T

articles
A Guide to Tax Planning

Contemporary
Issues on
Income Tax and
Real Property
Gains Tax
 ACCA
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 Author’s Profile
Dr. Choong Kwai Fatt is an Associate Professor and tax consultant at
the Faculty of Business and Accountancy of the University of Malaya.
Prior to joining the University of Malaya, he was a tax consultant involved
in both tax advisory and tax compliance services through attachment
with Malaysia Price Waterhouse Tax Services Sdn Bhd (now known
as PricewaterhouseCoopers Tax Services Sdn Bhd), an international
accounting firm.
Dr Choong is a member of the Malaysian Institute of Certified Public
Accountants (MICPA), a member of the Malaysian Institute of Accountants
(MIA) and a fellow member of the Malaysian Association of Company
Secretaries (MACS).
He holds a Bachelor’s degree in Accounting (Honours) from the
University of Malaya, a Bachelor’s degree of Laws (Honours) from the
University of London, a Master’s degree in Comparative Laws and also
a Doctorate in Philosophy (Taxation Law) from the International Islamic
University of Malaysia.
He has written and published papers in local and international tax, law
and accounting journals. He is also the author of the following books:

(1) Advanced Malaysian Taxation. 2005 7th edition, Infoworld, Kuala Lumpur.
(2) Malaysian Taxation. 2005 11th edition, Infoworld, Kuala Lumpur.
(3) Practitioners’ Guide on Tax Incentives: An Anatomy. 2004 1st edition, Infoworld, Kuala Lumpur.
(4) Tax Audit and Investigation. 2006 (loose leaf edition), Infoworld, Kuala Lumpur.
(5) How to Fill in Your Income Tax Form B. 2005 2nd edition, Infoworld, Kuala Lumpur.
(6) Istilah Percukaian. 2004 1st edition, Sweet and Maxwell, Kuala Lumpur.
(7) Real Property Gains Tax - Principles, Policies and Practices. 1997 1st edition, Infoworld, Kuala Lumpur.
(8) Inland Revenue Guidelines, Rulings and Government Gazettes. 2002 2nd edition, Infoworld, Kuala Lumpur.
(9) Malaysian Taxation – Revision and Practice Set. 2004 4th edition, Infoworld, Kuala Lumpur.
(10) Tax Planning for Income Tax Waiver. 1999 1st edition, Infoworld, Kuala Lumpur.
(11) Personal Finance in Malaysia, 2000 1st edition, Infoworld, Kuala Lumpur.
(12) Malaysian Leading Cases in Income Tax. 2003 1st edition, Sweet and Maxwell, Kuala Lumpur.
(13) Tax Planning for Malaysian Employees. 2003 1st edition, Sweet and Maxwell, Kuala Lumpur.
(14) Tax Planning on Business Income. 2004 1st edition, Sweet and Maxwell, Kuala Lumpur.
(15) Advanced Taxation – Revision and Practice Set. 2003 1st edition, Infoworld, Kuala Lumpur.
(16) Malaysia Revenue Law Cases – A Practical Index (1932 – 2002). 2003 1st edition, Infoworld, Kuala Lumpur.
(17) Malaysian Tax Digest. 2005 1st edition, Infoworld, Kuala Lumpur.
(18) All Malaysia Tax Cases (1932 – 2005). 2006 (Loose Leaf), (5 volumes) Sweet and Maxwell, Kuala Lumpur.
He can be contacted at kwaifatt@yahoo.com
An update of Malaysian tax changes can be viewed at www.kwaifatt.com

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 Contents
Compensation on Termination of Joint Venture 4
Agreement
- Capital or Income receipts?

The New Outlook for Investment Holding 8

Company
- post Finance Act 2005

Listed Investment Holding Company 13

- The New Outlook post Finance Act 2005

Provision or Accrued Expenses? 16

- An analysis of the Court of Appeal’s decision in
Exxon Chemical (M) Sdn Bhd v Ketua
Pengarah Hasil Dalam Negeri

The Criteria For Determination Of Income Tax 19

Or Real Property Gains Tax In The Case Of Land
Appropriation From Investment To Trading Asset

The Tax Authorities’ power to revoke an assessment 28

made under Real Property Gains Tax and switch
to Income Tax

The scope of an ‘Executor’ and his/her liability to 33

income tax
- To sign or not to sign the Income Tax Form B for the
deceased person?

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income tax
Compensation on Termination of
Joint Venture Agreement
– Capital or Income receipts?
Introduction
It is a trite law in the Malaysia Income Tax Act
1967 (the Act) that capital gains are not taxed
while transactions that are ‘income’ in nature
will be taxed. Making the distinction between
‘capital’ or ‘income’ is never an easy task,
especially in relation to the compensation on
termination of a business contract. Generally,
compensation for payment of services is income
receipts while compensation for destruction
of capital structure is capital receipts. The
Court of Appeal in Suasana Indah Sdn Bhd v Ketua
Pengarah Hasil Dalam Negeri1 had an opportunity
to expound the legal principles on compensation
receipts in the Malaysian context.
The facts of the case
In Suasana Indah, the taxpayer through a Joint Venture
(JV) agreement had provided services to convert
two pieces of land in Gombak, extend the leasehold
period to 99 years and subdivide these lands. These
services ware valued at RM4.8 million, reflected as
contribution of capital to the JV. The other JV partner
contributed the said land, valued at RM5.3 million.
Due to some disagreement between the JV partners,
the JV was terminated and the taxpayer was paid a
compensation of RM6.4 million. The issue is whether
such receipts are capital or revenue receipts.
The taxpayer contended the RM6.4 million
was capital receipts as the amount was paid for
the loss of rights under the JV or alternatively
capital withdrawal form the partnership. The tax
authorities however argued that the payment was a
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compensation for loss of income assessable under s
22(2)(b) of the Act or alternatively an amount paid for
services rendered as stipulated in s 24(1)(b) of the
Act, thus income in nature and subject to tax. This
argument found favor with the Special Commissioners
and the High Court. The Court of Appeal was asked to
hear this appeal to verify the correctness of the law
as decided by the lower courts.
Does a JV amount to partnership?
The Court of Appeal was asked to decide whether the
JV is a partnership, therefore the amount received
was an amount for withdrawal of partnership. In the
JV agreement, two clauses expressly disclaimed that
the JV did not constitute a partnership or a principal-
agency relationship. The taxpayer conceded that
the JV was not a partnership by the “ordinary legal
concepts of partnerships” but maintains that it was a
partnership solely because it satisfied the definition of
“partnership” stipulated in s 2 of the Act.
Abdul Aziz Mohamed JCA delivered the Court
of Appeal judgment which affirmed the established
legal principle that the existence of a partnership
is referred to the law of partnership and not the
definition of partnership as stated in s 2 of the Act.
The definition of “partnership” in the Act is intended
only for the interpretation of that word where it is
used in the Act. The provision in the JV agreement
must prevail and be given effect to. Since it was
agreed between the JV partners that no partnership
existed, the argument for ‘capital withdrawal from
partnership’ was rejected.
 income tax
“In my opinion that asset, the congeries of rights which the appellants
(company) enjoyed under the agreements and which for a price they
surrendered, was a capital asset... The agreements formed the fixed
framework within which their circulating capital operated; they were
not incidental to the working of their profit-making machine...”

Compensation for loss of rights Commissioners’ decision as income receipts.

On the issue whether the compensation received
constituted a loss of rights under JV or merely
compensation for services rendered (loss of income),
the Court of Appeal approved the application of the
whole structure test as enunciated by Lord MacMillan
in Van Den Berghs Ltd v Clark2.
In Van Den Berghs Ltd, the margarine
manufacturer (cum dealer) entered several business
alliance agreements with its competitor, a Dutch
company, to improve its sales. These contracts
included agreements on the sharing of profits of their
respective margarine businesses, goods’ pricing,
designated places of trade and restrictions against
pooling with competing third parties. In short, these
contracts governed the business operations and were
expected to be in force for a period of 20 years, with
changes made as time necessitated. The contracts
were in operation for 7 years after which certain
disputes arose and the Dutch company paid Van Den
Berghs £450,000 as “damages” for the termination
of the contracts and the withdrawal of all future
claims.
The issue of whether the compensation was
an income or capital receipt was a complicated
one. The tax authorities assessed the payment as
trading income and taxed it accordingly. The general
commissioners agreed with the tax authorities and
held that it was a trade receipt. Upon further appeal
to the King’s Bench division, the High Court reversed
the commissioners’ decision and held that it was
a capital receipt. However, the Court of Appeal
reversed the High Court decision and affirmed the
In the House of Lords, Lord Macmillan propounded
the “whole structure” test as the test for determining
the nature of such compensation and held, on the
facts, that such payment was a capital receipt. His
Lordship was of the opinion that these terminated
contracts were not ordinary commercial contracts
made in relation to the sale of goods but were related
to the whole structure of the profit-making apparatus
of the manufacturer. The contracts regulated the
taxpayer’s activities, defined what the parties in the
contract may or may not do and further affected the
whole conduct of the business. As the compensation
was related to the termination of that which was
fundamental to the trader’s activities, it was therefore
a capital receipt. Lord Macmillan held:
“In my opinion that asset, the congeries of
rights which the appellants (company) enjoyed
under the agreements and which for a price
they surrendered, was a capital asset... The
agreements formed the fixed framework within
which their circulating capital operated; they
were not incidental to the working of their
profit-making machine but were essential
parts of the mechanism itself. They provided
the means of making profits, but they
themselves did not yield profits. The profits of
the appellants arose from manufacturing and
dealing in margarine.”
In Suasana Indah, the Court of Appeal elaborated
the fundamental requisites on the application of the

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income tax

whole structure test to determine the nature of the
contract termination receipts being capital receipts.
First, the test involves ‘structure of a profit-making
apparatus’ and not just any ‘structure’. Second,
such a profit-making apparatus is not referring to
business. The profit-making apparatus referred is an
organisation, a set up, a capital framework that a
taxpayer must necessarily and inevitably already have
that makes profit. Third, the test does not require that
the business of the taxpayer company be destroyed
or brought to an end3. The Special Commissioners
and the High Court have misunderstood the test to
mean that the cancellation of the JV agreement must
result in the destruction of the profit-making apparatus
of the taxpayer company, which was never intended
or seen in Van Den Berghs. In Van Den Berghs, the
profit-making apparatus of the English company did
not suffer from the termination of the agreements.
The correct application of the whole structure test
is to examine the nature of the agreement in relation
to the whole structure of the profit-making apparatus
of the company and to see whether the impact of the
termination affects the whole structure of the profit-
making apparatus. This is a two-fold test:
(Refer to Diagram 1)
In this case, the JV merely governs the sharing
of profit of the JV parties. It does not regulate the
carrying-on of the business as seen in Van Den
Berghs. It is an ordinary contract under which they
were to provide the land improvement services
in return for an interest in the land development
project. In short, it was a contract for the provision
of services. The facts of the case as determined
by the Special Commissioners’ show that the JV is
not a framework agreement, and the taxpayer was
not restrained in any way from providing its services
to other persons whether through another JV or
otherwise. Thus, the amount paid in its true essence
is compensation for loss of income, and thus subject
to tax.
Conclusion
The analysis of the two-fold test as suggested in
the Court of Appeal in Suasana Indah is crucial
in ascertaining whether compensation for the
termination of a contract is an income or a capital

(i) Nature of the agreement in relation to the whole structure of the profit-making
apparatus

(ii) The termination of the affects the whole structure of the profit-making
agreement apparatus
Diagram 1

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 income tax
receipt. A contract for business alliances is a capital the loss of an enduring trading asset.
asset of the company. It governs the whole structure The following test summarizes the legal principles
of the business, stipulating what the company of the compensation receipts in relation to termination
may or may not do. It has to regulate the conduct of contract: (Refer to Diagram 2)
of the business operations. It is different from a
contract of sale or an agency contract, which are
made in the ordinary course of the business. In a
business alliance, when one receives payment for the
termination of an agreement, the sum received is a
capital receipt and not a revenue receipt as it involves

Income Capital

(i) Contract for disposal of trading stock √ _

(ii) Ordinary commercial contracts in the course of √ _
carrying on their trade

(iii) Contract related to the whole structure of the _ √

profit-making apparatus

Diagram 2

Endnotes

1. [2006] 1 AMR 302.

2. 19 TC 390.
3. [2006] 1 AMR 302 at p320.

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income tax
The New Outlook for Investment Holding Company
- post Finance Act 2005
Introduction
Since the incorporation of Investment Holding
Company (IHC) legislation in s 60F of the
Income Tax Act 19671 with effect from year
of assessment2 19933, it has been accepted
that an IHC merely derives investment income
such as dividend, interest and rental. However,
the recent High Court’s decision in Fernrite Sdn
Bhd v Ketua Pengarah Hasil Dalam Negeri4 held
that an IHC, no less than an investment dealing
company, has been treated as carrying on a
business for taxation purposes.5
Business source is given preferential treatment
over investment source as it claims capital
allowances, has current year loss and is able to
set off unutilised business loss brought forward.
With Fernrite’s decision, IHC as computed with the
business source concept will have a lower income
tax payable as compared to the earlier investment
source concept. This tax treatment of IHC with
business source is consistent with all companies
having business sources such as an investment
dealing company, or a manufacturing, trading or
service provider company. It too complies with the tax
neutrality policy in a tax system.
This landmark decision delivered by the eminent
tax judge Faiza Tamby Chik J is short-lived with the
recent Budget 2006 proposal to amend s 60F via
the Finance Act 2005. The new amendments have an
effect on the YA 2006 and subsequent YAs.
This article examines the newly amended
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legislation and concludes that it contains more
contentious arguments instead of clarifing the law to
guide the taxpayer in a self-assessment regime.
The concept of IHC
With effect from YA 2006, IHC is redefined to mean
‘a company whose activities consist mainly in the
holding of investments and not less than 80% of its
gross income (whether exempt or not6 is derived
therefrom)’.
s 60F is further amended to provide that the
income from the holding of investment shall not be
treated as business income under s 4(a) and income
other than income from holding the investment be
treated as s 4(f) income7. This new legislation serves
as an anti-avoidance provision, preventing a company
from camouflaging management services as business
source into IHC and setting off a large portion of
expenses against it. Alternatively, it also denied a
company with several units of properties from having
its rental income assessed as business income,
relying on the Malaysian landmark Privy Council
decision of American Leaf Blending Sdn Bhd v DGIR.8
The Computation
With this amendment, IHC is not allowed to have its
income from the holding of investment as business
income. It thus only has s 4(c) dividend income, s 4(c)
interest income, s 4(d) rental income and s 4(f) other
income. No capital allowance or current year loss is
available to IHC. Any unabsorbed loss carried forward
 Chart 1

income tax
Case Study 1 2 3

Gross income RM RM RM
Management fees 40,000 60,000 40,000
Investment income
(includes exempt income) 160,000 80% 160,000 73% 140,000 78%
200,000 220,000 180,000

IHC ≠ IHC ≠ IHC

from YA 2005 will never be utilised within the IHC.
The new IHC concept continues to suffer the
deduction constraint. It severely restricts the
deduction of overhead expenses incurred in IHC.
s 60F, since the inception into the Act from YA 1993,
has restricted the deduction of permitted expenses
into the following statutory formula:
B may have to use the YA2005 tax computation
A x or 5% x B
4C
Which ever is the lower
Where A is the total of the permitted expenses
incurred for that basis period reduced by any receipt
of a similar kind; “Permitted expenses” means
expenses incurred by an investment holding company
in respect of –
(a) directors’ fees;
(b) wages, salaries and allowances;
(c) management fees;
(d) secretarial, audit and accounting fees,
telephone charges, printing and stationery
cost and postage; and
(e) rent and other expenses incidental to the
maintenance of an office which are not
deductible under s 33(1).
B is the gross income consisting of dividend,
interest and rent chargeable to tax for that basis
period; and
C is the aggregate of the gross income consisting
of dividend (whether exempt or not), interest
and rent, and gains made from the realisation of
investments for that basis period.
C = B + exempt dividends + gains made from the
realisation of investment.
In conclusion, IHC restricts the deduction of permitted
expenses. Where an amount of A is incurred, the
maximum expenses that are deductible are only
25% of A.9 The fraction of permitted expenses are
deducted from the aggregate income to arrive at the
total income of IHC.10
Presumption of being IHC
s 60F(1B) was inserted into the Act, and sets down
the IHC presumption application. Once a company
has been established as an IHC between the tax
authorities and the company, it shall be presumed the
company continues as an IHC for all subsequent YAs
unless the contrary is proven.
The company under the self-assessment regime
to gauge whether it falls into the IHC category in
YA2006. Proper tax planning is discussed below and
is required to ensure it is not IHC.
Management Alert
The newly-amended IHC concept requires that at least
80% of its gross income (including exempt income)
is derived from investment sources. Although exempt
income is not taxed, it is however used to examine
whether a company is an IHC.11 Once this condition
is fulfilled, income other than investment income is
treated as s 4(f) income. (Refer to Chart 1)
Management may exercise its discretion to either
increase management fees or reduce investment
income in YA 2006 and subsequent years to avoid
being labelled as IHC. If a company falls under IHC,
management fees would be treated as s 4(f) income
and no capital allowance and current year business
loss are accorded.
The unresolved issues
With effect from YA 2006, IHC is redefined to mean
‘a company whose activities consist mainly in the
holding of investments and not less than 80%
of its gross income (whether exempt or not)13 is
derived therefrom. The issue of deciding whether
an acquisition of asset is tantamount to ‘holding
of an investment’, ‘dealing with an investment’ or
‘holding of a trading stock’ is never easy. It has to
be examined with its peculiar facts. To be an IHC, it
has to be ‘holding of an investment’ and this sets the
demarcation line.

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income tax
IHC is a company incorporated with the primary
object to invest its share capital or borrow funds in
shares, real properties, unit trust, bonds and deposits
in order to derive dividend, rental or interest income.
The issue of whether an activity constitutes ‘making
an investment’ or ‘carrying on business’ is a question
of law, to be decided by the law lords. Generally,
a business is said to exist if there is repetition of
transactions, short period of holding, profit intention
and carrying out business using a profit-making
structure.
A company incorporated with its objective of
investment dealing, which actively buys or disposes
shares or landed properties for profit is prima facie
carrying on business. In an economic downturn,
such a company may withhold from acquiring its
trading stock and can never be treated as IHC even
if it derives dividend or rental income at the time of
quiescence.
In J.P. Harrison (Waford) Ltd v Griffiths14
Danckwerts J. opined:15
“When you find that there is a trading company
and it acquires the shares in question for the
purpose of making a profit out of those shares,
and it makes profit by getting an enhanced price
on resale or by getting an advantage out of
the temporary possession of the shares in the
form of dividend, to my mind it is dealing in the
shares in the course of its trade and not in any
other capacity whatever.”
Raja Azlan Shah FJ in I Investment Ltd v Comptroller
General of Inland Revenue16 held that a company
carrying on a business does not necessarily always
have high-frequency transactions as the business
cycle can go up and down. The lordship held17:
10
“If a company was formed to carry on
business, and in fact it carried it on, I think,
it cannot matter that its activities had been
an isolated one… A company’s business may
have been quiescent for a number of reasons.
For example, following a business set-back,
consolidating its business waiting for the
ripe opportunity to occur…If the company
still carries it on, then I think the company is
carrying on business.”
Where a company is incorporated with a business
object to provide management services, trading
or carrying on manufacturing, its excess funds
may be utilised to derive investment income. Such
companies cannot be termed as IHC even though
80% of the gross income is from investment income.
The primary objective that it never intended to be an
IHC is conclusive evidence that must be accepted
by the tax authorities. The determination is based on
circumstances and degree, a question of fact to be
decided and argued at the Special Commissioners’
level upon further appeal.
Likewise, in a securitisation exercise, a special
purpose vehicle (SPV) company which is incorporated
to issue bonds to finance the construction project of
its holding company will release its bond proceeds in
trunk batches while the excess funds will be placed in
the money market. Although it derives interest income
from the money market and pays the bond interest to
its investors, it can never be held as IHC.
The SPV is carrying on business. The series
of transactions, continuity and repetition of funds
placement and paying interest over a period of time
to bondholders are strong evidence pointing towards
business. That the interval between the investment
of funds in the money market and the payment of
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interest to bondholders may be short or long is
never a criteria to decide the issue of carrying on a
business.
In American Leaf Blending Co Sdn Bhd v DGIR18
Lord Diplock remarked19 :
‘The carrying on of ‘business’, no doubt,
usually calls for some activity on the part of
whoever carries it on, though, depending on
the nature of the business, the activity may be
intermittent with long intervals of quiescence
in between.’
In conclusion, we have to examine the first object
of the memorandum of association of a company
to determine its true objective, whether it is making
an investment or professing to carry on business.
The acid test is to look at the nature, purpose and
substance of the transaction and, in doing so, one
may have to go beyond technicalities. Lord Justice
Clark acknowledged the difficulty in California Copper
Syndicate v Harris20:
“What is the line which separates the two
classes of cases [investment or business] may
be difficult to define, and each case must be
considered according to its facts; the question
to be determined being - is the sum of gain
that has been made a mere enhancement of
value by realising a security, or is it a gain
made in an operation of business in carrying
out a scheme for profit making!”
Burden of proof
The taxpayer has the onus to show that a company is
not IHC in YA 2006. The tax authorities during the tax
audit may issue an additional assessment to contend
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income tax
otherwise. The assessment shall stand unless and
until the taxpayer satisfies the tax authorities, the
special commissioners or the court that such an
additional assessment is wrong. It is most important
for the taxpayer to keep proper accounts in
connection with the investment or business activities
as required by s 82 of the Act. Lack of documentary
evidence is an important factor which no doubt would
influence the tax authorities in drawing the adverse
inference that the company is an IHC.
Conclusion
It is felt that the Act should not discriminate an
investment holding company from other companies
such as investment dealing, manufacturing, trading or
service companies. It is an accepted legal principle
that the mere setting up of a company points to its
business intention because of its implied continuity21.
That would be a strong presumption that it intends
to do business. In addition, the neutrality of tax
treatment has to be preserved to ensure the tax
system is fair to all taxpayers. The latest amendment
to IHC may result in companies spending unnecessary
cash resources to engineer tax avoidance schemes to
frustrate the operation of s 60F. Legal battles in the
long run merely reduce the competitiveness of a firm
and result in less tax revenue to the country.
11
income tax

Endnotes

1. The Act.
2. YA.
3. Finance Act 497/ 1993.
4. [2005] 3 AMR 743.
5. Ibid at p 775.
6. The previous legislation refers to the IHC as a company whose activities consist wholly in the making of investments and whose
income is derived therefrom. It applies to prior YA 2006 assessments.
7. s 60F(1A) was inserted into the Act. It takes effect from YA 2006 and subsequent YAs.
8. [1979 - 1996] AMTC 903.
9. See Choong Kwai Fatt, Advanced Malaysian Taxation - Principal and Practice, 2005 7th ed at pp 98 - 100.
10. Tax practitioners who require a copy of the format of tax computation, examples of IHC at post and pre finance act 2005, please
email the author at kwaifatt@um.edu.my or kwaifatt@yahoo.com.
11. For examples of exempt income, see Choong Kwai Fatt, Malaysian Taxation - Principles and Practice 2005 11th Ed, pp 7, 181-182
and 193 - 194.
12. For a detailed discussion of business source versus investment source, see n 9 at pp 515 - 517.
13. The previous legislation refers IHC as a company whose activities consists wholly in the making of investments and whose income is
derived therefrom.
14. 40 TC 281.
15. Ibid at pp 285 - 286.
16. [1937 - 1978] AMTC 721.
17. Ibid at p 731.
18. [1979 - 1996] AMTC 903.
19. Ibid at p 908.
20. 5 TC 159 at pp 165 - 166
21. It was first propounded by Lord Diplock in American Leaf Blending v DGIR [1979 - 1966] AMTC 903, accepted and applied in the
subsequent case of I investment v CGIR. [1937 - 1978] AMTC 721.

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Listed Investment Holding
Company
- The new outlook post Finance Act 2005
Introduction
The investment holding company (IHC) is
presumed as deriving investment income since
the inception in the Income Tax Act 1967 (the
Act) in 19931. In 2005, the eminent tax judge
Faiza Tamby Chik J in Fernrite Sdn Bhd v Ketua
Pengarah Hasil Dalam Negeri2 held that the IHC is
instead carrying on business, which opened the
eyes of tax professionals and tax authorities. To
ensure certainty in the self-assessment regime,
the Finance Act 20053 legislates a new Section
60FA to govern listed IHCs. It takes effect from
year of assessment 2006 and in subsequent
years. Prior to YA 2006, the tax treatment of
an IHC is the same, irrespective of whether it is
quoted on Bursa Malaysia or not.
This article examines the provision, explains the
tax treatment and highlights the contentious issues in
this new legislation.
The Law
The definition of a listed IHC is the same as an
unquoted IHC4. IHC is defined to mean ‘a company
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income tax
whose activities consist mainly in the holding of
investments and not less than 80% of its gross
income (whether exempt or not)5 is derived
therefrom.’ A listed IHC is given preferential tax
treatment as its income from holding of investments
can be classified as business source. This is not
available to unquoted IHCs.
Dividend, interest or rental for a year of
assessment (YA) derived by resident-listed IHCs shall
be treated as a single business source, assessable
under s 4(a)6. All expenses relating to that source will
be deducted against the gross income in arriving at
adjusted income.
s 4(a) xx
Gross income
– dividend, interest, rental
Less: expenses (x)
Adjusted income xx
Overhead expenses such as directors’ fees,
wages, salaries and allowances, management fees,
secretarial, audit and accounting fees, telephone
13
 Listed Non- Company
income tax

Chart 1 IHC Listed IHC with s 4(a)

source

1. Availability of business sources Yes No Yes
2. Number of sources 1 3 1
3. Current year business loss No N/A Yes
4. Unabsorbed CA c/f No N/A Yes
5. Utilised unabsorbed CA and Yes N/A Yes
loss b/f from YA 2005
6. Deduction of overhead expenses Fully Restricted Fully

Chart 2

Case Study 1 2 3

RM RM RM
Management fees 40,000 60,000 40,000
Investment income
(includes exempt income) 160,000 80% 160,000 73% 140,000 78%
Gross income 200,000 220,000 180,000

IHC ≠ IHC ≠ IHC

charges, printing and stationery costs, and postage
and rent are fully deductible against the gross
income7.
Although the newly-inserted provisions s 60FA(2)
and (3) in the Act recognise the source as being a
business source, the deduction however is very much
restricted. If there is no gross income, the deduction
of expenses shall be disregarded. Likewise, if the
deduction of expenses exceeds gross income from
the business source, the excess shall be disregarded
too. Unlike the normal treatment of business source,
current year loss and unabsorbed loss accorded in s
43(2) and 44 are denied in listed IHC.
Capital allowances on plant, machinery, and
industrial building are available for deduction against
adjusted income to arrive at statutory income. The
excess capital allowance in a YA however is not
allowed to be carried forward and is thus permanently
lost. Unlike the normal treatment of business source,
unabsorbed capital allowances accorded in para 75
of schedule 3 of the Act are denied in listed IHCs.
A comparison of the listed IHC, non-listed IHC and
a company with a business income is as follows:
(Refer to Chart 1)
the company continues as an IHC for all subsequent
YAs unless the contrary is proven.
The company under the self-assessment regime
may have to use the YA2005 tax computation to
gauge whether it falls under IHC in YA2006. The
proper tax planning discussed below is required to
ensure it is not an IHC.
Management Alert
The newly-amended IHC concept requires at least
80% of its gross income (including exempt income)
be derived from holding of investments8. Although
exempt income is not taxed, it is however used to
examine whether a company is an IHC9. Once this
condition is fulfilled, the company is an IHC .
(Refer to Chart 2)
Management may exercise its discretion to either
increase management fees or reduce investment
income in YA 2006 and subsequent years to avoid
being labelled as IHC. If a company falls under IHC,
current year business loss is not accorded and
unabsorbed capital allowance is permanently lost.
If a listed IHC has no management fees, then it
would be an IHC in YA 2006 and subsequent YAs.

Presumption of being IHC Example 1

s 60FA(4) was inserted into the Act and it sets down Ice Ly Bhd is a listed company on Bursa Malaysia
the application of the IHC presumption test. Once a deriving rental income from 10 shophouses and a
company has been established as an IHC between the shopping complex in Kuala Lumpur. It falls under
tax authorities and the company, it shall be presumed IHC as defined in s 60F(2) as at least 80% of its

14 acca tax publication


income is derived from the holding of investments.
Rental income is a business source. However, no
current year loss available, and unabsorbed capital
allowances cannot be carried forward to YA 2007.
Example 2
Using Example 1, rental income is a s 4(d) source if
Ice Ly Bhd is a non-listed company although it is an
IHC. It is further subject to the restriction of permitted
expenses as stated in s 60F(1) in arriving at the total
income10.
Transitional Provision
s 18 of the Finance Act 2005 is a specific transition
provision allowing listed IHC to continue setting off
unabsorbed capital allowances and unabsorbed
business loss brought forward from YA 2005 in YA
2006 and subsequent years until it is fully utilised.
Current year loss and excess capital allowances
arising in YA 2006 and subsequent years are not
allowed to be carried forward to future YA, and are
thus permanently lost.
income tax
Conclusion
It is an accepted legal principle that the mere setting
up of a company points to its business intention
because of its implied continuity . That would be a
strong presumption that it intends to do business.
This is accepted and recognised in a listed IHC as
seen in s 60FA of the Act. It is felt that the Act should
not deny the availability of current year loss and the
carrying forward of its unutilised capital allowances
and business loss to future YAs. The neutrality of
tax treatment has to be preserved to ensure the
tax system is fair to all taxpayers. This is to prevent
taxpayers channelling their resources to embark on
tax avoidance schemes to frustrate the operation
of s 60FA, which in the long term will not benefit all
parties.

Endnotes

1. Finance Act 1993 (Act 497/1993).

2. [2005] 2 AMR 743.
3. Act 644/2005.
4. s 60F(2) amended by s 16 Act 644/2005.
5. The previous legislation refers to the IHC as a company whose activities consist wholly in the making of investment and whose
income is derived therefrom.
6. s 60FA(2).
7. In the situation of a non-listed IHC, such expenses are commonly known as permitted expenses. It is subject to a deduction based on
a statutory formula, A x B/4C or 5% of B, whichever is the lower. See Choong Kwai Fatt, Advanced Malaysian Taxation - Principal and
Practice, 2005 7th ed at pp 98 - 100.
8. s 60F(2) amended by Act 644/2005.
9. For examples of exempt income, see Choong Kwai Fatt, Malaysian Taxation – Principles and Practice 2005 11th Ed, pp 7, 181
- 182 and 193 - 194.
10. See Choong Kwai Fatt, Advanced Malaysian Taxation - Principal and Practice, 2005 7th ed at pp 98 - 100.
11. It was first propounded by Lord Diplock in American Leaf Blending v DGIR [1979 - 1966] AMTC 903, and accepted and applied in the
subsequent case of I investment v CGIR. [1937 - 1978] AMTC 721.

acca tax publication 15

income tax
Provision or Accrued Expenses?
An analysis of the Court of Appeal’s decision in
Exxon Chemical (M) Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri1
Introduction
The deduction of revenue expenses must satisfy
the prerequisite test of s 33 of the Income
Tax Act 19672, being ‘wholly and exclusively’;
’incurred’; and ‘in the production of income’. It is
a well-settled principle that ‘accrued expense’ is
tax deductible, being an amount incurred, while
‘provision of an expense’ is not tax deductible.
However, the demarcation of these two scopes
is a legal point, often disputed between tax
authorities and taxpayer. On 24 November
2005, the Court of Appeal delivered the
celebrated judgement of Exxon Chemical (M) Sdn
Bhd v Ketua Pengarah Hasil Dalam Negeri, shedding
light on these two issues and also laying down
the rule of interpretation of a tax act.
The facts
The taxpayer set up a retirement and resignation
benefits scheme for its employees who have worked
for at least 11 years. Such qualified employees
have an accrued and vested right to receive a lump
sum payment when they retire or resign or upon
termination from service other than termination for
cause. At the end of each financial year, if such
qualified employees demand these retirement benefits
when leaving employment, the taxpayer is under a
legal obligation to pay.
The taxpayer makes accrual each year and the
amount accrued has been charged as an expense in
its profit and loss accounts. The retirement amount
which has been set aside is not credited to an
external provident fund but is instead administered
entirely by the taxpayer. The issue is whether such an
annual sum set aside is an accrual expense or a mere
provision of an expense.
The tax authorities are of the view that there
exists uncertainty in the realisation of the payments
to its employees; therefore, the amounts set aside
annually are mere estimates, a contingent sum which
16
is mere ‘provision’ and not allowed as tax deduction.
This found favour with the Special Commissioners
and the High Court. Being dissatisfied, the taxpayer
appealed to the Court of Appeal as to the correctness
of the law of the lower court.
The leading judgement of Gopal Sri Ram JCA in
Exxon Chemical (M) Sdn Bhd v Ketua Pengarah
Hasil Dalam Negeri.
The crux of the dispute is whether the monies
set aside each year for this retirement plan is
‘incurred’ (accrued expense) or ‘not incurred’ (a mere
contingency or provision of an expense) in the year
concerned. Gopal Sri Ram JCA delivered the landmark
decision, applying the ratio decidenci of Lord
Brightman in the Hong Kong Privy Council decisions
of CIR v Lo & Lo3 that “an expense incurred” is not
confined to a disbursement, and must at least include
a sum which there is an obligation to pay, that is to
say an accrued liability which is undischarged. In
short, the scope of ‘incurred’ comprises of ‘paid,
payable or becoming payable’ so long as it includes
a sum which the taxpayer is under an obligation
to pay. Once an expense is established to be an
accrued liability, it will be admissible in the year as an
‘expenses incurred’ and tax deducted.
In this case, the Court of Appeal acknowledged
that despite there existing some form of uncertainty
that the amount due to the employee may be forfeited
due to misconduct, it would however not negate the
expense from being ‘incurred’. If a qualified employee
demanded the payment at the end of the year, the
taxpayer cannot resist the claim. An expense to
be incurred is not confined narrowly to mean only
disbursement in that year. The Justice Gopal Sri Ram
JCA held4:
“The fact that the appellant’s employees did
not actually receive the money in a given year
does not matter. For, had any of those who
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were eligible to receive the benefit claimed
it, then it would have been impossible for the
appellant to have lawfully resisted the claim.
The fact that the employees thought it fit
not to make a claim but to defer it does not
make the obligation to pay an expense that is
incurred by the appellant non-existence.”
The Court of Appeal reversed the High Court decision
and held that the sum was incurred in the respective
years and thus tax deductible.
The rule of interpretation of taxing statute
The Court of Appeal had an opportunity to re-establish
the legal principles on interpretation of the taxing
statue. Gopal Sri Ram JCA succinctly laid down the
following propositions:
(1) The maxim in revenue law: no clear provision, no
tax.
(2) If there is any doubt then it must be resolved in
the taxpayer’s favour.
(3) Those parts in a revenue statue that favour the
taxpayer must be read liberally.
(4) A provision in a taxing statue must be read strictly
against revenue and not in its favour.
It is interesting to note that the tax authorities urged
the Court of Appeal to strictly interpret the meaning of
‘incurred’ by applying the strict interpretation principle
as propounded by Rowlatt J in Cape Brandy Syndicate
v CIR5.
“…One has to look merely at what is clearly
said. There is no room for any intendment.
There is no equity about a tax. There is no
presumption so to a tax. Nothing is to be read
in, nothing is to be implied. One can only look
fairly at the language used.”
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income tax
This however was not accepted by the Court of
Appeal. The lordship held6:
“Learned counsel for revenue submitted… that
s 33(1), being a taxing statue, should be given
a strict construction and hence the words
“expenses wholly and exclusively incurred”
should receive a narrow interpretation. The oft
quoted judgement of Rowlatt J in Cape Brandy
Syndicate v Inland Revenue Commissioners
[1921] 1 KB 64 was prayed in aid of this
submission. With respect, I am unable to
agree with these arguments…
…the principles that a provision in a taxing
statue must be read strictly is one that is to be
applied against revenue and not in its favour.
This maxim in revenue law is this: no clear
provision; no tax. If there is any doubt then
it must be resolved in the taxpayer’s favour.
See, National Land Finance Co-operation
Society Ltd v Director General of Inland
Revenue [1979-1996] AMTC 1565. The
corollary of that proposition is that those parts
in a revenue statute that favour the taxpayer
must be read liberally. What learned counsel
for revenue is asking us to do is to go the
other way. That would be standing the true
principle on its head.”
The reliance on overseas tax precedents
Malaysia being a developing country has not
many local precedent tax cases to guide the legal
judiciaries, taxpayer and tax authorities. It is thus
important to seek guidance from overseas tax
precedents to borrow the wisdom of renowned judges
to ensure justice is done. Overseas cases especially
Privy Council, House of Lords, and Supreme Court
decisions must be given great weight. Gopal Sri Ram
referred to the judgement of Chang Min Tat FJ in
17
income tax

Director General of Inland Revenue v Kulim Rubber
Plantations Ltd [1979-1996] AMTC 10527:
“The court has laid down in Khalid Panjang &
Ors v PP (No 2) [1964] MLJ 108 the principle
that a Privy Council decision on appeal from
another country is binding on it and the
other courts of this country if the appeal is
on a provision of law in pari material with a
provision of the local law. The decision in
Lasala v Lasala [1979] 2 All ER 1146, that
the Privy Council would consider itself bound
by a decision of the House of Lords. Insofar
as the decisions of other courts in these
and other countries are concerned, we have
always treated these judgements as of only
persuasive authority, but we have never lightly
treated them or refused to follow them, unless
we can successfully distinguish them or hold
them as per incuriam. Other than for these
reasons, we should as a matter of judicial
comity and for the orderly development of
law, pay due and proper attention to them.
(emphasis added)”
In conclusion, these decisions are highly persuasive
and will serve as a guide to all interested parties on
tax matters.
Conclusion
The decision of Exxon Chemical (M) Sdn Bhd v Ketua
Pengarah Hasil Dalam Negeri is a welcome note. It
helps to reduce the cost of doing business in each
year and increases the competitiveness of a company
in the global market. It is hoped that taxpayers
seeking justice are not deterred even if they are
defeated at both Special Commissioners and High
Court level. One must keep pursuing justice to the
doors of the Court of Appeal to seek a final verdict:
victory or defeat. This is what we call courage and
professionalism.

Endnotes

1. [2005] 6 AMR 773.

2. The Act.
3. [1984] 1 WLR 986
4. Ibid at p 779.
5. [1912] 1 KB 64 at p 71.
6. Ibid at p 778.
7. Ibid at p 779.

18 acca tax publication

The Criteria For Determination Of Income Tax
Or Real Property Gains Tax In The Case Of Land
Appropriation From Investment To Trading Asset
Introduction properties if such gains are said to be Malaysian-
The disposal of Malaysian landed properties,
being either land, residential units, commercial
buildings or shop houses, may be subject to
either Income Tax or Real Property Gains Tax
(RPGT). In the Malaysian tax regime, there
can never be double taxation on the same
transaction1. The demarcation of these two
taxes is not always an easy one. It is determined
based on the merits of each case and in the
event of a dispute, the final decision rests on the
judiciary where their Lordships are guided by
the precedent tax cases2.
Income tax shall take precedence over RPGT on
the gains or profits arising from the disposal of landed
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derived income from a trade transaction or an act
tantamount to an adventure in the nature of trade,
both of which are defined as business income under
s 2 of the Income Tax Act 1967 (the Act). On the
other hand, gains from the disposal of landed
properties which have been held as long-term
investment are treated as capital receipts under
the Act and are tax-free. In such an instance, Real
Property Gains Tax (RPGT) will be imposed . The test
to ascertain whether landed properties are held as
trading asset under business source or as investment
asset under investment source is by applying the
‘badges of trade’ criterion which has been evolved
and developed by the various tax courts’ decisions4.
19
RPGT

In cases where a landed property has changed
its status from trading asset under business source
to investment asset under investment source or vice
versa, an apportionment of the profit between income
tax and RPGT has to be carried out which is never an
easy task to do. The Court of Appeal acknowledged
such difficulty in Mount Pleasure Corporation Sdn Bhd
v Director General of Inland Revenue5.
This article aims to analyse the Court Of
Appeal’s decision and derive from the judicial
wisdom, guidelines for taxpayers in future or similar
circumstances.
The distinction between Income Tax and RPGT
Where a landed property is disposed, RPGT is the
preferred choice for the taxpayer as the tax rate is
much lower than that computed under income tax.
However, in the case of a company, such capital
gains derived from the disposal are not available to
be paid out as dividends to shareholders. On the
other hand, if such gains are subject to income tax,
resident individual shareholders having a marginal
income tax rate below 28% will, under the imputation
tax credit system, be able to obtain a tax refund from
the tax credit on taxable dividend income received
from the company6.
The burden of proof on whether a landed property
is to be regarded as a long-term investment or as
a trading asset lies on the taxpayer7. In ABC v The
Comptroller of Income Tax8, it was held by the High
Court that the taxpayer had the onus not only to
show that the assessment was wrong but also what
must be done to put it right. Documentation such as
sale and purchase agreements, financial position of
the company, board meetings’ minutes, accounting
classifications and percentage of loan finance is
required to substantiate a long-term investment
motive.
The table below gives a comparison between
income tax and real property gains tax:

YA 2006 Income Tax RPGT

Individual Company Individual Company

Rate Scaled rate Flat rate of Disposal

from 20% or
0% - 28% 28%
within
2 years 30% 30%
3 years 20% 20%
4 years 15% 15%
5 years 5% 5%
Exceed
5 years 0% 5%

Availability of s 108 account N/A Yes N/A N/A

(to frank dividend)

Basis year of assessment Current Current Current Current

calendar year financial year calendar year calendar year

Utilization of unabsorbed Yes Yes No No

capital allowances or
unabsorbed business loss

Utilization of RPGT loss relief No No Yes Yes

b/f

20 acca tax publication

 RPGT
Diagram 1
Asset appropriation from investment asset to trading asset of the business

Market value of appropriation B

less: Original cost (x)

Chargeable gain for RPGT xx (capital appreciation)

Gross income from the sale of land xx

Cost of trading stock

less: Market value of appropriation (B)
Adjusted income for income tax xx

The case of appropriation of landed property
from investment asset to trading stock
When a property developer sells a landed property
it is holding as a trading asset, the sale which is
considered to be carried out in the ordinary course
of business is subject to income tax. However, in
certain circumstances, the developer may also hold
land as a long-term investment. In such a case, the
disposal of such land is considered capital gains
which are not subject to income tax but subject to
Real Property Gains Tax. The question of whether
the profit realized from the sale of the land is to be
considered as an investment or business profit is to
be determined according to the merits of each case.
To qualify as an investment profit, the intention of
acquiring the property for the purpose of investment
must be shown to have existed at the time of
purchase of the land9. Documents and circumstantial
evidence ought to be provided to affirm a long-term
investment motive. Such evidence may include
receipts of rental income from the land, minutes
of board meetings, relevant material witnesses,
availability of funds at the time of acquisition of
the land to carry out planned projects such as the
building of a cinema, golf course, etc.
When land is originally acquired as an investment
asset, the question of appropriation will arise if
the property developer later wishes to develop it
by applying land conversion and subdividing the
property into smaller units for sale at a profit. In such
a case, the land is said to have been appropriated
from investment asset to trading asset. The change
of intention from investment to trading involves a
shift of asset from one category to another. This
change must be clearly reflected in the company’s
documentations and accounts. A valuation of the
land from a reputable real estate firm is a must to
ascertain the market value of the land at the time
of the appropriation. The regime of taxation is then
moved from RPGT to income tax.
The market value of the land at the time of
appropriation will be regarded as the cost of the
business. The intention of appropriation must be
supported by accounting classification of the land
from non current asset (fixed asset) to current asset.
Precision is required. The market value is a cost
to the business; it is tax deductible from the gross
income and from the sale proceeds of the land. In
this regard, Lee Hun Hoe CJ (Borneo) held in Federal
Court’s decision, Director General of Inland Revenue
v LCW10:
“When respondent (taxpayer) converted his
capital assets into stock in trade and started
dealing in them the taxable profit on the sales
must be determined by deducting from the
sale proceeds the market value of the assets
at the date of conversion into stock in trade
since that is the cost of his business and not
the original cost to him.”
The capital appreciation between the original cost
and the market value at the time of appropriation has
nothing to do with the property developer’s business.
Such sum above its original cost is a chargeable
gain assessable under the RPGT Act 1976. (Refer to
Diagram 1)

acca tax publication 21

The relationship between the market value and
cost of land to the business
Business income is assessable under s 4(a) of the
Act. When a property developer transfers the land
from investment asset and brings it to its business,
the cost of land to the business is the market value
of such land at the time of appropriation. s 35(3)(a)
of the Act sets the basis for the valuation of trading
stock in relation to a business. It provides:
The value of any particular item of the stock at the
end of the relevant period shall be taken to be:
(i) an amount equal to its market value at that time;
or
(ii) if the relevant person so elects and that item
is physically tangible, an amount equal to the
total cost to him of acquiring that item (or any
materials used in its manufacture, preparation or
construction) and bringing it to its condition and
location at that time:
Provided that in the case of any item of the stock
consisting of immovable properties, stock, shares,
or marketable securities, the value thereof at the end
of the relevant period shall be taken to be an amount
equal to its cost price to that relevant person or its
market value at that time, whichever is the lower.
The proviso to s 35(3)(a) refers to “its cost price
to that relevant person”. As s 35 relates to business
source, “relevant person” must therefore refer to
a person in relation to his business. The cost price
referred to by the proviso would mean the cost to the
business of that person, that is to say, the market
value of the land at the time of appropriation.
Investment source and business source have
to be dealt in the Act separately. A cost to the
investment asset is not the same as the cost to the
trading stock of the business. s 35(3)(a)(ii) uses
the word ‘cost’ for stock valuation. One should
22
not limit the meaning of cost to be the amount
actually incurred or paid. The true value of the cost
to the business is the market value at the time of
appropriation and not the original cost.
The cost price to the relevant person for the
business can include the market value at the time
of appropriation when the asset has changed its
status from investment asset to trading asset. The
comprehension of this cost and market value principle
requires some accounting background as s 35(3)(a) is
a codification from the accepted accounting standard,
Financial Reporting Standard 102, which is applicable
in all business. Suffian, LP, in Director General of
Inland Revenue v LCW acknowledged the difficulty
of interpretation of s 35(3)(a) as the Lord President
found revenue law ‘a very technical branch of law.’
Suffian, LP, held11:
“… the provisions of the Income Tax Act
1967... are not all that clear, which is not a bit
surprising considering that we are dealing with
a very technical branch of the law...”
Burden of proof is on the taxpayer
The appropriation of landed property from investment
to trading stock will result in substantial tax savings
as the RPGT rate on the chargeable gain (see diagram
1) will be lower as compared to the income tax rate
of 28%. As such, companies would seek to qualify for
the lower RPGT rate.
The tax authorities would, however, require full
and satisfactory evidence before it would allow
appropriation of landed property from investment to
trading stock which would qualify the developer for
the lower RPGT tax. The intention as to whether an
acquisition of land is for investment or trading purpose
is determined by proven facts12. Documents and
accounting records must be provided to show that:
(1) The intention of the land acquisition is for long-
term investment,
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“… the provisions of the Income Tax Act 1967... are not all that clear, which
is not a bit surprising considering that we are dealing with a very technical
branch of the law...”
(2) The date of appropriation from investment
asset to the trading stock is clearly reflected by
documents such as minutes of board meetings,
valuation of the market value of the land at the
time of appropriation, accounting classification,
furnishing of material witnesses, etc.
Non-compliance to either one of the above is fatal.
It is a commonplaced law that the onus of proof
to establish (1) and (2) is on the taxpayer. It has
to demonstrate the balance of probabilities in
compliance to (1) and (2).
Mount Pleasure Corporation Sdn Bhd v The
Director General of Inland Revenue
In the above case, Mount Pleasure Corporation Sdn
Bhd acquired five plots of land in Penang, Malaysia,
for RM570,000 in 1971. On 12 April 1972, the
company submitted a layout plan to the local council
to construct a hotel complex and a theater club
which included the operation of a casino. However,
its proposal to operate a casino on the property
was rejected by the local council. Six years later in
1979, the company resubmitted a new layout plan
to develop a housing and commercial project on the
land – minus the casino. This was approved in March
1979 by the local council. The company, wanting to
obtain Real Property Gains Tax savings and citing the
case of Director General of Inland Revenue v LCW,
contended that:
(i) The land was acquired for investment with the
initial intention to develop the property as a hotel
complex and a theater club including a casino. It
was being retained as a fixed asset;
(ii) The Company had to change its initial intention
when its application to operate a casino at Mount
Pleasure was rejected;
(iii) The land therefore should be valued at the market
value in 1979 when it was appropriated to trading
stock.
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RPGT
The tax authorities argued otherwise. It contended
that:
(i) The land was acquired in 1971 with the intention
to develop to sell. Thus the question of asset
appropriation cannot arise because the land was a
trading stock in 1971.
(ii) The cost to the business is the original cost as at
the date of acquisition of the land.
The Special Commissioners headed by Augustine
Paul13 rejected the initial intention of the company
of having the casino as a valid investment intention.
There was no license granted to the company to
operate a casino at the time of acquisition of the
land in 1971. In Malaysia, the operation of a casino
required a special license that was wholly beyond the
control of the taxpayer.
The casino project was something severely
circumscribed and its implementation indefinite at that
point in time. The Commissioners held that such an
intention of obtaining a casino license cannot amount
to an intention acceptable in law as an investment
intention14.
The Company failed in the onus of proof to
establish its investment intention as:
(a) No witness was called to give evidence to
establish that the property was bought as an
investment.
(b) No evidence was adduced to demonstrate that
the proposed development of the hotel complex,
theater club and casino was for the company’s
own use or personal enjoyment.
(c) The Memorandum of Association of the company
did not authorize the company to purchase land
for purposes of investment except with surplus
funds which it did not have.
The Special Commissioners found the following facts
which were fatal to the company: (Refer to Diagram 2)
23
 Badges of Trade The proved facts
RPGT

1.Company’s object The Company’s primary role as a property developer

raises prima facie inference that it was carrying on
the business of land dealings. The current disposal
of the property was not much different from its
previous four dealings.

2. Frequency of disposal The company had in all five dealings in properties.
Habitual dealing in land is tantamount to trading, an
act carried out in the ordinary course of business.

3. Organization of special skills The company was highly organized in its operations.
It had staff and methods to sell properties and
owned skills in building works in 1972.

4. Income generating The holding of land for 10 years before development
yielded no income and the company adduced
no evidence that it was purchased for personal
enjoyment or investment15.

Diagram 2

The Special Commissioners applying the badges liability to tax18.”

of trade criteria above held that the company was
carrying on a business of land dealing either as a land
developer or as a real estate merchant.
The company also failed to comply with the
‘precision requirement’ on asset appropriation. It
claimed that the property was transferred as stock-
in-trade in 1978. However, the accounts continued
treating the property as fixed assets up to 1982.
No explanation was offered by the company for this
discrepancy. The evidence adduced by the company
fell short of the required precision.
It is an established truism that land cannot be
both trading stock and investment asset at the same
time. Land may change from investment asset to
trading stock or vice versa because the intention
may be changed. The appropriation of land from one
category to another required precision, supported by
accounting evidence. This was enshrined in Simmons
v IRC16 where Lord Wilbeforce held17:
“Intentions may be changed. What was first
an investment may be put into the trading
stock, and I suppose, vice versa. If findings
of this kind are to be made precision is
required, since a shift of an asset from one
category to another will involve changes in
the company’s accounts, and possibly, a
The issue of asset appropriation only arises if the
land has been acquired with the original intention
of permanent investment. Thereafter the company
may change its intention from investment to trading.
The shift of land from one category to another
requires the determination of market value at the
time of transfer. However in this case, there was no
appropriation of the land as it was purchased as a
trading asset in 1971.
The Special Commissioners concluded that the
cost of the land in 1971 was the cost to the business
and the case of Director General of Inland Revenue
v LCW had no relevant application as there was no
asset appropriation in Mount Pleasure’s case. The
High Court (Nik Hashim J) affirmed the decision. Being
dissatisfied, the taxpayer appealed to the Court of
Appeal.
The Court of Appeal’s decision
The panel of judges comprised Mokhtar Sidin,
Abdul Aziz b Mohamad JCA and Raus Sharif J. Abdul
Aziz b Mohamad JCA expressed his difficulty in
comprehending the correlation of the dispute of stock
value in 1971 and 1978 in relation to the additional
assessment in Year of Assessment (YA) 1984. His
Lordship too concurred with Suffian LP in LCW’s

24 acca tax publication


decision that revenue law was a very technical branch
of the Law.
Abdul Aziz JCA commented19:
“I therefore have not been able to understand
why the formulation of the question, as far as it
reflects the appellant’s contention, suggests that
the at end value of the property should be its
market value when the property was appropriated
to stock in trade in 1978, since 1978 can have
nothing to do with the basis period for the YA
1984.”
In this case, the land was developed in 1979 but the
disposal of the land and its buildings took place in
1984. Thus, income tax liability arose only in 1984.
The crux of the issue was the ‘cost’ of the land. If the
land was an investment asset acquired in 1971, then
the issue of appropriation will arise in 1978 when it
was shifted to business. Market value of the land in
1978 is then the ‘cost’ to the business. This ‘cost’ will
be brought forward to YA 1984, deductible from the
sale proceeds of land and buildings in YA 1984.
On the other hand, if the land asset was a trading
stock in 1971, then the issue of asset appropriation
cannot arise as there is no shift of asset from one
category to another. Even though the company
developed the land in 1979, the cost of the land
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RPGT
remained at the 1971 original cost. Such cost will be
brought forward to YA 1984, deductible from the sale
proceeds of land in YA 1984.
It should be noted that the proviso in s 35(3)
permits the valuation of closing stock for immovable
property to be either
(1) Cost or
(2) Market value
Whichever is the lower.
The crux of the dispute between the taxpayer and
tax authorities is as to the meaning of ‘cost’ of land
brought in to the business. In accounting terminology,
the dispute is on the opening stock and not on closing
stock value. The market value of the land in YA 1984
bears no relevance in this case as it refers to closing
stock.
In relation to YA 1984 on the value of opening
stock, the ‘cost’ stipulated in s 35(3) will be either
(a) Original cost in 1971 (if there is no shift of asset),
or
(b) Market value in 1978 (a shift of asset from
investment to business)
If investment intention can be established in 1971, it
would result in asset appropriation from investment
category to business category in 1978. The gains
from the capital appreciation of investment are capital
gains and market value in 1978 will be the trading
25
RPGT
stock cost to the business.
In the income tax regime of taxation, capital gains
from investment assets are not within the scope of
taxation, i.e. they are tax free. Only the profits from
the disposal of trading assets are taxed. Whether
an asset was originally acquired for investment or
trading has tremendous impact on the tax paid by the
company in YA 1984. If the taxpayer was able to base
the cost of the trading stock on the market value in
1978, a higher amount will be deducted from the
sale proceeds of land, and the tax in YA 1984 will be
substantially reduced.
Addul Aziz JCA expressed his difficulty in
understanding the significance of investment asset
and trading asset on the amount of tax to be paid by
the taxpayer. His Lordship said20:
“I have not been able to understand how the
value is affected according to whether the
stock was originally acquired for investment
or trading. Even if, as contended by the
appellants, the holdings were acquired in 1971
for investment and in 1979 were appropriated
to stock, I am not able to see that that would
make their stand…correct…”
Although Abdul Aziz JCA had difficulty in
understanding the income tax law, which is a very
technical branch of law, he nonetheless accepted
the findings of the Special Commissioners and held
that they were right in their decision and affirmed
that the High Court was right in dismissing the
taxpayer’s appeal.
26
Raus Sharif J sitting at the Court of Appeal
acknowledged the Special Commissioners’ jurisdiction
as the final judges with regard to the question of facts.
Such facts cannot be overruled or supplemented by
the courts. The determination by badges of trade
has to be based on proven facts. The taxpayer failed
to adduce evidence that the land was acquired for
investment as no witness was called to give evidence.
Neither did it have a license to operate a casino. Its
intention of obtaining the casino license cannot amount
to an intention in law.
Since the onus is on the taxpayer to establish
evidence and it failed to do so, the assessment must
stand. Raus Sharif J accepted in totality the findings
of the Special Commissioners that the taxpayer was
carrying on a business of land dealing either as a land
developer or real estate merchant. Mokhtar Sidin JCA
concurred with the decision of Raus Sharif J.
Conclusion
Mount Pleasure’s case reaffirms the importance of the
law of evidence in the winning of an appeal. The onus
of proof rests on the taxpayer and the assessment
of proof is on the balance of probability. Both the
High Court and Court of Appeal emphasized that the
taxpayer failed to discharge its burden by calling no
witnesses or adducing any supporting documentary
evidence. The taxpayer has to maintain complete and
adequate accounting records on the transaction to
sustain its intention. This is all the more important
when it encounters tax audit in a self assessment
regime. The tax planning opportunity given in LCW’s
case only bears fruit if the investment intention was
established and the precision test complied with.
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 RPGT
Endnotes

1. See s 2 of the RPGT Act 1976 and MR Properties Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri [2003 - 2005] AMTC 298.
2. A complete collection of the Malaysian tax precedent cases can be found in Choong Kwai Fatt, All Malaysia Tax Cases, (1937
- 2005) 4 volumes, Sweet and Maxwell.
3. Section 2 of the Real Properties Gains Tax Act 1976 sets out the scope of charge, defining gains as gains other than gain or profit
chargeable with or exempted from income tax under the income tax law.
4. See Choong Kwai Fatt, Malaysian Taxation - Principles and Practice, 2005, 11th ed, Infoworld, pp 223 - 233.
5. [2006] 1 AMR 563.
6. For an understanding of tax imputation system, see Choong Kwai Fatt, Malaysian Taxation - Principles and Practice, 2005 11th Ed,
Infoworld, pp 493 - 506.
7. Para 13, Sch 5 of the Act.
8. [1937 - 1978] AMTC 102.
9. This rule of law was developed by Lord Wilberforce in Simmons v Inland Revenue of Commissioners [1980] 2 ALL ER 798.
10. [1937 - 1978] AMTC 667 at p 681.
11. Ibid at p 682.
12. See NYF Realty Sdn Bhd v Comptroller of Inland Revenue [1937 - 1978] AMTC 523.
13. A leading expert on evidence. Now he sits in the Federal Court.
14. See Lower Perak Co-operatives Housing Society v Director General of Inland Revenue [1979 - 1996] AMTC 1638, Kirkham v William
[1991] STC 342.
15. Precedent cases do hold that a purchase of land which does not produce income or personal enjoyment and is later sold at a profit
is considered as trading. See CIR v Fraser (24 TC 498), Lowe v JW Ashmore (46 TC 597).
16. [1980] 2 All ER 798.
17. Ibid at 801.
18. Simmons’ case was followed by the Privy Council’s in Lim Foo Yong Sdn Bhd v Comptroller General of Inland Revenue [1979 - 1996]
AMTC 1264 and recently by the Supreme Court’s in Lower Perak Co-operative Housing Society v DGIR [1979 -1996] AMTC 1638.
19. [2006] 1 AMR 563 at p 569.
20. Ibid at p571.

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RPGT
The Tax Authorities’ power to revoke an
assessment made under Real Property
Gains Tax and switch to Income Tax
Introduction
Where there is a disposal of landed properties
in Malaysia, the gains or profits may be taxed
under either Income Tax or Real Property Gains
Tax (RPGT). Income tax will take precedence
over RPGT as RPGT is only applied if a
transaction is non-taxable by or is exempted
from income tax1. There is no double taxation
on the same transaction under the Malaysian
tax regime.
Generally, the disposal of real property which
has been held as a long-term investment or asset
inherited from the family will be subject to RPGT. On
the other hand, real property acquired by a taxpayer
in the capacity of a property developer or land trader
or as a person who is deemed to have embarked in
land transactions as an adventure in the nature of
trade will be assessed as income tax2. The question
on whether the disposal of real property is subject
to income tax or RPGT has to be considered on
the merits of each case, based on proven facts by
applying the badges of trade criteria, a test evolved
through the tax court decisions3.
When a gain on disposal of real property is to
be assessed under RPGT, the tax administration
procedures require a taxpayer to file the Form CKHT
1 within 30 days to the IRB assessment branch
upon disposal, together with the sale and purchase
agreement and relevant documents or receipts,
requesting the tax authorities to issue an assessment
on RPGT. Unlike income tax, the RPGT regime is not
placed under self assessment.
Upon receiving the Form CKHT 1, the tax
authorities will examine the circumstances of the case
and, if necessary, ask for additional information or
particulars to decide whether the land in question had
28
been held by the taxpayer as a long-term investment.
A notice of RPGT assessment will be issued once
the tax authorities are satisfied that the transaction
comes under RPGT. In such a case, RPGT has to be
paid within 30 days from such notice and a certificate
of clearance will be issued upon the payment of
RPGT. The taxpayer is said to have discharged his
RPGT obligation under the RPGT Act 1976 and the
assessment cycle comes to an end.
The question that is being examined here is
whether the tax authorities are empowered to
withdraw their assessment in subsequent years
and reassess the taxpayer under income tax, thus
substituting the RPGT assessment with income tax
assessment. The High Court in MR Properties Sdn
Bhd v Ketua Pengarah Hasil Dalam Negeri4 had an
opportunity to look into this issue and answered in
the affirmative. This article examines the legal points
and provides readers with an insight into the court’s
decision.
The law
Currently, there are no provisions in the RPGT Act
1976 or the Income Tax Act 1967 to govern the
switch from RPGT to income tax or vice versa. Both
the Acts only permit the tax authorities to issue notice
of additional assessments within the same Act if the
taxes are found to be inadequate5. One has to resort
to the established legal principles and the rule of
interpretation for guidance on this issue.
It is a truism that interpretation has generally to
be construed in favour of the taxpayer when there
is ambiguity as seen in the recent Court of Appeal’s
decision in Exxon Chemical (Malaysia) Sdn Bhd v
Ketua Pengarah Hasil Dalam Negeri6. Furthermore
revenue law is a very technical branch of law as has
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been openly acknowledged in the recent Court of
Appeal’s decision in Mount Pleasure Corporation Sdn
Bhd v Ketua Pengarah Hasil Dalam Negeri7 and in the
Federal Court’s decision in Director General of Inland
Revenue v LCW8.
In the case of MR Properties, the contention
is that the tax authorities had every opportunity to
examine the circumstances of the land sale and to
call for additional particulars or witnesses to assist
them in determining whether the gains from the
sale should be subject to income tax or RPGT. The
taxpayer is given an understanding that it is a RPGT
case upon receiving the RPGT assessment and is led
to the conclusion that the decision is final upon paying
the tax and receiving the certificate of clearance. The
matter is concluded as the taxpayer has discharged
its tax obligation as required under RPGT Act 1976.
Can the tax authorities retract the RPGT assessment
on the grounds that it has made a mistake? The
taxpayer may argue that the tax authorities are barred
from making the switch as the tax had already been
paid and the matter concluded.
The tax authorities however may contend that the
principle of estoppel does not apply in revenue law
cases. It has been seen in Government of Malaysia v
Sarawak Properties Sdn Bhd9 that an estoppel cannot
be brought against the IRB in the case of a tax officer
entering into an agreement purporting to conclude tax
and related questions for future years or conclude any
expression of option or adopt any course of action.
Any agreement made would be ultra vires to the rights
of the tax authorities and the Government.
The collection of tax is to be used to finance the
administration of the government and development
projects for the people. The interest of the public
is to be taken into account and safeguarded. If the
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RPGT
transaction should have been taxed under income
tax, then the earlier imposition of RGPT has to be
withdrawn in the interest of the public. The court
has to strike a balance between the interests of the
taxpayer and the public as pointed out by Gunn Chit
Tuan CJ in the Supreme Court’s decision in National
Land Finance Co-operative v Director General of
Inland Revenue where His Lordship held10:
“We realize that revenue from taxation is
essential to enable government to administer
the country and the courts should help in the
collection of taxes whilst remaining fair to
taxpayers.”
The question is whether it is fair to expose the
taxpayer to two regimes of taxation even though
eventually only one tax is imposed on the gains on
disposal of land.
The Special Commissioners headed by Augustine
Paul11 and Raus Sharif J in the High Court adopted
a commendable and pragmatic approach. They
allowed the tax authorities to switch the assessment
from RPGT to income tax to safeguard the public
interest and at the same time permitted the taxpayer
to adduce evidence to justify a long-term investment
motive so that the RPGT assessment may remained.
The interest of all parties was served to ensure that
justice was done.
MR Properties Sdn Bhd v Ketua Pengarah Hasil
Dalam Negeri
The taxpayer was carrying on the business of a
property developer in Kuala Lumpur with a paid-up
capital of RM2. On 10 April 1984, the company
acquired 589 acres of land for RM19 million. It
29
RPGT
subsequently sold 368 acres of the land on 10
August 1990 for a sum of RM29 million.
The gain from the sale is as follows: assessment and substitute with income tax upon
RM million
Sale proceeds of land 29
Less: Cost of land (14)
15
The tax liability for RPGT @ 5% 1
The tax liability for income tax @ 28% 4
It can be observed that the difference between
income tax and RPGT on the sale of the land is a
considerable sum of RM3 million.
The taxpayer contended that as the land was a
long-term investment it filed in Form CKHT 1 for the
gain to be assessed as RPGT. It pointed out that the
tax authorities had accepted the submission and
levied a RPGT of RM1 million on 2 May 1992. The
taxpayer paid the tax and obtained the certificate
of clearance in accordance with the RPGT Act
1976. The tax administration cycle was completed.
However, on 9 August 1993 the tax authorities
cancelled the RPGT assessment and substituted an
income tax assessment of RM4.2 million for the year
of assessment 1991.
The legal issue was whether the tax authorities
were empowered to switch an assessment from RPGT
to income tax after the taxpayer had already been
assessed to RPGT and paid the tax that was levied.
The Special Commissioners’ and High Court’s
decisions
The taxpayer argued that there was no statutory
power given to the tax authorities to discharge
the RPGT assessment and switch to income tax
assessment. It contended that the RPGT assessment
30
should be considered final once the tax had been
imposed and duly paid. However, the tax authorities
said they had the power to review the RPGT
findings that the gain from the sale of the land was of
income in nature. It pointed out that the principle of
estoppel did not apply to revenue law.
The Special Commissioners were asked to decide
whether a RPGT assessment which had already been
concluded and tax paid could be discharged and
income tax imposed instead. The Commissioners’
answer was in the affirmative following the precedent
set in the Court of Appeal’s decision in Bye v Coren12
where it was held that the tax authorities were not
precluded from raising an assessment under income
tax after the finalization of capital gains tax. In
Malaysia, RPGT is a limited version of capital gains
tax. The Commissioners held that accordingly the tax
authorities have the power to switch from RPGT to
income tax.
Raus Sharif J in the High Court accepted this
rule of law in its totality. The Special Commissioners’
decision was affirmed. His Lordship felt that the tax
authorities were empowered to review, revise and
discharge an assessment on the grounds that no
RPGT was payable. Since the sale of land was income
in nature, the tax authorities were empowered to
raise the assessment under income tax. His Lordship
opined13:
“The respondent (tax authorities) is not
precluded from raising the assessment
under income tax after reviewing the earlier
assessment made under the RPGT. To me,
the respondent has the power to review or
revise an assessment which include vacating
an assessment on the ground that no RPGT
is payable on the gains...Thus, I am unable to
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accept the contention of the appellant that the
assessment to income tax by the respondent
is null and void.”
MR Properties’ post script
The court decision in MR properties is a good
one. It is a fundamental principle in taxation that
every taxpayer should pay his fair portion of tax in
accordance with the law. The existing legislations
allow a taxpayer a time frame of six years to seek
amendments to tax levied on the ground of errors
or mistakes. By the same token the tax authorities
should also in the interest of the public be allowed to
amend their tax levy if they were to find that they have
made a mistake.
The taxpayer on the other hand has not been
denied justice as he is given the opportunity to
adduce evidence to prove that the land was an
investment asset and which should thus be assessed
to RPGT. The burden of proof that an asset was
a long-term investment lies on the taxpayer.
Documentations such as board meetings’ minutes
and percentage of loan finance are required to
substantiate a long-term investment. In MR Properties’
case, it is felt that there was no breach of natural
justice.
Income tax or RPGT
The Special Commissioners headed by Augustine
Paul found that the land sold by MR Properties was a
trading stock of the company and not an investment
asset as claimed. In arriving at this conclusion, the
Commissioners applied the badges of trade criteria.
They found the following badges or marks of trade
with regard to the purchase and sale of the land in
question:
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RPGT
(i) The land was earlier bought by the company with
99% financing from a loan. The nominal value of
RM2 capital has an adverse inference that the
company has the intention to hold the land as
long-term investment.
(ii) The intention at the time of purchase was to
build houses in line with the company’s business
as a property developer. The company failed to
show that the land was a capital asset and not a
trading stock.
(iii) The company had applied for conversion of the
land and had done substantial preliminary work to
carry out the housing project.
(iv) The land had been treated in the company’s
accounting record as property development.
(v) The company had sold land previously and
from the number of such transactions could be
regarded or seen as a land dealer.
(vi) The land was disposed like in the normal trade
or business of a property developer with high
organizational skills.
Conclusion
There is no rule of law preventing the tax authorities
from switching from RPGT to income tax. At the same
time the taxpayer is not prevented from adducing
evidence to prove his case for the gain from the sale
of the land to be assessed to RPGT. It is felt that so
long as fair play is given to both parties, justice will
prevail.
31
RPGT

“We realize that revenue from taxation is essential to enable

government to administer the country and the courts should help in
the collection of taxes whilst remaining fair to taxpayers.”

Endnotes

1. Section 2 of RPGT Act 1976 sets the scope of charge for the imposition of RPGT. It defines gains as gains other than gain or profit
chargeable with or exempted from income tax under the income tax law.
2. For a discussion on the distinction between RPGT and income tax, see Choong Kwai Fatt, The critieria for the determination of
income tax and real property gains tax in the case of land appropriation from investment to trading asset, 2006 tax research series.
3. See Choong Kwai Fatt, Malaysian Taxation - Principles and Practice, 2005, 11th ed, Infoworld, pp 223 - 233 on the application of
badges of trade.
4. [2003 - 2005] AMTC 298.
5. Section 15 of RPGT Act 1976 and s 96 of the Income Tax Act 1967.
6. [2003 - 2005] AMTC 371.
7. [2006] 1 AMR 563.
8. [1937 - 1978] AMTC 668.
9. [1979 - 1996] AMTC 1556.
10. [1979 - 1996] AMTC 1565 at p 1571.
11. A leading expert on evidence matters. Now he is a Federal Court Judge.
12. 60 TC 116.
13. [2003 - 2005] AMTC 298 at p 304.

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The scope of an ‘Executor’ and his/
her liability to income tax
– To sign or not to sign the Income Tax Form B for the
deceased person?
Introduction
Income tax liability does not cease eventhough
the taxpayer has passed away. The Income Tax
Act 1967 (the Act) empowers the tax authorities
to recover any outstanding taxes and its penalty
from the executor1. In 2006, the Federal Court
was asked to spell out the parameters of an
executor in the decision of Kerajaan Malaysia
v Yong Siew Choon2 where it was held that
the meaning of “executor” includes a legal
representative, which is the spouse of the
deceased taxpayer irrespective of whether a
grant of probate has been obtained or there are
no assets to be distributed to the beneficiaries.
The facts
The deceased was a partner in a legal firm and
had settled his income tax liability up to year of
assessment (YA) 1983. He passed away on 12
January 1984 leaving behind his wife and his son.
The wife of the deceased did not apply for the grant
of probate or for letters of administration as the
deceased did not leave any assets to be distributed.
The tax authorities issued the income tax return
Form B under the name of the deceased for YA 1984
and 1985 as there was income from the legal firm
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income tax
being the share of profits paid to the deceased. An
additional sum of RM280,000 was paid to the wife of
the deceased.
The wife completed the Form B for her deceased
husband as legal representative. Under the
paragraphs which required her to state the deceased
husband’s share of the partnership income/loss,
she had written as ‘refer to the legal firm’s file’. The
tax authorities then issued the notice of assessment
for YA 1984 and 1985 covering the following basis
periods:
YA Basis Period
1984 01.01.1983 – 31.12.1983
1985 01.01.1984 – 12.01.1984
The total income tax payable amounted to
approximately RM251,878. She however did not pay
the tax that had become payable on the grounds
that she was not the executor and it was not her
responsibility to make the payment to the tax
authorities. The tax authorities imposed penalties on
the non-payment of tax, making the total due to the
government amount to RM290,9193.
The Government was determined to collect the
outstanding income taxes and penalties from the
33
income tax
deceased via the wife. This can only be done provided
the wife is the executor of the deceased as provided
in s 74 of the Act. When the wife of the deceased
failed to settle the tax and penalty, the tax authorities
commenced recovery proceedings against the wife in
her capacity as executor by virtue of ss 106 and 142
of the Act. The wife contended that she was never
an executor as no grant of probate was extracted.
Therefore, it was not her responsibility to make the
payment to the tax authorities.
The crux of the issue is whether the wife can
be held as an executor under the Act given the fact
that she did not apply for the grant of probate or
for letters of administration as the deceased did not
leave any assets to be distributed. The only act she
had done for the deceased was to file the income tax
returns forms for the YA 1984 and 1985.
The arguments
The wife testified that she was a housewife with no
income whatsoever. After the demise of her husband,
she did not petition for any grant of probate or for
letters of administration as the deceased did not
leave any assets at all. The wife contended that she
did not in any way administer or manage the estate
of the deceased because there was nothing for her
to administer. She argued that the income tax and
penalties of RM290,919 for her husband were never
her responsibility because she was not indebted to
the tax authorities.
The tax authorities contended otherwise. They
found that the wife who had signed the Form B for the
deceased, must have acted as a legal representative,
falling squarely within the definition of “executor” as
defined in s 2 of the Act. Section 2 reads as follows:
“Executor’ means the executor, administrator
or other person administering or managing the
estate of a deceased person.”
The filing of Form B on behalf of the deceased person
and the signature of the wife on those forms are fatal.
It denotes that she is administering or managing the
estate of a deceased person and is an executor under
the Act. She can be sued and is responsible for the
deceased husband’s tax.
The High Court’s decision
RK Nathan J at the High Court rejected the taxpayer’s
argument that a legal representative can only exist
when there are assets to administer. His Lordship was
34
of the opinion that a legal representative unfolds itself
immediately upon the death of the person concerned,
until such time as a grant of probate or letters of
administration are obtained. Therefore, the wife is
the executor notwithstanding that no grant of probate
or letters of administration had been applied for. RK
Nathan J opined:
“I have no hesitation in holding that the
defendant clearly fell into the third category
of a person defined as executor, namely as a
person administering or managing the estate
of the deceased person.”
The High Court held that despite the fact that the
wife of the deceased did not apply for a grant of
probate or letters of administration, she was clearly
administrating the estate of her deceased husband
when she signed the Form B for the YA 1984 and
1985. Thus, she falls within the meaning of executor.
Judgment was entered against the wife of the
deceased in the sum of RM290,919.
RK Nathan J held:
“To my mind the definition in s 2 of the Act
clearly encompasses persons under the
category of the defendant. Although she
had neither taken probate nor letters of
administration, she was clearly administrating
the estate of her deceased husband when she
signed the Form B for the years 1984 and
1985. ... It is clear therefore that until probate
or grant of legal administration is obtained, the
person most acceptable to manage the estate
of the deceased until such time as the grant
is obtained is the legal representative. In this
case it is the wife. She contends that since
there was nothing left in the estate, she had
nothing to administer and therefore, she could
not be the legal representative. The position of
a legal representative does not impose itself
only when there are assets to administer. That
position unfolds itself immediately upon the
death of the person concerned, until such time
as probate or legal administration is obtained.”
In conclusion, the signing of the respective income
tax returns form for the deceased person was held to
be an act administering the estate of the deceased.
She was then termed as legal representative, falling
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into the third category of the executor. She is liable to
the tax and penalties claimed by the tax authorities.
Being dissatisfied, the wife appealed to the Court
of Appeal.
The Court of Appeal’s decision
In the Court of Appeal, Gopal Sri Ram JCA
acknowledged the tax authorities’ intention to implead
the estate of the deceased with a view to recovering
the tax from it and not from the widow’s personal
assets. However, his Lordship found that such
recovery action against the estate of a deceased
person is governed by Order 15 r 6A of the Rules
of High Court 1980 where it requires the extraction
of letters of representation as the pre-requisite. This
however was not fulfilled.
The rule of substantive law requires an action to
be commenced only after letters of representation
have been extracted. It is only in an action against the
duly appointed legal representative of the estate of a
deceased that a judgment may be obtained that may
be enforced against the assets of the estate. Failure
to comply with this fundamental requirement thus
rendered the recovery by the Government an illegality
and therefore a nullity. The case was dismissed and
it was held that the wife was not liable to the amount
sued. The case was even now.
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income tax
The tax authorities, being dissatisfied, appealed to
the Federal Court.
The Federal Court’s decision
The Federal Court was asked to determine the
following point of law:
“Whether in view of the provisions of the
Income Tax Act 1967, Order 15 r 6A of the
Rules of the High Court 1980 is applicable to
an action or proceeding raised under s 106
of the Income Tax Act 1967 in relation to an
assessment in the name of an executor as
defined in the Act.”
Augustine Paul FCJ delivering the judgment of the
Federal Court however held that the Order 15 r 6A
of the Rules of High Court has no application to the
proceedings for the recovery of tax in the light of ss
64 and 74 of the Act.
Section 64 of the Act sets out the liability of
an executor as being the person assessable and
chargeable to tax in the case of an estate of a
deceased person. Therefore, proceedings can be
commenced against an executor for the recovery of
income tax due and payable. Under Section 2 of the
Act::
35
income tax
“Executor means the executor, administrator
or other person administering or managing the
estate of the deceased person.”
His Lordship examined the scope of executor as
defined in s 2 of the Act and concluded that the
definition encompassed two groups of persons
being an executor. The first group is the person
who has obtained the grant of probate or letters of
administration of a deceased person. These persons
are legally appointed. The second group refers to
the person “administering or managing the estate of
the deceased person” which must refer to those who
are not legally appointed. The wife falls into the latter
group and was therefore an executor and liable to tax.
Augustine Paul FCJ held4
“It follows that reference in ss 64 and 74 of
the Act to an ‘executor’ includes a person
who is administrating or managing the estate
of a deceased person. Such a person is
assessable and chargeable to tax and is
therefore a person who can be sued in law.
The corollary is that Order 15 r 6A will have
no application to proceedings under the Act
against such a person. The extension of
the scope of Order 15 r 6A by the Court of
Appeal to proceedings under the Act cannot
therefore be sustained. The answer to the
question posed to us must therefore be in the
negative.”
The final victory goes to the tax authorities. The tax
recovery from the deceased wife is valid in law as she
is the executor as defined under the Act.
Yong Siew Choon post script
It is the finding of the High Court that the wife of the
deceased taxpayer is the person administering the
estate of the deceased when she signed the Form B
for YA 1984 and 1985 as legal representative. RK
Nathan J opined:
Endnotes
1. See ss 64 and 74 of the Act.
2. [2006] 2 AMR 93.
3. Section 103 of the Act empowers the tax authorities to impose a late payment of penalty of 10 + 5 %.
4. Ibid at p 107.
36
“The agreed documents in the CABD show that
it was the defendant who had completed and
signed Form B, being the “Return of income by
an individual” for years of assessment 1984
and 1985. She had declared herself on signing
the said forms as the wife of Abdul Hamid
bin Tun Azmi (deceased). … To my mind, the
definition in s 2 clearly encompasses persons
under the category of the defendant. Although
she had neither taken probate nor letters of
administration, she was clearly administrating
the estate of her deceased husband when she
signed the Form B for the years 1984 and
1985.”
Reading the above passage, does it mean that if she
did not sign the Form B, she would have escaped the
tax liability of RM290,918?
The answer is Yes and No. It is felt that if the
deceased taxpayer has distributed his wealth to
his beneficiaries before his death for a bona fide
consideration, then the tax authorities have no
recourse from the beneficiaries. However, if there
is ample circumstantial evidence that the deceased
taxpayer has distributed his wealth during his
lifetime solely to avoid his income tax responsibility,
the tax authorities can have recourse from those
beneficiaries notwithstanding that none of them
signed the Form B on behalf of the deceased and
were not executors under the Act.
Conclusion
Yong Siew Choon’s decision is a landmark authority
in tax recovery matters relating to deceased persons.
It defines the scope and responsibility of an executor
under the Act. Its complexity is shown through the
various opinions expressed by the learned judges of
the High Court, Court of Appeal and Federal Court.
The comprehension of this decision has a great
impact on succession planning. So now, to sign or
not to sign that Form B?
acca tax publication
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