The Malaysian Accountant - The Malaysian Institute Of Certified ...

More documents

Recommendations

Info

FEATUREBasis ofRecognitionof Incomefor PropertyDevelopersBY Dr ARJUNAN SUBRAMANIAMThis paper examines the basis of incomerecognition for property developers. In so,examining statutory case-law developmentsand the general guidelines issued by theInland Revenue authorities are explored.The Statutory ProvisionsThe Income Tax Act 1967 does not set out any specialsections or provisions for property developers. This factmust be borne in mind in attempting to find answers ofincome recognition for property developers. Section 36 ofthe Income Tax Act 1967 authorises the Director Generalto give directions to be published in the gazette as to thecomputation of business income in certain cases. But nosuch directions for property developers have been made.Thus, a property developer must be taxed as any othertaxpayer under the following provisions of the Income TaxAct 1967.These provisions, inter alia, are:(a) Section 3 – derived and remittance basis;(b) Section 5 – manner of computing chargeable income– determine source;(c) Section 33(1) – deduction – ‘…by deducting from thegross income of that person from that source for thatperiod all outgoings and expenses wholly andexclusively incurred… in the production of gross income’;(d)(e)(f)Section 2 – ‘stock in trade’ definition includes work inprogress;Section 43 – Business losses brought forward;Section 44 – Adjusted business loss for current year;Since there are no special rules in the Income Tax Act1967, surely the changeability to tax must proceed alongthe sections in the Income Tax Act 1967 cited above.Applying the sections the proposition is well summarisedin the case of YF Development Sdn Bhd v Ketua Pengarah HasilDalam Negeri 1 in the following terms:In the case of a housing developer, the questionof whether or not his project has been completed, orwhether or not he has sold all the units uponcompletion of the project does not arise. A housingdeveloper must be taxed just like any other trader.This means that for ascertaining his gross income fora basis period, the sales of units, works in progressand stock-in-trade must be taken into account. Inarriving at his adjusted income, all expenses whollyand exclusively incurred in the production of thatincome during the relevant period must be allowed.In arriving at his statutory income, capitalallowances allowable under Schedule 3 to the Actmust also be taken into account. However, wherelosses arise in the application of these rules, then suchlosses can be carried forward to the following year ofassessment. Unabsorbed capital allowances can alsobe carried forward and allowed against adjusted10 | The Malaysian Accountant | June/August 2007 www.micpa.com.my
income of the same source. Thus, the assessments areto be amended in accordance with these rules, andmay require recomputation.‘Source’ and its Implicationsfor Property DevelopersHowever, notwithstanding what is said in YF Development,a developer company can have many sources of income,i.e. a business can have several sources 2 . A source is aquestion of fact 3 , but even questions of fact must be basedon evidence. An error of fact is an error of law 4 .How does the concept of a ‘source’ impact the taxposition of a developer? The case of Sarawak Properties SdnBhd v Director General of Inland Revenue 5 illustrates theimpact well. In this case the facts were:(i) There were two separate projects, i.e. there were twosources of income;(ii) The completed contract method (CCM) of accountingwas adopted;(iii) No income was recognised at the end of a financial year;(iv) Income was only recognised upon completion of theproject. No work in progress is ever shown;(v) No expenses were claimed until at the end of the project;and(vi) It is mandatory under the CCM method NOT to reportincome until the completion of a project. It is alsomandatory NOT to claim expenses until the projectsare completed.The important point to note is that the Court foundtwo projects. And no income was reported from theuncompleted TAR project.Steve Shim J as His Lordship then, put it in this way:There was, however, no income realised fromthe uncompleted TAR Centre at the time. The factsalso disclose that an amount of RM19,521,342.05 wasexpended on the shop house project whereas anexpenditure of RM30,229.843.27 was incurred for theuncompleted TAR Centre in the year ending 1985.Given the circumstances above and in the light of theauthorities cited earlier, it could well be said that theincome of RM35,914,865.48 derived from the sales ofthe shop house under the shop house project was onesource of income and the amount of RM19,521,342.05was the expenditure incurred wholly and exclusivelyin the production of that income. This income ofRM35,914,865.48 from the shop house project wasrecognised pursuant to the completed contractmethod of accountancy. It was recognised by therespondent and such recognition was accepted asproper by the Special Commissioners. On the factsand evidence before them, I agree with their finding.In my view, this is not inconsistent with provisions ofs 33(1) of the Act.The court further emphasised two separate projects thus:As I have said, the shop house project, whichwas held by the Special Commissioners to be quiteseparate from the TAR Centre project, would beregarded as a distinct source of income, which wasrecognised by the respondent pursuant to thecompleted contract method of accountancy. As theTAR Centre which would, in the circumstances, beregarded potentially as another source of income, hadyet to be completed or substantially completed at thematerial time, the income was therefore not recognised.His Lordship continued on to say:Recognition would come once the said projectwas completed or substantially completed.The importance of the conclusions reached by theCourt in Sarawak Properties is that property developers maydecide on the accounting methods to be adopted and bebound by consequences. Thus, if in Sarawak Properties adifferent accounting method was adopted whereby incomewas recognised at each accounting year with work inprogress and deductions claimed that procedure would beapplicable and accepted if consistently followed. But notethat the completed contract method is no longer acceptedby the Revenue. See Public Ruling 3/2006 (infra). So wheredoes that leave the judgement in Sarawak Properties? Thisproves that it is so important to follow the law – not whatparties accepted.Consistent Applicationof Chosen Method is ImportantA method once adopted should not be changed, withoutvalid reasons. Consistently in application was alsoemphasised in the case of Thomas Hill Ltd v Comptroller ofIncome Tax 6 , by Lord Templeman in these terms:In the present case, the company is not beingasked to abandon the completed contract method butto apply it uniformly and consistently.The facts in Thomas Hill were that the taxpayer adoptedthe completed contract method in computing profits. Bythis method:The expenses directly incurred by the company,in relation to a site which is developed are not chargedin the company’s profit and loss account year as thoseexpenses are incurred. On the other hand, noaccount is taken of the value of the work in progresswww.micpa.com.myJune/August 2007 | The Malaysian Accountant |11
Page 1: June/August 2007 www.micpa.com.my K
Page 4 and 5: PERSPECTIVEIt was a night of fellow
Page 7 and 8: FEATUREInternet Piracy- Copyright I
Page 9: license of the owner of the copyrig
Page 14 and 15: year by year. Upon completion of th
Page 16 and 17: Revision of Estimatesand Tax Comput
Page 18 and 19: towards auditors for the assurance
Page 20 and 21: FEATURETowards Selecting and Mainta
Page 22 and 23: Dato' NordinBaharuddinIt’s after
Page 24 and 25: Dato’ JohanRaslanHis gracious and
Page 26 and 27: INSTITUTE NEWSYB Dato’ Dr Ng Yen
Page 28 and 29: INSTITUTE NEWSRECIPIENT OF ANUGERAH
Page 30 and 31: dented the image of the profession.
Page 32 and 33: updates on recent developments at t
Page 34 and 35: INSTITUTE NEWSExtraordinaryGeneral
Page 36 and 37: INSTITUTE NEWSAcknowledgementsThe M
Page 38 and 39: INSTITUTE NEWSNOVEMBER 2007 EXAMINA
Page 40 and 41: The following candidates passed Mod
Page 42 and 43: AccQuiz for Secondary Schools(Prize
Page 44 and 45: INSTITUTE NEWSACCA-MICPA MUTUALRECO
Page 46 and 47: consistent in all material respect
Page 48 and 49: IASB UpdateIASB welcomes US SEC pro
Page 50 and 51: any restrictions that may be in pla
Page 52 and 53: IFAC UpdateIFAC Seeks Proposals to
Page 54 and 55: interest by setting high quality et
Page 56 and 57: GLOBAL INSIGHTNEWSfrom Down UnderA
Page 58 and 59: GLOBAL INSIGHTWORLDNEWSUNITED KINGD
Page 60 and 61: But respondents also reported that
Page 62:
trapping gases that are so essentia
show all

The Malaysian Accountant - The Malaysian Institute Of Certified ...

Create successful ePaper yourself

Delete template?

Save as template?