PR No. 2/2020 and 3/2020 – Tax Treatment for Stock in Trade
PRs No. 2/2020 and 3/2020: Tax Treatment of Stock in Trade Part I – Valuation of Stock and Part II – Withdrawal of Stock, published on 3 June 2020, provide guidance on the valuation of stock in trade and the tax treatment for withdrawals of stock in trade, in relation to a business carried on by a person in Malaysia. The IRB has stated in both PRs that the earlier single 11-page PR No. 4/2006 (see Tax Alert No. 24/2006) that was issued on 31 May 2006, has been amended, updated, rewritten, rearranged and published in two parts (i.e. the two PRs outlined above). The IRB has also advised that both PR No. 2/2020 and 3/2020 should be read together. Hence, PR No. 4/2006 should no longer be referred to. Details of the two PRs are set out below.
Public Ruling No. 2/2020 – Tax Treatment of Stock in Trade Part I – Valuation of Stock |
The new 17-page PR comprises the following sections and sets out 10 examples:
1.0 Objective
2.0 Relevant provisions of the law
3.0 Interpretation
4.0 Introduction
5.0 Stock in trade and its importance
6.0 Valuation of opening stock in trade and closing stock in trade
7.0 Method of valuing stock in trade
8.0 Valuation of stock in trade on cessation of business
9.0 Stock in trade obsolescence
10.0 Diminution in value of shares as stock in trade
11.0 Updates and amendments
12.0 Disclaimer
The new PR is broadly similar to the earlier PR and explains the importance of valuation of stock in trade, methodology of valuing stock in trade in carrying on the business and upon cessation of business, as well as the tax treatments under various scenarios.
Some of the key changes are as follows.
- Paragraphs 4 and 5.1
The new PR explains that stock in trade is anything a business acquires, produces or manufactures, for the purpose of manufacturing, selling at a profit or exchanging. The PR also elaborates on the definition of stock in trade and reiterates that whether an item is stock in trade or otherwise would depend on the nature of the business, as an asset may be stock in trade for one business but capital asset to another.
- Paragraph 5.2
The new PR explains the timing of the transfer of ownership of goods under various scenarios.
- Paragraph 6.3
The new PR clarifies the acceptable and unacceptable methods of determining “market value” for stock in trade.
- Paragraph 6.4(a)
The PR indicates that where stock in trade is valued at cost, the acquisition cost would include:
(i) Direct expenditure on the purchase of goods bought for resale and of materials and components used in the manufacture of finished goods;
(ii) Other direct expenditure which can be identified specifically as having been incurred in acquiring stock or bringing it to its existing condition and location (e.g. customs duties, direct labour, transport and packaging); and
(iii) Such part of any overhead expenditure as is properly attributable to the manufacture of the goods (e.g. rental of office, utilities charges, stationery and maintenance services)
The earlier PR outlines the expenditure to be included as part of the “acquisition cost” for manufacturing and retail businesses separately.
- Paragraphs 7.2 and 7.3
The new PR explains the accounting standards applicable to stock in trade. However, as the basis of valuation of stock in trade for accounting purposes may not always be acceptable for income tax purposes, the new PR goes on to elaborate on the interaction between valuation for accounting purposes and tax purposes, as well as what should (or should not) be included in the valuation of stock in trade for tax purposes .
- Paragraph 8.4
The new PR explains the methodology for the valuation of stock in trade of a ceased business in the hands of the purchaser of the stock. An example is also provided to demonstrate the treatment for both seller and purchaser of the stock, where the stock purchased does not constitute stock in trade of the purchaser.
Public Ruling No. 3/2020 – Tax Treatment of Stock in Trade Part II – Withdrawal of Stock |
The new eight (8)-page PR comprises the following sections and sets out 10 examples:
1.0 Objective
2.0 Relevant provisions of the law
3.0 Interpretation
4.0 Introduction
5.0 Withdrawal of stock in trade for own use
6.0 Withdrawal of stock in trade for other reasons
7.0 Stock in trade parted with by compulsion
8.0 Updates and amendments
9.0 Disclaimer
The new PR explains the tax treatment of withdrawal of stock in trade in ascertaining the adjusted income of a business carried on by a person in Malaysia, pursuant to Sections 24(2) and 24(3) of the ITA.
Similar to the earlier PR, the new PR reiterates that pursuant to Section 24(2)(a) of the ITA, stock in trade withdrawn for one’s own use has to be accounted for and valued at the amount equal to the market value of that stock at the time of its withdrawal. This amount is to be taken as part of gross income from the business. The new PR further clarifies the tax treatment where the withdrawal of stock in trade for one’s own use relates to:
- Two distinct business activities; or
- The reclassification from trading to capital or vice versa due to the change in intention of the business
Four examples have been provided in the new PR to demonstrate the above under various scenarios.
The new PR explains and provides examples to demonstrate the tax treatment pursuant to Section 24(2)(b) of the ITA, where stock in trade is withdrawn from one’s business (other than on requisition or compulsory acquisition or in a similar manner), including the withdrawal of stock in trade:
- Without any consideration received
- For a consideration consisting of any property not being either a debt owing to the relevant person or a sum in cash or the equivalent of cash
- For other reasons for a consideration consisting of property together with a debt owing to the relevant person and/or any such sum in cash
Pursuant to Section 24(3) of the ITA, where the stock in trade is withdrawn under scenario (iii) above, the market value of that stock in trade can be reduced by the amount of the debt and/or sum. The new PR clarifies and provides an example to demonstrate that in this scenario:
(a) The amount of debt would be a trade debt and is taxable when the stock in trade is withdrawn (Sections 24(1) and 24(3)(b) of the ITA);
(b) The cash sum would be taxable when it is received (Section 24(3)(c) and 28 of the ITA); and
(c) The balance would be taxed at the time the stock is withdrawn from the business (Section 24(2) of the ITA)
In addition, the new PR also highlights the tax treatment pursuant to Section 4C of the ITA (which is effective YA 2014), where gains or profits from a business would include amounts receivable arising from stock in trade parted by an element of compulsion. The amount receivable would constitute gross income of the business in the year when the stock in trade was compulsorily acquired.
