GENERALLY, income tax is applied to income, just as real property gains tax is applied to gains on disposal of real properties, whether or not the land is vacant or with buildings erected.

       An exception would be where a person has held the land as trading stocks or where the land transaction has elements of badges of trade. The gains from disposal of such land would then be subject to income tax.

       Let us say an individual inherited a piece of land. He later entered into a joint venture agreement with a property developer to develop the land into residential properties. To pay for the construction cost of the residential units, he sold part of the land to the developer.

       Would the sale of this part of the land be subject to real property gains tax or to income tax?

       Can he be said to have the badges of trade (such as knowledge in land trading, intention to trade, activities carried out, and commercial value of the land) because of the joint venture agreement with the developer?

       Companies are usually incorporated to carry out a business.

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       Would this make companies more inclined to have the badges of trade compared to individuals?

       However, some companies are formed to hold landed properties as investments.

       Would there be any badges of trade if such investment land is developed after it has been held for say, more than 10 years?

       Shouldn’t this be treated as a realisation of investment instead? Would it make any difference if the land was previously acquired from its holding company which is a property developer, instead of it being acquired from a third party?

       In tricky, ambiguous situations, real property gains tax returns which have been previously filed by the taxpayers and tax clearance obtained are being disregarded by the tax authorities for the reason that the gain ought to be subject to income tax instead of real property gains tax, allegedly due to the presence of the badges of trade.

       The pertinent question is, when did the badges of trade arise in respect of the developed land?

       Could there have been a change in intention which the landowner might not even be aware of?

       The debate of whether income tax or real property gains tax should apply to gains from disposal of land has remained a contentious issue since time immemorial.

       A myriad of appeals has gone from the Special Commissioners of Income Tax right up to the Court of Appeal for a decision.

       Judgements may not always be unanimous. The final decision is a question of mixed law and fact.

       Certainty in the law is crucial as legal principles are applied to the facts of each taxpayer’s case.

       An examination of the facts of each case to establish the intention for the acquisition of land is, therefore, of paramount importance.

       Apart from establishing the initial intention at the time of purchase of the land, evidence must be adduced from the actual background acts and conduct of the taxpayer to corroborate this initial intention of the taxpayer.

       There must also be “intention in law”. This means that the intention is not a mere contemplation. There must be a reasonable prospect for the intention to be achieved by the taxpayer’s action on his own free will and volition.

       In several decided tax cases, the courts have ruled that the taxpayer could not be said to have intention because the taxpayer’s ability to carry out its intention is subject to the approval of government authorities, which was not forthcoming.

       To have certainty in tax law with regard to land transactions, it would be helpful for the tax authorities to issue rulings or guidelines to set out quantitative tests and qualitative circumstances that would provide clarity to the appropriate tax treatment.

       For example, how long must the holding period be before the tax authorities would accept and conclude that the land had been held as a long-term investment?

       In what circumstances would joint venture activities between a landowner and a developer be treated as a realisation of investment or an adventure in the nature of trade?

       The director-general is empowered under the law to disregard or vary a transaction where he has reasons to believe that the transaction has the direct or indirect effect of altering the incidence of tax, relieving any person from any liability, evading or avoiding any duty or liability, or hindering or preventing the operation of the law.

       Without certainty in the tax law, taxpayers that embark on tax planning which may seem legitimate in law are advised to be careful not to cross the Rubicon that would cause the anti-avoidance provision to be invoked by the director-general.

       In conclusion, when the tax authorities disregard real property gains tax return, this would cause the Real Property Gains Tax Act 1976 to be subservient to the Income Tax Act 1967.

       It would make the filing of real property gains tax return redundant for landowners, and a waste of time and resources.

       Certainty in the law would go a long way towards helping taxpayers file the return under the correct Act and avoid penalties from being imposed.

       As for the landowners, the importance of keeping adequate records cannot be overemphasised as the onus of proving intention for acquiring the land lies with the taxpayer.

       Fo Wai Lan is a member of the Malaysian Institute of Certified Public Accountants (MICPA) and executive director of Mazars Taxation Services Sdn Bhd. The views expressed here are the writer’s own.