Position on the tax deductibility of Bumiputera Unit Release Fee
The developer’s payment to the State Government for the release of the Bumiputera unit is allowed to be deducted from the developer’s gross income in arriving at its adjusted income. This is because the unit sold is part of the developer’s stock in trade which can generate revenue.
Below there are few reported tax cases respectively from year 2020 – 2021 as to the tax treatment of the bumiputera unit release’s payment fee that have being allowed for deduction by the High Court.
# Case 1 – Mitraland Kota Damansara Sdn Bhd (31st October 2021)
In this High Court’s case, Noorin binti Badaruddin Judge had held that the taxpayer company (developer) payment fee to the Lembaga Perumahan dan Hartanah Selangor (“LPHS”) for the release of the Bumiputera units to Non-bumiputera units was allowed for tax deduction under section 33(1) of the Income Tax Act 1967 (“ITA”).
The Bumiputera units involved were 2 commercial blocks and also 1 office block (Commercial Title). The payment fee involved was RM5,518,597 paid to LPHS. This case involved payment for release of bumiputera units involving both commercial units and also residential units.
1.1 The Special Commissioners of Income Tax (SCIT) decision
The SCIT concluded that the payment fees made were equivalent to discount and it is capital in nature.
1.2 Taxpayer Company’s Argument
The taxpayer company argued that the payment made to the State Authority was not penalty but was to obtain the approval to sell the Bumiputera units to the Non-Bumiputera. It was a conditional approval by LPHS for the release of the bumiputera quota. There was also no creation of new asset.
1.3 IRB’s Argument
Taxman argued that it was capital in nature as the payment made was for the permission to release the reserved quota for the Bumiputera to the Non-Bumiputera. It was argued that the LPHS has imposed penalty on the taxpayer company for violating the terms of the quota.
1.4 Decision
The payment fee made to LPHS was tax deductible. It is the Special Commissioners of Income Tax (SCIT)’s finding that without the making of the payment fee, the Bumiputera units cannot be transferred or released to the Non-bumiputera. There was no issue of penalty as the taxpayer company did not violate any condition imposed for the quota.
The payment made was to widen its group or class of people to sell to.
# Case 2 – Taman Equine (M) Sdn Bhd (25th October 2021)
In this High Court’s case, the taxpayer company (property developer) had applied to the Selangor State Government for the release of their bumiputera unit (Commercial Title) so that they can sell it to the Non-bumiputera buyer.
The Inland Revenue Board (IRB) had conducted an audit over the taxpayer company and raised an assessment over the payment made for the release of the bumiputera units.
2.1 Taxpayer Company’s argument
Taxpayer company argued that payment made for the release of the Bumiputera units was revenue expenditure as it is wholly and exclusively incurred in the production of its gross income.
2.2 IRB’s argument
IRB took the position that the payment made for the release was capital expenditure as the payment was made to cancel the quota rights allocated to bumiputera and subsequently to obtain rights to sell to non-bumiputera.
2.3 Decision
High Court’s Noordin binti Badaruddin Judge held that the payment made for the release of the bumiputera unit was made to sell the bumiputera unit to non bumiputera. The taxpayer company would receive income from the sale of the bumiputera units to non-bumiputera buyer.
# Case 3 – Sovereign Teamwork (M) Sdn Bhd (2021)
In another High Court’s case that reversed its earlier decision in the SCIT, had affirmed that the payment fees made to the LPHS/State Government Authority is tax deductible and not capital in nature. The High Court’s case has no written decision so far.
# Case 4 – Setia Indah Sdn Bhd (5th July 2021)
The developer (taxpayer company) is based in Johor. The taxpayer company applied to the Johor State Government for the release of the Bumiputera housing units to the non-bumiputera by making contribution to the Johor State Government. Taxes imposed in the sum of RM13,273,903.67. In this case, there is also an issue whether the contribution is allowed under s.44(6) of the ITA 1967 (Donation).
Leave to commence judicial review was granted on 30 September 2020 together with interim stay.
In this case, the taxpayer company had filed an amendment to declare that the contribution made for the release of the Bumiputera quota is also deductible under section 33(1) of the ITA 1967. The Court relied on O.1A of ROC to allow the amendment.
# Case 5 – Tropical Land Property Sdn Bhd (27th June 2021)
This case’s judicial review and stay application has been granted. It was in relation to payment fee made to Johor State Government for release of bumiputera units in the sum of RM4,958,871.35. We look forward to the result of the substantive hearing.
In light of the High Court’s decision in so far, for year 2021, it is mostly decided in allowing deduction for payment fees made for release of bumiputera quota units.
# Case 6 – Prima Nova Harta Development Sdn Bhd (30th September 2020)
In this High Court’s case, Mariana binti Haji Yahya Judge allowed the deduction for the payment made for the reduction of bumiputera quota made to PTGS.
In this case, the taxpayer company applied for the reduction of bumiputera unit for medium cost terrace house and also Office Shoplot.
6.1 Taxpayer’s Company Argument
Taxpayer company argued that payment fee made to LPHS was not penalty but to secure the approval to sell the bumiputera unit to non-bumiputera.
6.2 IRB’s Argument
IRB took the position that the payment made by taxpayer company was a penalty under the Pekeliling PTGS Bilangan 3/2007.
6.3 Decision
Taxpayer company has received a letter of approval for the release of bumiputera unit under the PTGS letter dated 6 February 2007. Taxpayer company has fulfilled the term imposed by making payment back to LPHS. The return of the bumiputera discounted price was a form of donation and not penalty. The IRB had also issued the notices of assessment for 2010 and 2011 based on the Pekeliling 2011 instead of Pekeliling 2007.
CONCLUSION
From 2020 to 2021, there were 6 decided cases in the High Court that ruled that payment fee made to State Authority for release of the bumiputera quota was allowed for tax deduction.
There were appeals filed by IRB to the Court of Appeal. The law in the High Court currently stands as of now unless the Court of Appeal overruled the decision of the High Court.
Authored by Dylan Chong
The contents of this publication are given as general information for reference purposes only and do not constitute the firm’s legal advice. For any specific matter or legal issue, please do not rely on this publication but make sure to consult a legal adviser. We would be delighted to answer your questions, if any.