TAX CASES Leave Passage for Directors Not Deductible Real Property Gains Tax (RPGT) - Valuation of Shares Tax Treaty Protection on Section 4A Income Loss of Employment Not Due to Ill-Health Proceeds from Disposal of Land Taxable 1. Leave Passage for Directors Not Deductible In KHK DMB and B Sdn Bhd v DGIR (2000) MSTC 3201, the taxpayer, a company entered into service agreements with 3 of its directors. The taxpayer incurred leave passage expenses in the years 1983, 1984, 1985 and 1986 as provided for in the service agreements and claimed a deduction for the expenses. The Inland Revenue disallowed the cost of leave passage of two directors, KHK and LKC and raised additional assessments on the company. The taxpayer argued that the expenses were deductible as being benefits in kind and were of a revenue nature incurred to produce income. The taxpayer was not a controlled company and the leave passage was not prohibited under Section 39(1) of the Act and the leave passage was provided for under the terms of the service contract. Further, the Inland Revenue had given different tax treatment by allowing a deduction in respect of one director and an employee and disallowing it in the case of 2 directors, namely KHK and LKC. The SCIT held that the leave passage was not an expense wholly and exclusively incurred in the production of gross income. The fact that the leave passage was contractual was irrelevant for tax purposes. As for the Inland Revenue giving preferential treatment to a director and an employee of the company but not to KHK and LKC, it was settled law that there was no estoppel against the Inland Revenue. ^ Top 2. Real Property Gains Tax (RPGT) - Valuation of Shares In GC Sdn Bhd v DGIR (2000) MSTC 3151, the taxpayer, a property developer, acquired shares in a real property company and disposed of the shares within the same year. For purposes of RPGT, the Inland Revenue took RM40,586,400 as the market price of the land at 27th January 1995 and computed the acquisition price of the 28,000,000 shares to be RM22,728,324 based on the valuation by a government valuer. The taxpayer claimed that the acquisition price of the 28,000,000 shares should be RM101,920,000 based on RM182,000,000 which is the defined value of the asset acquired. The issue for determination before the SCIT was what should be the acquisition price for computation under the Real Property Gains Tax Act, 1976. The SCIT held that :- a. the comparison method of valuation adopted by the government valuer is the better method of valuation compared to discounted cash flow adopted by the private valuer. The taxpayer valuer failed to use a comparable sales of similar lands of similar quality in the locality at or prior to the time of acquisition as the basis of valuation; b. the best approach was to take on the average price of the best 3 comparables in the government valuation and make the necessary adjustments in respect of certain dissimilarities. As such, the acquisition price of 28,000,000 shares was computed to be RM57,120,000 and the Inland Revenue was ordered to amend the notice of assessment. ^ Top 3. Tax Treaty Protection on Section 4A Income In SGSS Pte Ltd v DGIR, (Civil Appeal No. R1-14-2-98) the High Court overruled the decision of the SCIT and decided in favour of the taxpayer. The taxpayer company, a Singapore incorporated and resident company received payment from Petronas Carigali Sdn Bhd (PCSB) under a contract for the provision of third party inspection and expediting services of which 98% was carried out outside Malaysia and 2% by a subsidiary of the appellant. The DG had treated the income earned by SGSS from the provision of inspection services as income under Section 4A of the Act. The appellant sought a full refund of the tax withheld. The SCIT held that the payments were chargeable to tax under Section 4A of the Act and were not excluded under Article IV of the Singapore - Malaysia DTA. The High Court in reversing the decision of the SCIT held that SGSS did not derive income or profits from Malaysia within the meaning of Article II(1)(l) of the DTA. SGSS was not carrying on a business or having a PE in Malaysia and accordingly Article IV(1)(a) (PE Article) of the treaty operated to accord relief from double taxation. In allowing the appeal, the High Court held that relief from income tax is available under Article IV of the DTA, if the following 3 conditions are met :- a. that the taxpayer is a ìSingapore enterpriseî; b. that the taxpayer does not ìcarry on businessî through a ìPE in Malaysiaî; and c. the taxpayer derives ìincome or profitsî from Malaysia. An examination of the contract indicated that the taxpayer was not a project management contractor exercising ìmanagement, control or supervisionî of PCSBís trade within the exclusionary definition of ìincome or profitsî under Article II(1)(I) of the DTA. The decision of the SCIT was found to be erroneous in law as they have erred in interpretation of the relevant provisions of the DTA and the contract. The contract showed that the taxpayer was merely an independent contractor providing ìinspecting and expediting servicesî to PCSB, and the services were carried out outside Malaysia. These services may be brought under Article XII(4) of the DTA but on the basis that no services were rendered in Malaysia by the appellant, the appellant cannot be liable to tax in Malaysia. The provisions of the DTA apply and not the domestic law. ^ Top 4. Loss of Employment Not Due to Ill-Health In HSG v DGIR (2000) MSTC 3,170, the appellant, an employee of a bank suffered from an illness which required him to wear a neck collar. During that time in 1997, the bank introduced a Separation Scheme for officers including those suffering from illnesses. The appellant applied for early retirement under the scheme and received an amount of RM390,437 under the scheme as compensation for loss of employment. The issue before the SCIT was whether the amount received qualified for an exemption under Paragraph 15(1)(a), Schedule 6 of the Act i.e. loss of employment due to ill-health. The appellant argued that the compensation received by the appellant was for loss of employment due to ill-health and hence entitled to full exemption under Paragraph 15(1)(a), Schedule 6 of the Act. The Inland Revenue argued that the compensation was paid for loss of employment because the appellant participated in the scheme and not because of ill-health. The medical report of the doctor did not state that the appellant was unfit or that his ill-health warranted termination or voluntary retirement. The SCIT ruled that the appellant qualified under Paragraph 15(1)(b), Schedule 6 of the Act, whereby he was entitled to RM4,000 exemption for each completed year of service. The balance of the sum received by the appellant was taxable. ^ Top 5. Proceeds from Disposal of Land Taxable In S(Pg) Sdn Bhd v DGIR (2000) MSTC 3785, the High Court held that the disposal of 3 pieces of land to a company in exchange for shares was an adventure in the nature of trade and therefore taxable. All 3 pieces of land were held for more than 10 years. The company acquired pieces of land between 1970 and 1972. The intention was to build houses for family use but the intention was subsequently changed. In 1982, it entered into a joint venture agreement with Beauticon Development Sdn Bhd to develop the said lands. For that purpose, both companies agreed to incorporate a new company called Primo Sdn Bhd. The company then transferred the land to Primo Sdn Bhd in exchange for 380,000 shares. The SCIT held that the proceeds from the disposal of land was taxable under Section 4(a) of the Act and the High Court upheld the decision. The following were considered by the High Court in dismissing the appeal of the company :- a. the company had in submitting their tax returns for years 1971 to 1983 held themselves to be property developers; b. the purpose for which the company was incorporated was to trade; c. the term trade or an adventure in the nature of trade is not possible to be defined exhaustively. However, the badges of trade on the whole supported the contention that the company carried out an adventure in the nature of trade; and d. although the company classified its land as ìfixed assetsî, it was not conclusive by itself to be a capital asset and not taxable. ^ Top