. Gains from the disposal of shares in such companies which will be known as “real property companies”, will he liable to tax. The amendments will come into force on 21st October 1988”.

The taxpayer in this instance (i.e. BHSB) is not an individual who had used a company to acquire land and dispose of the shares as the land had already been acquired by SPSB prior to the taxpayer’s acquisition of the shares. On this count alone, the gains should not be subject to RPGT. Parliament had also deemed the acquisition of shares in RPC to be an acquisition of a chargeable asset notwithstanding that at the time of disposal; the relevant company is no longer an RPC. This is in order to seal a scheme where the dealer of a property uses a company to avoid RPGT. In this instance, it was also established that the taxpayer held the shares in SPSB to develop the land and not to deal in the property and dispose of it to avoid RPGT. Paragraph 34A purports to equate the shares of the company with the character of the assets. As SPSB’s asset is not real property but stock-in-trade, SPSB cannot be by such definition a RPC and the RPGTA does not apply to the taxpayer.

In summary, the learned judge, Faiza Tamby Cik J. has laid down 2 important propositions of law on RPC

i. The term “real property” used to ascertain whether a controlled company is RPC should exclude all landed properties that are held as “stock in trade” for income tax purposes. Given this, a property development company may not be classified as RPC because, land, prima facie, are its trading tax for income tax purposes.

ii. To apply the concept of RPGT, the motives of the shareholders are crucial, hence would need to be examined. The concept of RPC was introduced as an anti-avoidance in view an individual may attempt to avoid RPGT by disposing shares of a company that owns land rather that disposing the land itself. Based on this, if an individual holding shares in a controlled company is not for the above tax avoidance, the RPC concept is inapplicable and no RPGT should be imposed on the gain arising from disposal of the shares.

2.6 Group Opinion
We are of an opinion that the principles laid down by the judgement. However, an issue requires further consideration before one can actually comfortably rely on the principles established. The considerations are:

i. Subject matter BHSB is a holding and investment company. Its principal activity is to hold investment and to derive investment income, e.g. dividend income or interest income that would be taxed respectively under Section 4(c) under the ITA. BHSB clearly is not a share dealing company which trades in shares. SPSB is merely a subsidiary of BHSB. On this single account, the gains from disposal of an investment should not be subject to income tax in accordance to Section 60F of the ITA. On top of that, no RPGT is imposed as decided by the High Court. The view that BHSB held the shares in SPSB to develop the land would not change the fact that BHSB is an investment and holding company to a property developer, which was supposedly to undertake the property development.

ii. Circumstances responsible for the realisation BHSB acquired the shares in SPSB but unfortunately, due to the failure to settle the matter of the access road with a developer of the neighbouring estate, SHL, it had to sell the shares in SPSB to SHL (i.e. a forced sale). As mentioned above, the unanticipated circumstances that lead to this disposal of shares would support the contention that income tax is not applicable.

iii. The length of ownership BH acquired 9,400 shares, 30,000 shares and 35,600 shares on 15 June, 1996, 21 June, 1996 and 27 July, 1996 respectively and thereafter disposed of all them on 6 April, 1998. In this regard, it can be argued that the taxpayer had held the shares only for a short period of time before the disposal (i.e. approximately 2 years). A relatively short holding period may constitute an adventure in the nature of trade. However, this factor in supporting income tax is not solid as one must always consider the actual reason that results in the disposal. To recapitulate, the unforeseen circumstances (i.e. the dispute in access road) was responsible for the realisation of SPPB shares by BHSB. Against this fact, one may strongly contend that BHSB was not trading in shares after all. It was merely realising one of its investment.

iv. Frequency of transactions It was argued that the character of the shares in SPSB was by the qualifiable equation stock in trade, and thus disposal thereof goes under income tax. The land is a stock in trade to SPSB since it is a property developer. With this is mind, the High Court reviewed the tax treatment of the disposal of the properties by SPSB as Paragraph 34A equates the shares in SPSB as the land. As the gains from disposal of shares in SPSB would be subject to income tax, the gain cannot fall under the ambit of the RPGTA.

In order to ascertain the correctness of the above approach, one must realize that the manner of equating shares to real properties is a RPGT concept. RPGT and income tax are two different matters all together and in determining whether a transaction is subject to income tax or RPGT, one must rely on the relevant law, namely ITA and RPGTA respectively. Of course, as mentioned earlier, income tax will prevail over RPGT by the virtue of Section 2 of the RPGTA which defines gain for RPGT purposes as follows : -

“Gain other than gain or profit chargeable with or exempted from income tax under the income tax law”

Against the above, one should examine the applicability of income tax by analyzing the badges of trade and precedent case laws. If a particular receipt is of capital in nature (hence not subject to income tax), the next move is to ascertain as to whether the said receipt constitutes a chargeable gain for RPGT purposes. Since Malaysia does not impose capital gains tax, this simplifies the process because one just needs to concentrate on RPGT. In doing so, all the relevant sections and paragraphs in RPGTA must be duly considered together with the Explanatory Statement of Finance Bill 1988 (which Finance Act 1988 introduced the said paragraph 34A in Schedule 2 of the RPGT Act).

3.0. KHK ADVERTISING SDN BHD v KETUA PENGARAH HASIL DALAM NEGERI

[2001] 5 MLJ 177

CIVIL APPEAL NO R1-14-4 OF 1999

HIGH COURT (KUALA LUMPUR)

DECIDED-DATE-1: 15 NOVEMBER 2000

KC VOHRAH J

3.1 Overview of the case
DEDUCTIBILITY OF LEAVE PASSAGE FOR DIRECTORS
The taxpayer, KHK Advertising Sdn Bhd (‘the appellant’), had received four notices of additional assessment by the Director General of Inland Revenue (‘DGIR’). The Appellant’s appeals had previously been dismissed by the Special Commissioners of Income Tax. The appellant then appealed to the High Court, which allowed the appeal with cost.

3.2 Facts of the case
The appellant was known as KHK Needham Standard Sdn Bhd, but in 1989 it was changed to KHK Standard Sdn Bhd. Then, in 1991, it took the name of KHK DMB & B Sdn Bhd and finally in October 1997, it became known as KHK Advertising Sdn Bhd. The appellant, a private limited company incorporated on 5 May 1972, carried on the business of advertising, designing contracts and film production. On 8 March 1983, the appellant was known as KHK Needham Standard Sdn Bhd, entered into service agreements with three of its directors, namely, Kok Hong Kung, Lim Keng Chuan and one Cheng Sin Po. The service agreements, provided, among other terms, leave passage for the directors and their families, once in every two complete years of service, to a country or countries of their choice. The taxpayer appealed on the basis that the leave passage is an expense incurred under section 33(1) of Income tax Act 1967 and the Special Commissioners (SC) dismissed the appeal and confirmed the additional assessments on the appellant.

3.3 Issue of the case
The issue for the determination was whether the cost of leave passage provided by the appellant to its directors under the service agreements and claimed by the company for years 1983 to 1986 was tax deductible.

3.4 Arguements 3.4.1 Contentions of the appellant i. The expenditure incurred for leave passages should be allowed unless prohibited by section 39. There was no prohibition in section 39 save for the provision, relating to the prohibition from the year of assessment 1989 which does not cover the years of assessment 1984 to 1987 claimed. Thus all compensation paid, such as free leave passage prior to the year of assessment 1989, was incurred wholly and exclusively in the production of gross income under section 33(1). Section 39(1) was amended to prohibit from the year of assessment 1989, deductions for leave passage. The appellant had contended that prior to the coming into force of the amendment, such leave passage was an allowable deduction.

ii. The appellant submitted that in view of s 13(1)(b)(ii) of the Act, which recognises leave passage as employment income, it follows that such expenditure should be given deduction. The character of expenses is not determined by the nature of the receipt in the hands of the recipient.

iii. The appellant 's argument that the expenditure was debited to the profit and loss accounts of the appellant, and that for tax purposes the expense is said to be incurred.

iv. The appellant argued that the leave passage being a contractual term found in the service agreement.

2. Contentions of the respondent i. Revenue argued that each of the air passages was 'private and vacational ' as a term of the contract of service between the appellant and each of the two directors. • The terms of each contract of service do not determine the deductibility of the payments made to the said director. • Being 'private and vacational ', the cost of each leave passage is not wholly and exclusively incurred in the production of gross income under s 33(1) of the appellant. • Revenue relied on the principle in the High Court case of Saledy Sdn Bhd v DGIR [1995] 2 MSTC 31440 decided by Harun J. ii. The special commissioners were obviously influenced by the Saledy case -- they said they were bound by the High Court decision and concluded that the cost of leave passages of KHK and LKC are not allowable deductions under s 33(1) of the Act.

iii. The SC analyzing section 33(1) of Income Tax Act 1967 by three conditions, which are, ‘outgoings and expenses’, ’wholly and exclusively’ and ‘incurred in that period’ are not in dispute. . The crux of the appeal centres on one issue only, ie whether the expenses incurred, was 'in the production of gross income’.

iv. The taxpayer outgoing account does not influenced, still entitled to see for what the expenses or loss incurred.

3.5 Judgement
Held: The taxpayer’s appeal was allowed with costs for the following reasons: i. Free leave passage was one of the components of the salary package and was a cost to the employer in respect of service rendered.

ii. The judge does not agree with what was stated in the Saledy case that '... being private and vacational, the expense clearly cannot be wholly and exclusively incurred in the production of gross income ... ' with respect, how an employee expended his compensation paid by the employer was not in issue. To make a distinction that may have escaped some, if an employee claims a deduction from his salary the cost of a private trip abroad, then that is private and vacational. It is not so where the claim by an employer for compensation agreed for services rendered is a benefit in kind.

iii. The special commissioners were erred on a point of law by addressing the wrong issue. The issue was not whether the leave passage contributed towards the production of the taxpayer’s gross income. It was whether the services rendered by the employees contributed towards the production of gross income and the leave passage was the reward for such services. Where the services provided by the employees are for the production of gross income, the reward for such services should be deductible. In addition, the Act was amended with effect from the year of assessment 1989 whereby leave passages are restricted as a deduction.

3.6 Group Opinion
We agree with that the principles lay down by the High Court. Leave passage form is part of the director’s employment. The view of the SC that the cost of leave passage was private and vacational and hence not wholly and exclusively incurred in the production of gross income was wrong. The wrong emphasis was placed by the SC on how the directors expended their compensation received from the employer. The proper issue was what compensation (salary, benefits-in-kind, free leave passage) was given for the services rendered by the directors.

Bibliography

Inland Revenue Board Malaysia. (2003, August 5). Tax Treatment of Leave Passage. [Electronic version]. Addendum to Public Ruling No. 1/2003.

Laws of Malaysia. (2006, January 5). Act 169. [Electronic version]. Real Property Gains Tax 1976.

Legal Research Board. (2010, March 1). Income Tax Act 1967 (Act 53). Petaling Jaya. International Law Book Services.

Lembaga Hasil Dalam Negeri. (2003, August 5). Tax Treatment of Leave Passage. [Electronic version]. Public Ruling No. 1/2003.

Lexis Nexis Academic. (2008). The Malayan Law Journal. [Electronic version]. [2001] 5 MLJ 177, KHK ADVERTISING SDN BHD v KETUA PENGARAH HASIL DALAM NEGERI, CIVIL APPEAL NO R1–14–4 OF 1999, HIGH COURT (KUALA LUMPUR), 15 NOVEMBER 2000, KC VOHRAH J

Lexis Nexis Academic. (2008). The Malayan Law Journal. [Electronic version]. [2001] 5 MLJ 481, BINASTRA HOLDINGS SDN BHD v KETUA PENGARAH HASIL DALAM NEGERI, CIVIL APPEAL NO R2–14–8 OF 2000, HIGH COURT (KUALA LUMPUR), 7 DECEMBER 2000, FAIZA TAMBY CHIK J

Malaysia Budget 2002. Tax Cases. Retrieved November 14, 2010, from http://www.mir.com.my/lb/budget2002/tax.htm

Malaysian Special Commissioners’ Decision.(2003). CPA Tax & Investmen Review 2003. [Electronic version]. Summary of Tax Cases

Tax Insights. (2009). Malaysian Developments. [Electronic version]. Binastra Holdings Sdn Bhd v. Ketua Pengarah Hasil Dalam Negeri (Court of Appeal Decision –Unreported)

|CONTENTS |Page |
|1.0 |Introduction |1 |
|2.0 |Binastra Holdings Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri |2 |
| |2.1 |Overview of the case |2 |
| |2.2 |Facts of the case |2 |
| |2.3 |Issue of the case |3 |
| |2.4 |Arguements | |
| | |2.3.1 Contentions of the appellant |3 |
| | |2.3.2 Contentions of the respondent |3 |
| |2.5 |Judgement |5 |
| |2.6 |Group Opinion |7 |
|3.0 |KHK Advertising Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri |10 |
| |3.1 |Overview of the case |10 |
| |3.2 |Facts of the case |10 |
| |3.3 |Issue of the case |11 |
| |3.4 |Arguements | |
| | |3.3.1 Contentions of the appellant |11 |
| | |3.3.2 Contentions of the respondent |11 |
| |3.5 |Judgement |12 |
| |3.6 |Group Opinion |13 |
|Bibliography |

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UNIVERSITI UTARA MALAYSIA

GMUL 5063 ETHICS, LAW AND CORPORATE SOCIAL RESPONSIBILITY
ASSIGNMENT 1

This report submitted in accordance with requirement of the Universiti Utara Malaysia (UUM) for the Master of Business Administration (Supply Chain). submitted to
DR. NUARRUAL HILAL B. MD DAHLAN

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Bibliography: | ----------------------- UNIVERSITI UTARA MALAYSIA GMUL 5063 ETHICS, LAW AND CORPORATE SOCIAL RESPONSIBILITY ASSIGNMENT 1 This report submitted in accordance with requirement of the Universiti Utara Malaysia (UUM) for the Master of Business Administration (Supply Chain). submitted to DR. NUARRUAL HILAL B. MD DAHLAN ----------------------- 1