Real Property Gain Tax vs Income Tax on Gain on disposal of property/land

Gain on disposal of land – RPGT or Income Tax??

Let’s understand from a Real tax case: KST vs KETUA PENGARAH HASIL DALAM NEGERI

What is this case study?

KST sold a land to a developer company, amounting to RM1,520,000.00. IRB argued the disposal of land is subject to Income Tax Act 1967 (ITA).

KST did not agree

Initial intention is to distribute land to 9 siblings and no intention for trade purpose.
After that, KST dispose the land when KST received an offer from developer.

So, the gain from disposal of land is not subject to ITA1967.

What is IRB argument?

The initial intention has changed.
The holding period is short.
KST is one of the director of land acquired company.
Improvement on land is done before the disposal.

So, the gain from disposal of land is subject to Income Tax Act 1967 (ITA1967).

Decision by Special Commissioners of Income Tax:

Special Commissioner agreed with IRB tax treatment. Gain from disposal of land is subject to Section 4(a) ITA 1967.

What is the difference between RPGT and ITA?

The main difference is the “tax rate”. Let’s see the comparison as follows (tax rate for year of assessment 2020):

For individual (resident):

Income tax : Graduated rate from 0% to 30%

RPGT

Disposal within 3 years from date of acquisition - 30%
Disposal in the 4th years from date of acquisition - 20%
Disposal in the 5th years from date of acquisition - 15%
Disposal in the 6th years from date of acquisition - 5%

For company (resident)

Income tax

17% on the first RM600,000.00 of chargeable income*
24% on the subsequent balance of chargeable income

*Resident company with paid up capital of RM2.5 million and below at the beginning of the basis period and having gross income from source or sources consisting of a business not more than RM50 million for the basis period for a year of assessment.

RPGT

Disposal within 3 years from date of acquisition - 30%
Disposal in the 4th years from date of acquisition - 20%
Disposal in the 5th years from date of acquisition- 15%
Disposal in the 6th years from date of acquisition - 10%

How to determine the disposal is subject to RPGT or ITA?

The badges of trade should be considered:

Method of acquisition of real property - How was the property acquired? For example, inheritance, through open market or auction.
Nature of the real property - Whether the property is generating rental income or left for vacant?
Number of transactions - Frequent transaction is likely to indicate trading of properties and subject to income tax.
Profit seeking motive - Intention of making profit will be subject to income tax.
The period of ownership - How long was the property held before disposal?
Alteration, modification or improvement made to the real property - Renovation or improvement of property before disposal may be viewed as effort to enhance the value of the property, it may subject to income tax.
Source of financing - How was the purchase of property financed? Short-term or long term borrowing?
Circumstances surrounding the sale - What were the circumstances leading to the sales of property? Was the property sold because of realise profit or emergency need of funds?

𝐕𝐢𝐬𝐢𝐭 𝐮𝐬 :

Wisma 𝐊𝐓𝐏, 53 Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
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