UPDATES ON CRITICAL TAX MATTERS ON LAND ISSUES

AND IN STRUCTURING LAND JV AGREEMENTS

BY DAVID LAI
DATE : 6 October 2017
VENUE : Wisma REHDA
Updates on critical tax matters on land issues and in structuring Land JV Agreements

Contents

• Land issues
• Tax Audits & Investigations
• Stamp Amendment Bill 2017
• GST – Supply of land for public amenities, public utilities and general
use
• GST Registration

• Land JV Agreements
• Landowner – active or passive?
• Developer – for sale or investment?
• GST – Treatment of JV Agreements

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Tax Audits & Investigations

• Tax treatment on disposal of land remains a common tax issue in tax audits
& investigations.

• IRB is aggressively reviewing past land disposals, especially those between

1/4/2007 – 31/12/2009 (exemption period).

• Time-bar for raising assessments under ITA 1967 – 5 years (wef 1/1/2014).

• IRB can disregard time-bar in the following circumstances:

• Fraud – knowingly/recklessly/carelessly making false representations
• Wiful default – intentionally failing to carry out duty imposed under the
Act
• Negligence - similar but less severe than fraud/wilful default
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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Tax Audits & Investigations

• IRB is required to provide evidence of fraud/wilful default/negligence

before it can disregard time-bar.

• In practice, IRB usually claims that taxpayer is negligent in failing to

properly declare its income as required under the Act.

• What taxpayers should do:

• Request IRB for specific details
• Review supporting documentation
• Obtain professional & legal advice

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Tax Audits & Investigations

• Determining whether a land disposal is subject to income tax or RPGT –

“badges of trade”

• Subject matter of realisation

• Length of period of ownership
• Frequency of similar transactions
• Modification/supplementary work
• Circumstances responsible for realisation
• Motive

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Tax Audits & Investigations

• “Serious Offences” under Anti-Money Laundering, Anti-Terrorism Financing
and Proceeds of Unlawful Activities Act 2001 (“AMLATFPUAA”):
Income Tax Act 1967 GST Act 2014
s. 112 – failure to furnish return/ give notice of s. 88 – incorrect return
chargeability
s. 113 – incorrect returns s. 89 – evasion of tax, fraud
s. 114 – wilful evasion s. 90 – improperly obtaining refund, etc.
s. 91 – offences in relation to goods, invoices and
receipts

• Penalties on any person for offence of money laundering:

• Up to 15 years imprisonment, and
• Fine of not less than 5 times the sum/value of proceeds of unlawful
activity/instrumentalities of an offence, or RM 5 million, whichever is
the higher.
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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Tax Audits & Investigations

• Powers to freeze, seize or forfeit properties under AMLATFPUAA:
• Freezing Order – can be issued by IRB if it has reasonable grounds to
suspect property is proceeds of unlawful activity/ instrumentalities of
an offence. This order expires after 90 days if person is not prosecuted.

• Seizure Order – issued by public prosecutor authorising the property to

be seized/cannot be disposed. This order expires after 12 months if
person is not prosecuted.

• Forfeiture (upon prosecution) – court can order forfeiture of property

frozen/seized.

• Forfeiture (no prosecution) - public prosecutor can apply to court for

forfeiture order within 12 months from date of freezing/seizure order.
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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Proposed Amendments to the Stamp Act 1949

• Stamp (Amendment) Bill 2017 tabled for first reading in the latest Dewan
Rakyat meeting ended 10/8/2017.

• Replaces the Stamp (Amendment) Bill 2016 which was withdrawn before
its second reading.

• Second reading of the new bill deferred to the next Dewan Rakyat meeting
commencing on 23/10/2017.

• Effective date of amendments to be determined by Minister.

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Proposed Amendments to the Stamp Act 1949

• Key proposed amendments of interest in the new bill:

• Removes the proposed amendment in the old bill that imposes ad

valorem stamp duty on agreements for the sale of property.

• Increase in the stamp duty chargeable on the transfer of property to 4%

on the amount or value of consideration exceeding RM 1 million.
(Previously announced in Budget 2017 to be effective from 1/1/2018.)

• Tightening of conditions for stamp duty relief under Section 15 & 15A.

• Changes to the stamp duty on exchange of real property (Section 20A).

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Proposed Amendments to the Stamp Act 1949

• Changes to the conditions for Section 15 relief:
Current Proposed
Where shares in the transferee company have been The required beneficial ownership period is increased
issued to the existing company in consideration of the to 3 years.
acquisition, the existing company must remain the
beneficial owner of those shares for 2 years from the
date of registration or incorporation, or of the
authority for the increase of capital, of the transferee
company.
Exception to the above is given where the beneficial Words underlined are replaced with “or to achieve
ownership ceases as a consequence of reconstruction, greater efficiency in operation”.
amalgamation, liquidation or in compliance with
Government policy on capital participation in industry.
No requirement to notify the Collector of any breach in Requirement on both transferee company and existing
the conditions for the relief. company to notify the Collector within 30 days from
the occurrence of the breach.
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Updates on critical tax matters on land issues and in structuring Land JV Agreements
Proposed Amendments to the Stamp Act 1949
• Changes to the conditions for Section 15A relief:
Current
No requirement regarding the purpose of the transfer
of property.
No requirement for the place of incorporation of
transferee company.
No restriction on subsequent disposal by the
transferee company of the property transferred.
No requirement for the transferor and transferee to
remain “associated” after the transfer of the property.
No provision for subsequent revocation of the relief if
the conditions are not met.
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Proposed
The transfer of property must be for the purpose of
achieving greater efficiency in operation.
The transferee company must be incorporated in
Malaysia.
The property transferred cannot be disposed by the
transferee company within 3 years from the date of
transfer.
Transferor and transferee must not cease to be
“associated” for a period of 3 years from the date of
transfer.
If it is subsequently found that the declaration or other
evidence provided is untrue, the relief is revoked and
duty shall be charged with 6% p.a. interest.
Updates on critical tax matters on land issues and in structuring Land JV Agreements
Proposed Amendments to the Stamp Act 1949
• Changes to the conditions for Section 15A relief:
Current
No requirement to notify the Collector of any breach in
the conditions for the relief.
No requirement for the statutory declaration to claim
the relief to be made by an advocate and solicitor.
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Proposed
Requirement on both transferor company and
transferee company to notify the Collector within 30
days from the occurrence of the breach.
The Collector may require a statutory declaration to be
made by an advocate and solicitor in relation to the
claim for the relief.
Updates on critical tax matters on land issues and in structuring Land JV Agreements
Proposed Amendments to the Stamp Act 1949
• Changes in relation to exchange of real property (Section 20A):
Current
In an exchange of real property, only the consideration
paid or given for equality is subject to ad valorem duty.
David Lai
Proposed
Any exchange of real property, whether with or
without consideration, is charged with ad valorem duty
as if it were a conveyance on sale.
Exception given for the following exchanges with no
consideration:
(a) A partition/division where both transferor and
transferee are the original owners of the property.
(b) Between any person and a Ruler, Government or
State Government.
(c) Between husband and wife, parent and child,
grandparent and grandchild or among siblings.
Updates on critical tax matters on land issues and in structuring Land JV Agreements

GST – Supply of Land for Public Amenities, Public Utilities and General Use
Land use Prior to 1/1/2017 From 1/1/2017
For public amenities and public Taxable supply, but given relief Deemed not a supply
utilities (per approved layout plan for
project) supplied to Government,
State Government, local authority or ITC claimable ITC not claimable*
any person in compliance with any
requirements, for no
consideration/nominal value
General use (i.e. burial ground, Exempt supply Exempt supply
playground or religious building)
supplied to any public body ITC deemed claimable ITC not claimable*

* Subject to transitional provision (see next slide)

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

GST – Supply of Land for Public Amenities, Public Utilities and General Use
Transitional provision for claiming ITC on supply of land for public amenities,
public utilities and general use:
Public Amenities & Public Utilities General Use
Project approved before 1/1/2017 and fulfilled -
conditions specified by Town & Country Planning Dept,
Public Works Dept, Drainage & Irrigation Dept and Fire
& Rescue Dept;
Layout plan approved by local authority before -
1/1/2017;
Planning permission granted by local authority before Planning permission granted by local authority before
1/1/2017; 1/1/2017;
Certificate from authorised person (e.g. architect) Certificate from authorised person (e.g. architect)
certifying that at least 10% of the value of development certifying that at least 10% of the value of development
works has been completed within 12 months from date works has been completed within 12 months from date
planning permission is granted; AND planning permission is granted; AND
Input tax claimable is incurred within 36 months from Input tax claimable is incurred within 36 months from
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date planning permission is granted. date planning permission is granted.
Updates on critical tax matters on land issues and in structuring Land JV Agreements

GST Registration
• In DG’s decision 2/2014 (as amended), RMCD imposed an additional condition
for voluntary registration, i.e. that 1st taxable supply is made within 12 months
from date of application.

• Commercial property developments under new company/subsidiary unlikely to

meet this requirement. However, RMCD may consider giving exception on a
case-by-case basis.

• Handling of RMCD rejection of application for voluntary registration:

• Appeal to RMCD
• Not appealable to GST Tribunal
• Judicial review?
• Capitalisation as inventory cost?
• Review of business structure/practice?
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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Land JV Agreements
Joint Venture
Landowner Developer
Development Rights

Unit Title Completed Unit

End-Buyer
Variations
• Active participation by landowner?
• Power of attorney/timing of title transfer?
• Fixed consideration or profit sharing?
• Cash consideration or in-kind or both?
• Type of development (residential/commercial/mixed)?
• Incorporation of JV?
• Intention of parties (for investment/for sale)?
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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Land JV Agreements – Landowner Direct Tax Considerations

• IRB’s general position on tax treatment of landowners under a JV:
No active participation by landowner in Landowner not undertaking a business, hence not
development activities subject to income tax (assuming no badges of
trade)
Landowner actively participates in development Landowner is undertaking a property
activities development business, hence subject to income
tax

• What is active participation?

• Involvement in day-to-day project operations?
• Involvement in project decision-making?
• Assistance in dealing with authorities?
• Uncertain/variable consideration?
• All/combination of the above?
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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Land JV Agreements – Landowner Direct Tax Considerations

• Is RPGT always better than income tax? Points to consider:

• RPGT rate for disposals within 3 years @ 30%, compared to income tax rate
of 28% (max) for individuals / 24% (max) for companies.

• Wider scope of deductible expenses under income tax (e.g. interest

expense), compared to permitted expenses under RPGT.

• Income tax losses can be set off against other income (current year) or other
business income (future years). RPGT losses can only be set off against
future gains on disposal of real property.

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Land JV Agreements – Developer Direct Tax Considerations

• Is the development project for sale (e.g. residential lots, commercial lots) or for
investment (e.g. shopping mall, hotel, private school, etc.) or a mixture of both?
Is the intention clearly stated in the JV Agreement?

• Potential tax benefit of proper demarcation:

• Development for sale – subject to income tax on sale.
• Development for investment – subject to RPGT on disposal.
• Avoid “deemed sale/withdrawal of stock” provision.

• Planning to meet tax incentive conditions.

• Beware of anti-avoidance provisions under s. 140.

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Land JV Agreements – GST Treatment

• No specific provision in the GST Act for JV developments.

• RMCD’s latest Guide on Land and Property Development dated 18/4/2016 has
been withdrawn and a new guide has yet to be issued.

• Based on DG’s decision 4/2014 (as amended), the RMCD’s position is to treat a
JV agreement as a supply of land/right to use land by landowner to developer.

• Time of supply:
• If periodical payments – earlier of time of consideration received or tax
invoice issued.
• In other cases – normal time of supply rules.

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Updates on critical tax matters on land issues and in structuring Land JV Agreements

Land JV Agreements – GST Treatment

• Value of supply:
• Amount of landowner’s entitlement per JV agreement.

• RMCD clarified in Technical Committee for GST Implementation minutes of

Meeting No. 1/2017 that for land supplied prior to conversion, the intended use
of the land as indicated in the JV agreement is used to determine the type of
supply (i.e. taxable or exempt).

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