UPDATES ON CRITICAL TAX MATTERS ON LAND ISSUES AND IN STRUCTURING LAND JV AGREEMENTS

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1 UPDATES ON CRITICAL TAX MATTERS ON LAND ISSUES AND IN STRUCTURING LAND JV AGREEMENTS BY DAVID LAI DATE : 6 October 2017 VENUE : Wisma REHDA

2 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

3 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/ /12/2009 (exemption period). Time-bar for raising assessments under ITA 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

4 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

5 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

6 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 chargeability s. 88 incorrect return 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.

7 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.

8 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.

9 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).

10 Proposed Amendments to the Stamp Act 1949 Changes to the conditions for Section 15 relief: Current Where shares in the transferee company have been issued to the existing company in consideration of the 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 ownership ceases as a consequence of reconstruction, amalgamation, liquidation or in compliance with Government policy on capital participation in industry. No requirement to notify the Collector of any breach in the conditions for the relief. Proposed The required beneficial ownership period is increased to 3 years. Words underlined are replaced with or to achieve greater efficiency in operation. Requirement on both transferee company and existing company to notify the Collector within 30 days from the occurrence of the breach.

11 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. 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.

12 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. 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.

13 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. 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.

14 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 utilities (per approved layout plan for project) supplied to Government, State Government, local authority or any person in compliance with any requirements, for no consideration/nominal value General use (i.e. burial ground, playground or religious building) supplied to any public body * Subject to transitional provision (see next slide) Taxable supply, but given relief ITC claimable Exempt supply ITC deemed claimable Deemed not a supply ITC not claimable* Exempt supply ITC not claimable*

15 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 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 1/1/2017; Certificate from authorised person (e.g. architect) certifying that at least 10% of the value of development works has been completed within 12 months from date planning permission is granted; AND Input tax claimable is incurred within 36 months from date planning permission is granted. - - General Use Planning permission granted by local authority before 1/1/2017; Certificate from authorised person (e.g. architect) certifying that at least 10% of the value of development works has been completed within 12 months from date planning permission is granted; AND Input tax claimable is incurred within 36 months from date planning permission is granted.

16 GST Registration In DG s decision 2/2014 (as amended), RMCD imposed an additional condition for voluntary registration, i.e. that 1 st 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?

17 Land JV Agreements Landowner Joint Venture Development Rights Developer 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)?

18 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 development activities Landowner actively participates in development activities Landowner not undertaking a business, hence not subject to income tax (assuming no badges of trade) Landowner is undertaking a property 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?

19 Land JV Agreements Landowner Direct Tax Considerations Is RPGT always better than income tax? Points to consider: RPGT rate for disposals within 3 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.

20 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.

21 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.

22 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).