Background Facts

1. International Naturopathis Bio-Tech (M) Sdn Bhd (“the Taxpayer”) was involved in naturopathic medicine, which bought six different shop lot units (3 shoplots in Block A and 3 shoplots in Block B) (“Properties”).

2. The delivery of vacant possession of the Properties was made in August 2010 and the Taxpayer sold the Properties respectively in June 2011 and August 2011.

3. The Director of Inland Revenue (“DGIR”) in 2014 raised a notice of assessment in respect of the disposal of the properties amounting to RM543,906 for the year of assessment 2011.

4. The issue in dispute was whether the disposal of the properties was subject to RPGT or income tax.

5. The Special Commissioner of Income Tax (“SCIT”) and the High Court (“HC”) held that the disposal of the properties was subject to income tax. Being dissatisfied, the Taxpayer filed the appeal to the CoA.

Decision

6. The CoA confirmed the decision of the SCIT and HC and held that, amongst others, the disposal of the Properties subject to income tax and not RPGT as:

a) the Properties were sold within a short period of time (i.e. 6 months and 12 months after delivery of vacant possession;

b) no effort was done to look for a tenant;

c) disposal of the Properties was not undertaken to help pay for the Taxpayer’s medical bills;

d) the intention of buying the Properties is to trade as (i) the purchase of the Properties was financed by the loans taken by a director and not the Taxpayer; and (ii) the Properties located at a strategic business location area;

e) the Taxpayer gave no evidence of a change in the ‘intention’;

f) the Taxpayer face no difficulty in selling the Properties within such short period of time; and

g) accounting evidence is not conclusive.

Comments

This is a classic RPGT vs income tax case. For decades, taxpayers have been in tug-of-war with the DGIR in determining whether a disposal of a real property is subject to income tax or RPGT.

In this case, the CoA succinctly laid down the following badges of trade:

i. Intention or the motive of the purchase of the property which is subsequently disposed of;

ii. Subject matter/nature of the asset disposed of;

iii. Interval of time between purchase and sale/Length of period of ownership;

iv. Number or frequency of transactions;

v. Changes made to the asset would make it more saleable;

vi. The circumstances responsible for the realisation of the property;

vii. Method of finance for the purchase of the property;

viii. Existence of similar trading transactions or interests; and

ix. The way the sale or disposal was carried out.

Notably, CoA also made the following key observations on the application of the badges of trade:

a) these badges are merely a guide which assists the deliberation as to whether a set of facts and circumstances would constitute a trade or an adventure in the nature of trade;

b) no one single badge of trade is usually conclusive or determinative;

c) it is also not uncommon that the application of one badge may lead to one answer but that of another results in another, potentially contradictory conclusion;

d) deliberation involves the interplay of the combination of the various badges of trade, and the weight attached to each badge of trade will depend on the precise circumstances of the case; and

e) it is also fair to say that the more badges of trade can be fastened on a transaction making it more likely that the transaction will be construed as a trade and thus subject to income tax.

This case serves as good guidance in applying the badges of trade and understanding the interaction between these badges. Remember, no one single badge of trade is conclusive and accounting evidence itself is not conclusive.

About the Authors

Desmond Liew Zhi Hong is a Partner at Halim Hong & Quek, a member firm of Andersen Global specialising in Tax.

Boey Kai Qi is an Associate at Halim Hong & Quek, a member firm of Andersen Global specialising in Tax.