The Background
In the bustling heart of Kuala Lumpur, a taxpayer found itself at the center of a heated tax dispute. The matter revolved around 59 apartment units located in Fahrenheit 88, a prime location within the city’s Golden Triangle. Originally purchased with claims of long-term investment, these properties were sold within three years, triggering questions about the true nature of the transactions.
The taxpayer argued that the sales were merely a response to an irresistible offer from a purchaser and insisted that the gains should be treated as capital gains, not taxable under the Income Tax Act 1967 (ITA). The properties, they maintained, had been acquired solely for investment purposes, with rental income as the primary objective.
The Disputed Sales
The disposals occurred in four transactions between 2010 and 2011. For YA 2009 and 2010, the taxpayer had failed to file tax returns, prompting the Director General of Inland Revenue (DGIR) to issue best judgment assessments under Section 90(3) ITA. The final disposal of 56 units en bloc was declared in YA 2011, but the DGIR contended that all the gains were taxable under Section 4(a) ITA, as the sales constituted a profit-making scheme.
The DGIR’s case was clear: the taxpayer’s actions were inconsistent with long-term investment. No evidence showed reinvestment into other properties or assets. The taxpayer admitted the acquisition wasn’t purely for rental income but for anticipated profits from resale, leveraging the strategic location near Pavilion Kuala Lumpur. The properties were sold without renovations, a choice aligned with quick sales rather than tenant improvements.
“These repeated transactions, executed within a short span of three years, clearly indicate trading activity,” the DGIR argued.
The Courtroom Battle
The taxpayer relied heavily on their financial statements, which classified the properties as fixed assets. “This proves these were investment properties,” their counsel argued.
But the DGIR countered. “Accounting classifications don’t override the substance of the transactions. The facts show a profit-making scheme: quick sales, strategic location, and no forced circumstances behind the disposals. These aren’t the hallmarks of a long-term investment.”
The Special Commissioners of Income Tax (SCIT) sided with the DGIR, but the taxpayer appealed to the High Court, which overturned the decision. Undeterred, the DGIR brought the case to the Court of Appeal.
The Final Verdict
On 8 May 2024, the Court of Appeal reinstated the SCIT’s decision. “The taxpayer failed to prove the assessments were erroneous or excessive. The disposals were part of a trading activity, not a capital investment,” the court ruled. The taxpayer’s appeal was dismissed, and the additional assessments, penalties, and best judgment assessments under Section 90(3) ITA were upheld.
The Lesson Learned
This case serves as a powerful reminder: intent and conduct are critical in distinguishing investment from trading activity.
- For taxpayers: The lesson is clear: mere classification in financial statements isn’t sufficient to prove intent. The substance of transactions, supported by documented behavior and business practices, will ultimately determine tax treatment.
- For practitioners: This case highlights the need for detailed planning and documentation when managing property portfolios. Failing to align conduct with declared intentions can lead to costly disputes and unexpected liabilities.
In taxation, actions often speak louder than words, and the true nature of transactions will always take precedence over appearances.
Relevant Laws
- Seksyen 4(a) Akta Cukai Pendapatan 1967
- Seksyen 90(3) Akta Cukai Pendapatan 1967
