Apportionment of Common Expenses Between Leasing and Non-Leasing Business
In DL Sdn Bhd v Ketua Pengarah
Hasil Dalam Negeri (Civil Appeal No. R1-14-7-97), the taxpayer was in the business
of providing leasing, factoring and hire purchase financing facilities. Under the
Income Tax (Leasing) Regulations 1986, income from leasing business was required
to be separated from income derived from non-leasing business from the year of assessment
1986 onwards. However, there were no provisions in either the Act or the Income
Tax (Leasing) Regulations 1986 providing for the formula for computing
the amount of common expenses attributable to the leasing and non-leasing businesses.
While the parties agreed on the method upon which the common expenses ought to be
apportioned, the taxpayer made the apportionment on the basis that only the interest
component earned in its leasing portfolio was income of its leasing business. The
DG disagreed, and took the view that the gross income of leasing portfolios comprised
total rentals which in turn is made up of principal plus interest, while the gross
income of non-leasing portfolio would include interest not connected with the leasing
On appeal to the SCIT, the SCIT ruled that the formula adopted by the DG was to be
followed. However, the High Court reversed the decision of the SCIT and allowed the
appeal made by the taxpayer. It was held that revenue expenditure should only be
deducted against income revenue which was based on accepted principles and was not
at cross purposes with the provisions of the Act. Accordingly, the formula for the
apportionment of the common expenses for lease financing shall not take into account
the element of principal. The method of apportionment for common expenses between
the leasing portfolio and the non-leasing portfolio shall be in accordance with the
ratio between :-
||the "non-capital" income
from the leasing portfolio which consists of the interest element of the lease rentals
plus the incidental income; and
||the "non-capital" income
from the non-leasing portfolio which consists of the interest income plus the incidental
The DG has appealed to the Court
House Transferred to a Companyís Director - Whether Should be Taxed as Employment
In DM vs Ketua Pengarah Hasil
Dalam Negeri [(2001) MSTC, 3215], the taxpayer and her husband were the only
two directors of E Sdn Bhd ("the Company"). The taxpayer was not a service
director and was not paid any wages or any other remuneration by the Company. The
Company owned a residential house in which the taxpayer and her husband resided.
The house was transferred by the Company to the taxpayer for a consideration of RM1.
The DG argued that the taxpayer was regarded as an employer under Section 2 of
the Act and that the transfer of the house was a form of remuneration. The DG
took the market value of the house to be RM730,000 and sought to tax the amount of
RM729,999 as a perquisite received by the taxpayer having exercised an employment
under Section 13(1)(a) and chargeable to tax under Section 4(b) of the Act.
The taxpayer argued that she was not an employee of the Company and hence the transfer
of the house was not a perquisite in respect of having or exercising an employment
and further, that she has been appointed director of the Company in order to fulfill
the requirements of the Companies Act, 1965.
On appeal, the SCIT held that the taxpayer was not paid wages, salary, remuneration,
leave pay, fee, commission, bonus, gratuity or allowance within the meaning of Section
13(1)(a) of the Act. There was no service contract between the taxpayer and
the Company and there was no offer or promise or resolution of any kind to pay the
taxpayer any form of remuneration for her services.
The taxpayer was appointed a director to satisfy the requirements of Section 122
of the Companies Act, 1965. The consideration of RM1, albeit seemingly inadequate,
was sufficient consideration to make the transaction a valid sale and purchase.
Driving Training Ground Qualified as a Plant for Capital Allowances
In Ketua Pengarah Hasil Dalam
Negeri v. MSDC Sdn Bhd (Civil Appeal No. R2-14-6-1999), the taxpayer was licensed
to carry on the business of driving school for motorcars, motorcycles, lorries, tractors
and all other motor vehicles instructing, teaching, guiding and rendering services
of all kinds which the company thought fit.
In complying with the conditions of the permit issued for its driving school, the
taxpayer had incurred expenditure in constructing a training ground and buildings
necessary for the business. The taxpayer claimed capital allowances in respect of
the buildings and the training ground as qualifying building expenditure and qualifying
plant expenditure under Schedule 3 of the Act. The DG was of the view that the training
ground and the school buildings were settings and therefore did not qualify for capital
The SCIT agreed that the buildings were merely part of the setting in which the business
was carried on. The buildings had no function to perform other than to shelter the
trainees who were given instructions on theory. As such, the buildings were only
the structure within the function of educating the trainees and therefore did not
qualify as plant.
As regards the training ground, the SCIT held that it was prepared specially for
carrying out the business of a driving institute. It played an essential part in
the business and satisfied the functional test as an apparatus used in the conduct
of the activities of the trade based on various case laws. Thus, it constitutes qualifying
plant and is eligible for capital allowances.
On appeal to the High Court by the DG, the judge upheld the decision of the SCIT
and pointed out the training ground which is specially prepared for carrying out
the business of a driving institute is in fact an integral part of the taxpayerís
business and is therefore a plant. It is obvious that without the training ground,
the taxpayer would not be able to carry on their business of a driving institute.
Applicability of Service Tax on Shared Management Services
In Sarawak Shell Bhd v Menteri
Kewangan (Civil Appeal No. R2-25-118-1999), the applicant and its other joint
venture partners were in the business of exploration and production of crude oil
and natural gas, the refining of crude oil and manufacture of petroleum products.
They were not carrying on the business of providing management services. Under a
production sharing contract of arrangement pursuant to a joint venture agreement,
the cost for management services are shared between the production sharing contractors
without any mark-up or profit levied.
Section 7 of the STA provides that service tax shall be charged on and paid
by any taxable person who carries on the business of providing taxable service. Such
persons providing management services (i.e. a taxable service) are required to levy
service tax at 5% on management fees with effect from 1st January, 1998. The issue
was to determine whether management services provided under a cost sharing arrangement
where the service provider is not in the business of providing management services
should be chargeable to service tax under the STA.
For service tax to be chargeable upon the applicantsí cost sharing arrangement under
its joint operating arrangements, the essential statutory requirement under the STA
is that the applicants must carry on business of providing taxable service within
the scope of the enabling provision i.e. Section 7 of the STA.
In this case, the applicants were
in the business of exploration and production of crude oil and natural gas and the
management services were only rendered to other joint venture partners under the
joint operating agreements. It was held that the applicants merely provided incidental
management services and were not carrying on the business of providing management
services. Section 7 of the STA only operates where there is a distinct business of
providing taxable service and not where the ëserviceí is a component feature of some
other business. To be eligible for service tax, a person must carry on a business
of providing those services, which then becomes taxable if such services are prescribed
in the Service Tax Regulations.
Thus, the management services provided under the production sharing contract to the
joint venture partners which were incidental to the applicants' business of exploration
and production of crude oil and natural gas should not be subject to service tax.
The case has been referred to the Court of Appeal.
of Efficiency Study and Retrenchment
In the High Courtís case of Ketua
Pengarah Hasil Dalam Negeri v IF Sdn Bhd (Civil Appeal No. R2-14-9-98), the parent
company of the taxpayer has engaged a company to conduct an efficiency study of its
subsidiaries including the taxpayer. The efficiency study was carried out on the
taxpayer for the period between 25th June, 1985 to 31st December, 1985. The assets,
business and employees of the taxpayer were transferred to the related company on
1st December, 1985 and thereafter the taxpayer was voluntarily liquidated on 31st
December, 1985. The retrenchment exercise was carried out on 15th December, 1985.
The taxpayer made a claim for the costs of the efficiency study and the retrenchment
costs to be deducted against its business income.
The SCIT allowed the appeal of the taxpayer. They found that the efficiency study
increased the speed time in production, reduced non-productive time and improved
plant maintenance. The costs of the efficiency study, and the retrenchment costs
were thus held by the SCIT to be incurred in the production of income and hence deductible
expenses. The DG appealed to the High Court.
In consideration of the facts and circumstances of the case, the High Court allowed
the appeal by the DG stating that the taxpayer company was a different legal person
from the other subsidiary companies and with the liquidation of the taxpayer, it
was impossible to accept the contention that the efficiency study was meant for the
benefit of the taxpayer, whose business was taken over by a related company with
the taxpayer being voluntarily liquidated soon thereafter. The costs of the efficiency
study were therefore not wholly and exclusively incurred in the production of income.
As regards the retrenchment costs,
from the facts it was an irresistible conclusion that the retrenchment exercise was
done for the benefit of the successor company of the taxpayer. The timing of the
retrenchment exercise was very close to the takeover of the business of the taxpayer
and the liquidation of the taxpayer. Further, the application to the Foreign Investment
Committee to amalgamate the companies was made before the efficiency study was conducted
in June 1985 indicating that the efficiency study and the retrenchment exercise were
meant more to facilitate the takeover of the taxpayer's business. As such, the costs
of the retrenchment exercise were similarly not incurred in the production of the
Gains from Compulsory Acquisition Not Subject to Tax
In P. Construction Sdn Bhd v DG,
the appellant was in the business of housing development in Perak. It purchased the
subject land in 1975. In 1980, the land was capitalised in the accounts as fixed
asset. No subdivision was done and no developerís licence was obtained in respect
of the land.
On 5th October, 1995, the Government gave notification for acquisition of the land.
The official notification document was dated 10th June, 1997. Compensation was received
for the compulsory acquisition. The issues for determination were whether the gains
from the compensation received were subject to income tax and if positive, whether
the tax should be for the year of assessment 1996 as held by the Inland Revenue.
The SCIT have ruled that the gains were subject to income tax and since the compensation
was paid in 1995, the tax should be raised for the year of assessment 1996.
On appeal to the High Court, both the above decisions of the SCIT were reversed.
It was held that the subject land was capital and did not form part of the stock
in trade of the company and that the relevant year of assessment should be 1998 since
the acquisition document (Borang K) was issued in 1997. The date of payment of the
compensation was held to be irrelevant.
The DG has withdrawn its appeal to the Court of Appeal.
Bank Guarantee Fee Not Deductible
In F. Sdn Bhd v DG, the appellant
company involved in investment holding, in order to facilitate the purchase of certain
shares, had entered into a guarantee facility agreement with a group of banks to
secure an irrevocable bank guarantee for the purchase price of the shares. A commission
of 1.2% per annum was payable for the bank guarantee secured. The company received
dividend income from the shares purchased.
The company argued that the commission incurred on the bank guarantee facility was
analogous to an operating cost or the cost of maintaining its business. The DG treated
the commission as a capital expenditure prohibited from deduction under Section 39(1)(c)
of the Act. On appeal to the SCIT, it was held that the commission payments were
capital in nature citing Seabanc Credit (1998) / CLJ 349 in support.
The company has appealed against the decision to the High Court.
Rider Attached to Life Policy and Withholding Tax on Charges Paid to Head Office
of an Insurer
In AIA Co. Ltd vs KPHDN [(SCIT)(PKCP
(R) 15/99)], the taxpayer is a non-resident insurer carrying on life and general
insurance business. Among others, the issues of dispute with the DG were :-
||whether riders attached to the life
policy are to be treated as part of the life business or as part of the general business;
||whether certain charges (i.e. American
International Data Centre [AIDC] charges) paid to the Head Office in Hong Kong fall
under Section 4A(ii) of the Act.
The other two issues of dispute were settled by way of agreement in accordance with
Section 101(2) of the Act.
On the riders issue, the taxpayer argued that riders are a part of its life business
and not part of its general insurance business. As such, the tax treatment should
be in accordance with Section 60(4) of the Act in respect of the life fund of a non-resident
insurer. On the other hand, the DG contended that the riders should be classified
as part of the taxpayer's general insurance business and income tax on riders should
be computed pursuant to Section 60(6) of the Act in respect of the general business
of a non-resident insurer.
The SCIT held that the DG has not been invested by any power to reclassify riders
from life business to general business and therefore riders should be treated as
part of life business.
As regards AIDC charges issue, the taxpayer incurred expenses in respect of services
provided by i.e. AIDC which was part of the taxpayer's Head Office in Hong Kong.
The taxpayer argued that the AIDC charges were allocated by the Head Office on an
actual cost basis in respect of routine office administrative services rendered and
as such, it is not an income falling under Section 4A(ii) of the Act which is subject
to withholding tax. Further, the AIDC charges were wholly and exclusively incurred
in the production of income which should be allowed under Section 33(1) of the Act.
Based on the facts submitted and the Service Agreements between the taxpayer and
American International Data Centre Ltd, it was held that the services rendered are
technical in nature and therefore the AIDC charges fall under Section 4A(ii) of the
Act and subject to withholding tax under Section 109B of the Act. The claim for AIDC
charges are thus denied in accordance with Section 39(1)(j) of the Act for non-compliance
with the requirement under Section 109B of the Act to deduct and remit the withholding
tax applicable to the DG.
The DG has appealed to the High Court against the decision of the SCIT on riders
issue whereas taxpayer has appealed on the issue of AIDC charges. However, both the
DG and the taxpayer have discontinued with the cross appeals subsequently.
Deductibility of Leave Passage for Directors
In KHK Advertising Sdn Bhd v KPHDN
(Civil Appeal No R1-14-4-99), the issue of dispute was whether the cost of leave
passage provided to certain directors under the service agreements and claimed by
the company for years 1983 to 1986 was tax deductible. The SCIT denied the claim
on the ground that the expense was of private and vacational nature and not incurred
wholly and exclusively in the production of income.
On appeal to the High Court, the learned judge pointed out that the view of the SCIT
that the cost of leave passage was private and vacational and hence not wholly and
exclusively incurred in the production of gross income was wrong. The wrong emphasis
was placed by the SCIT on how the directors expended their compensation received
from the employer. The proper issue was what compensation (salary, benefits-in-kind,
free leave passage) was given for the services rendered by the directors. The free
leave passage was one of the components of the salary package and was a cost to the
employer in respect of services rendered.
The High Court allowed the cost of the leave passage reversing the decision of the