1. Those real property owners who are looking at cashing out now will see a substantial gain upon disposal of their real property. Now the question is this: is the gain on disposal of real property a capital receipt or a revenue receipt?
2. A layman’s answer to that question would be capital receipt. Generally, Malaysia does not impose tax on capital receipts except in certain situations where the receipt arose from the disposal of real property or shares in a real property company, which is taxable under the Real Property Gains Tax 1976 (RPGTA), or where the capital receipt is treated as a revenue receipt.
3. Many of us are familiar with the RPGTA that imposes real property gains tax (RPGT) on gains arising from the disposal of real property in Malaysia or shares in a real property company. The RPGT rates vary from five per cent (5%) to thirty per cent (30%), depending on the holding period of the real property.
4. However, not many are aware that the gain on the disposal of real property in Malaysia could be treated as a revenue receipt and hence, subject to income tax under the Income Tax Act 1967 (ITA) at the prevailing individual income tax rate [i.e. up to twenty eight per cent (28%)] or corporate income tax rate [i.e. twenty four per cent (24%)]
5. Now, the next question is, under what situation will the gain on the disposal of real property be treated as a revenue receipt instead of a capital receipt.
6. Generally, if the real property is an investment i.e. capital asset to a person, then the gain on the disposal of such real property is likely to be treated as a capital receipt.
7. Conversely, if the real property is a stock-in-trade to a person, then the gain on the disposal of such real property will be treated as a revenue receipt.
8. In order to determine whether a real property is an investment or a stock-intrade of a person, it is important to analyse the nature of activity carried on by that person. Normally, a person who acquires a real property for personal usage or long term holding to generate rental income is likely to hold that real property as an investment (i.e. property investor). On the other hand, a person who is in the business which deals with real property on a recurring basis is likely to hold that real property as a stock-in-trade (i.e. property developer or property dealer).
9. However, sometimes it could be difficult to determine the nature of the real property (i.e. investment or stock-in-trade) for a person due to the different nature of each transaction. Hence, one of the common methods employed by the Court in determining the nature of the real property for a person is by looking at the existence of badges of trade. A summary of the badges of trade is as follows:
10. As a general rule, the gain on the disposal of real property will likely be regarded as a revenue receipt if the gain arises from a business activity or if a number of badges of trade exist in the real property transaction. On the other hand, the gain on the disposal of real property will likely be regarded as a capital receipt if the gain arises from an investment activity or it cannot be ascertained that badges of trade exis
11. As a conclusion, property transactions often involve significant amounts, hence tax inevitably becomes a key consideration. Whilst Malaysia has a generally simple income tax and real property gains tax regime, understanding the tax implications arising from property transactions tend to be challenging especially when the transactions being contemplated do not have clear characteristics of either ‘investment’ or ‘trading’.
DETAILED EXPLANATION
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.
Source:
https://newpropertyboard.com/taxation-on-property-gain/
https://www.crowe.com/my/-/media/Crowe/Firms/Asia-Pacific/my/CroweMY/Insights/Article_Vol-8.pdf?la=en-GB&hash=A334A0E212B5E0E13C3921A0EC762810D048E47E
