THE concept of capital gains tax (CGT) is new to the Malaysian business fraternity. The provisions in the Finance Bill issued recently are rather complicated for a layman to understand and comply with.
The underlying intention of confining CGT is to tax capital assets situated in Malaysia directly or indirectly.
The capital assets that will be taxed will be shares of unlisted companies incorporated in Malaysia, and shares of foreign incorporated companies that owns real property situated in Malaysia or shares of real property companies in Malaysia. All types of capital assets situated outside Malaysia will be subject to CGT in Malaysia upon remittance into Malaysia.
The taxable persons will be companies, limited liability partnerships (LLPs), cooperatives and trust bodies, including unit trusts that own the above assets. Individuals will not be subject to CGT.
The tax rates for capital assets acquired before Jan 1, 2024 will be 10% of the net gain or 2% of the gross disposal price. If the assets are acquired on or after Jan 1, 2024 they will be subject to tax at 10% of the net gain. Any disposal of capital assets situated outside Malaysia and remitted into Malaysia will be taxed at 24% for companies, LLPs and trust bodies, while cooperatives will be subject to tax at scaled rates from 0% to 24%.
The taxation of the capital gains is now brought within the income tax legislation. However, the capital gains and capital losses are ring-fenced. Capital losses can only be offset against either current year capital gains, or against future capital gains. It cannot be mixed with income tax gains and losses.
When it comes to determining the acquisition costs and disposal consideration, the rules are similar to the Real Property Gains Tax (RPGT) legislation which takes into consideration the expenditure incurred in enhancing and preserving the value of the asset, or any receipt of compensation or insurance for damaged of the asset, and incidental costs such as stamp duty, accounting and legal fees, valuer fees, etc.
The acquisition and disposal dates are similar to the RPGT provisions where the date of acquisition will coincide with the date of disposal.
Disposal of shares in a real property company by companies, LLPs trust bodies, and cooperative societies will only be subject to CGT. RPGT will not apply.
Tax returns will need to be filed electronically within 60 days from the date of disposal of every capital asset, and the tax must be paid within 60 days from the date of disposal. Although taxation is only confined to disposal of unlisted shares, the requirement to file tax returns appears to encompass sale of all capital assets, whether or not CGT applies.
This does not seem to fit with the spirit of the legislation. Collecting information on non-taxable events such as the sale of capital assets such as plant and machinery, intangible assets, motor vehicles, licenses, does not seem to serve any purpose.
We do not understand why this information needs to be reported to the Inland Revenue Board (IRB). This is an unproductive compliance burden placed on businesses.
Under certain circumstances, where the transactions are not at arm’s length, or by way of gift, or for a consideration that cannot be valued, or between connected persons, the disposal and acquisition consideration of the capital asset will be deemed to be equal to the market value of the asset.
Inevitably, you can expect disputes with the IRB. Where the Director General of Inland Revenue believes that the prices agreed between the parties are not at market value, he can insert his own market value. Valuation of unlisted companies is not an exact science and will be subject to many disputes in the future.
Understanding the provisions relating to connected parties is complex. It is not as simple as one person having control over the other, or a third-party having control over two or more different parties. You need to look beyond that because you need to club persons beyond the immediate control, and the definitions in the Finance Bill is complex and will lead to interpretational issues in the future.
Although the legislation attempts to tax any disposal of foreign company shares that own real estate or real property company shares in Malaysia, it will be difficult for the IRB to collect taxes from a sale taking place outside Malaysia entirely between two foreign parties.
Navigating through the CGT legislation is a perilous journey. Please be careful when dealing with the disposal of capital assets.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).