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Case Update: Navigating the Fine Line between Investment and Trading for Tax Purposes

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15 December 2023

TAX LAW
Trading Assets – Investment – Duration of Ownership – Rental Income – Income Tax Act

International Naturopathic Bio-Tech (M) Sdn. Bhd. v Ketua Pengarah Hasil Dalam Negeri Malaysia
Civil Appeal No. W-01(A)-732-12/2021 | Court of Appeal
- see the grounds of judgment here

Facts International Naturophatic Bio-Tech (M) Sdn Bhd (the ‘Appellant’) is a locally incorporated company, and has as its main business, the promotion of naturopathic medicine including the provision of training, advice, information, consultancy, guidance and counselling on all aspects of naturopathic medicine. In 2008, the appellant executed six sale and purchase agreements to purchase six different shop lot units at Block A and Block B at Zenith Corporate Park located in Kelana Jaya, Petaling Jaya. Delivery of vacant possession in respect of all the Shop Lots was made in August 2010. Subsequently, the Shop Lots in Block A were sold in June 2011 and those in Block B in August 2011. The Director General of Inland Revenue (the ‘Respondent’) raised the notice of assessment dated 18 December 2014 in the requisite Form J on the appellant company in respect of the disposal of the Shop Lots, amounting to RM543,906.00 for the year of assessment 2011. TheAppellant appealed against the assessment raised by the respondent pursuant to s. 4(a) of the Income Tax Act 1967 (‘ITA’). The case was heard before the Special Commissioners of Income Tax (‘SCIT’) which had dismissed the appeal. The Appellant then appealed to the High Court, however the learned High Court Judge affirmed the decision of the SCIT. Hence this appeal.

Issue 1. Whether the disposal by the Appellant of its Shop Lots is subjected to real property gains tax (‘RPGT’) under s. 3 of the Real Property Gains Tax Act 1976 or s. 4(a) of the ITA.

Held In unanimously deciding to affirm the decisions of the High Court and the SCIT, and therefore dismissing the appeal, the Court of Appeal rejected the Appellant's argument that the shop lots were held for investment and emphasized the importance of considering all relevant badges of trade collectively. This approach involves examining various factors to determine whether the transactions were more in line with investment or trading activities. Further, the Court of Appeal considered the period of ownership before disposal. Generally, a longer ownership period is indicative of investment. In this case, there was only short period of ownership, in the sense that the Shop Lots in Block A were sold some 6 months after they were rented out and 10 months after delivery of vacant possession, whilst the Shop Lots in Block B were sold 12 months after vacant possession. Besides that, the Court of Appeal addressed the Appellant's argument that its primary business was not trading in property but distributing health products. The Court of Appeal clarified that while relevant, this factor alone is not determinative, and other relevant factors must be considered. Hence, the Court of Appeal affirmed that the SCIT's findings were based on a proper evaluation of the evidence and consistent with the law, concluding that the Appellant failed to demonstrate errors in the assessment. The Court of Appeal further cautioned against challenging findings of specialized statutory entities like the SCIT on weak grounds. It reiterated the limited scope for appellate intervention and stressed the need for substantial evidence to justify such intervention.

Zul Rafique & Partners
{15 December 2023}

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