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Case law on the application of Paragraph 34A, Schedule 2 of the RPGTA on the disposal of shares in property development companies
The Inland Revenue Board (IRB) recently published on its website a summary of an update to a tax case that addresses whether a property development company constitutes a “real property company” (RPC) pursuant to Paragraph 34A of Schedule 2 of the Real Property Gains Tax Act 1976 (RPGTA) (the legislation). The full case decision is not yet available.
On 1 March 2021, in Continental Choice Sdn Bhd & CB Ventures Sdn Bhd v. Director General of Inland Revenue (DGIR), the Court of Appeal (CoA) delivered a judgment in favour of the IRB and affirmed the decision by the High Court (HC) (see Tax Alert No. 19/2018). In this case, the HC had overturned the decision of the Special Commissioners of Income Tax (SCIT) (see Tax Alert No. 23/2017) and disagreed with the SCIT’s position in adopting a purposive interpretation of the legislation.
The CoA held that when looking at the definition of “real property”, the legislation does not make any distinction between land held as stock-in-trade or as a capital asset. The CoA concurred with the HC that the words in the legislation are clear and unambiguous and would apply as long as shares are disposed in a company that falls within the definition of an RPC, regardless of whether the real property held by the company is capital asset or stock-in-trade. This decision is consistent with the CoA decision in the case of Binastra Holdings Sdn Bhd (Mahkamah Rayuan Rayuan Sivil No. W-01-80-05). Note that there is no written judgment available for the Binastra CoA decision.
In conclusion, the CoA held that the taxpayers had disposed of shares of a company that is an RPC within the ambit of the legislation, even though the company was a property developer which held its real property as stock-in-trade. As such, the gains from the disposal of the shares are subject to real property gains tax.