Member Article

A case note by Abhilaash Subramaniam

Introduction

In the recent case of SWW v Ketua Pengarah Hasil Dalam Negeri, the High Court of Malaya granted the taxpayer leave to apply for judicial review, a stay of proceedings pending the disposal of the taxpayer’s application for judicial review and subsequently allowed the taxpayer’s judicial review application on the merits, ordering a prohibition on all collection and enforcement action relating to disputed taxes and assessments raised by the Inland Revenue Board (“Revenue”).

Facts

The taxpayer was a property development company that was established for the purposes of being the master developer of a Petrochemical and Maritime Industrial Centre (“TMI Centre”) in Johor. The Johor State Government alienated anumber of plots of leasehold land to the taxpayer for it to undertake the establishment and development of the TMI Centre.

The taxpayer subsequently undertook extensive development of the TMI Centre to convert the relevant plots of land into a suitable and utilisable state to be sold to prospective buyers who would use the facilities at the TMI Centre. This included, amongst others, land reclamation, the setting up of roads, the building of bridges, the building of land barriers and others.

Due to the nature of the relevant plots of land that are located a significant distance from the city of Johor Bahru and the specific function of the TMI Centre, the taxpayer had to undertake efforts to identify potential buyers for the relevant plots of land.

In 2008, the taxpayer identified a purchaser who wished to acquire a portion of land (“the Johor Land”) situated in a larger plot of land (“Master Plot of Land”) at the TMI Centre. Accordingly, the taxpayer disposed of its leasehold interest in the Johor Land for the duration of 30 years (renewable for a further 30 years) to the purchaser.

The taxpayer wished to dispose of the entire leasehold interest in the Johor Land to the purchaser but was constrained as the Johor Land was leasehold land and still formed part of the larger Master Plot of Land. The National Land Code only allowed the taxpayer to dispose of the leasehold interest in the Johor Land for a duration of 30 years at a time.

Following the above, the taxpayer (as a property developer) deducted the property development expenditure it incurred to develop the Johor Land from the income received from the disposal of the leasehold interest in the Johor Land to the purchaser.

The Revenue subsequently audited the taxpayer and took the position that the disposal of the 30 + 30-year leasehold interest in the Johor Land to the purchaser was not a “sale of land”. The Revenue further purported that for the purposes of the transaction, the taxpayer was not engaged in the business of property development but the business of leasing land and, accordingly, that the taxpayer was not entitled to any deductions of its property development expenditure against the income for the disposal of the leasehold interest in the Johor Land to the purchaser.

According to the Revenue, the taxpayer would only have been entitled to its property development expenditure if it subdivided the Master Plot of Land, obtained a separate title for the Johor Land and thereafter disposed of the full 99-year leasehold interest in the Johor Land to the purchaser.

The Revenue accordingly raised Notices of Additional Assessment in October 2019 amounting to more than RM27 million with penalties against the taxpayer (“Disputed Notices”). The Disputed Notices had the effect of taxing the taxpayer on its gross income with no deduction for its expenditure.

The taxpayer filed an application for judicial review before the High Court to challenge the conduct of the Revenue in raising the Disputed Notices. It was argued before the High Court that the taxpayer was constrained by the provisions of the National Land Code and accordingly could not dispose of the full 99-year leasehold interest in the Johor Land (at the relevant time) and it was perverse for the Revenue to disregard the National Land Code and purport to introduce further conditions (such as the requirement to subdivide the Master Plot of Land) that do not exist in law.

It was further argued that the fact that the taxpayer disposed of a 30-year leasehold interest in the Johor Land (with the option to renew) did not change the fact that the taxpayer was nevertheless engaged in the business of property development and accordingly was entitled to deduction of its property development expenditure.

Decision of the High Court

At the leave stage, the High Court granted the taxpayer leave to apply for judicial review and further ordered a stay of proceedings and enforcement, pending the disposal of the taxpayer’s judicial review application on the merits.

At the merits stage, the High Court recognised that this matter involved important questions of land law and accordingly granted the taxpayer’s application for judicial review and ordered a prohibition on all attempts to enforce and/or collect the taxes and penalties under the Disputed Notices pending the determination of the validity of the Disputed Notices in the judicial review proceedings (including any appeals arising therefrom) and/or the determination of the taxpayer’s appeal under sections 99 to 102 of the Income Tax Act 1967 (including any appeals arising therefrom).

The Revenue has appealed against the decision of the High Court.

ABHILAASH SUBRAMANIAM - TAX AND REVENUE PRACTICE GROUP

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