(1) For exemption from building low cost and medium cost housing
In the case of Ehsan Armada Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2022), High Court, the issue was related to the deductibility of the payment/contribution made by the taxpayer company (developer) to the Lembaga Perumahan Hartanah Selangor (LPHS) for the exemption of the appellant from building low-cost, medium cost housing for its Mutiara Indah housing project in Puchong. The Special Commissioner of Income Tax (SCIT) had disallowed the deduction for the contribution made under section 33 of the Income Tax Act 1967 (ITA).
The SCIT had disallowed on the following reasons:
- The payment/contribution made is not a payment directly related to the appellant’s main activity, ie, property development;
- The payment/contribution made was to release the appellant from the obligation or condition imposed.
The taxpayer company appealed to the High Court. The High Court had allowed the deduction with reasons as follow:
- The payment/contribution made to LPHS was in line with the Pekeliling Pengarah Tanah dan Galian Selangor 3/2007;
- By making contribution, the taxpayer has the option to build other types of units that can produce more money and yield greater profit;
- The fact that the State Government provides an exemption from building low costs houses suggests that it is clearly within the law.
- The money goes back to the State Government to fund the development of low-cost housing.
(2) For release of unsold Bumiputera quotas reserved under residential and commercial properties
In the case of Mitraland Kota Damansara Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri (2023), Court of Appeal, the case was related to the claim for deduction under section 33 of the ITA in relation to the payment/contribution made for the release of bumiputera quotas in a mixed development project in Selangor.
The SCIT held that the deduction was capital in nature and they were not expenses that were wholly and exclusively incurred in the production of gross income as stipulated under section 33(1) of the ITA.
The High Court set aside the SCIT’s decision. The High Court found out that the expenses were expenditure revenue in nature and thus deductible under section 33 of the Income Tax Act 1967.
The Court of Appeal has allowed the claim by the taxpayer company and held that:
- that the payments of 7% and 10% of the sale price to the State Government are not penalty
- that the taxpayer company (developer) is entitled under the two circulars of the State Government for the release of the unsold bumiputera units to non-bumiputera purchasers.
- that the payment of refund of the sum of RM4,468.000 to the LPHS is equivalent to the bumiputera discount, which is a revenue expense that is deductible under section 33(1) of the ITA 1967.
- The effect of the payment of the sum was to achieve sales.
- The developer was given the option to release the bumiputera units because it is the developer’s stock in trade.
Law from the Court of Appeal Case of Mitraland
The Mitraland’s case had also reaffirmed the law on tax payer good faith and full disclosure. The Court of Appeal allows the imposition of penalty to be set aside due to the differing interpretation of the law under section 113(2) of the ITA (incorrect return).
Conclusion
The developer should only sell the bumiputera units to non bumiputera after they have obtained the approval from the State Government. Otherwise, the payment made will be turned into as “penalty” and not eligible for deduction under section 33 of the ITA.
It is similar to a situation where the taxpayer whilst transport his goods with his lorry had subsequently been served a traffic summon of RM300, and seek to claim for deduction for the RM300 imposed in his tax returns. The fine of RM300 imposed is not a tax deductible as it is not wholly and exclusively incurred in the production of its income.
Contact us at [email protected] for tax advisory if you are making contribution to the State Government
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