In general, income tax applies to income, just as real estate capital gains tax applies to capital gains from the sale of real estate, as land either vacant or not or with erected constructions.
An exception would be where a person has held the land as a commercial stock or when the land transaction has elements of trade badges. Gains from the cession of such land would then be subject to income tax.
Let’s say that an individual has inherited a piece of land. He then entered into a joint venture agreement with a real estate developer to develop the land into residential properties. To pay for the cost of building the residential units, he sold part of the land to the developer.
Would the sale of this part of the land be subject to real estate gains tax or income tax?
Can it be said to have the trade badges (such as knowledge of the land trade, intention to trade, activities carried out and commercial value of the land) as a result of the joint venture agreement with the developer?
Businesses are generally incorporated to carry on a business.
Would that make businesses more inclined to have the trade badges compared to individuals?
However, some companies are formed to hold land properties as an investment.
Would there be any trade badges if such an investment land is developed after it has been held for, say, over 10 years?
Shouldn’t that rather be treated as an investment achievement? Would it make a difference if the land was previously acquired from its holding company which is a real estate developer, instead of being acquired from a third party?
In delicate and ambiguous situations, the tax returns on real estate gains that have been previously filed by taxpayers and the tax clearance obtained are not taken into account by the tax authorities on the grounds that the gain should be subject to tax. income tax instead of real estate gains tax, allegedly due to the presence of trade badges.
The relevant question is, when did the trade badges appear in relation to developed land?
Could there have been a change of intent that the owner might not even be aware of?
The debate over whether income tax or real estate gains tax should apply to gains from the disposal of land has remained a contentious issue from time immemorial.
A myriad of appeals have gone from special income tax commissioners to the Court of Appeal for a ruling.
The judgments are not always unanimous. The final decision is a question of mixed law and fact.
Certainty of the law is crucial, as legal principles are applied to the facts of each taxpayer’s case.
An examination of the facts of each case to establish the intention to acquire land is therefore of paramount importance.
In addition to establishing the initial intention at the time of purchase of the land, evidence must be adduced from the actual facts and the conduct of the taxpayer to corroborate this initial intention of the taxpayer.
There must also be a “legal intention”. This means that the intention is not a simple contemplation. There must be a reasonable chance that the intention will be realized by the action of the taxpayer of his own volition.
In several decided tax cases, the courts have ruled that the taxpayer could not be considered to have an intention because the taxpayer’s ability to achieve his intention is subject to the approval of government authorities, which has not been obtained.
To have tax law certainty regarding land transactions, it would be helpful for tax authorities to issue rulings or guidelines to define quantitative tests and qualitative circumstances that would clarify the appropriate tax treatment.
For example, how long must the holding period last before the tax authorities accept and conclude that the land has been held as a long-term investment?
Under what circumstances would joint venture activities between a landowner and a developer be treated as the making of an investment or an adventure in the nature of commerce?
The Chief Executive Officer is empowered by law to ignore or modify a transaction when he has reason to believe that the transaction has the direct or indirect effect of modifying the incidence of tax, exempting any person from any liability, to avoid or avoid any obligation or liability, or to hinder or prevent the application of the law.
Without certainty in tax law, taxpayers who engage in tax planning that may appear legitimate in law are advised to be careful not to cross the Rubicon that would cause the CEO to invoke the anti-avoidance provision.
In conclusion, when the tax authorities disregard the real estate gains tax return, the 1976 Real Estate Gains Tax Act 1976 would be subordinate to the 1967 Income Tax Act. .
This would make filing the real estate gains tax return unnecessary for property owners, and a waste of time and resources.
The certainty of the law would greatly assist taxpayers in filing the return under the correct law and avoid the imposition of penalties.
As for landowners, the importance of keeping adequate records cannot be overstated, as the onus is on the taxpayer to prove the intention to acquire the land.
Fo Wai Lan is a Fellow of the Malaysian Institute of Chartered Accountants (MICPA) and Executive Director of Mazars Taxation Services Sdn Bhd. The opinions expressed here are those of the author.