Although it has been famously said that nothing is certain but death and taxes, this may be more true of the former than the latter. What is certain is that when a death takes place, somebody has to face up to the task of settling any related tax issues. This article attempts to throw some light on the subject.

When the deceased has left a will behind, it will state who is to act as executor and who is to inherit the estate. Where no will is left, that is known as an intestacy. The estate will then be administered by an administrator appointed by the High Court. The persons who inherit, usually family members, will then be determined under the law of intestate succession.

Syariah law applies to the inheritance of assets left by Muslims, who have only a limited ability to pass their property by will. Their estates are dealt with in much the same way as under intestate succession. The responsible persons, often referred to collectively as “the executor”, will need to consider capital taxes as well as income tax.

CAPITAL TAXES

There is no estate duty or inheritance tax in Malaysia so unless the deceased died domiciled in a foreign place, these taxes can be ignored.

Real property gains tax will also be of no consequence on death even if an asset has not been owned by the deceased for more than five years because a disposal on death is deemed to take place at the deceased person’s acquisition price, i.e. a no gain/no loss transaction. Executors themselves have no liability to tax on transferring an asset from the estate to a legatee as this is not a disposal.

However, if the legatee subsequently disposes of the asset within five years of its transfer to him he must treat its market value at the time of transfer as his acquisition price. Also, if the executor disposes of an asset of the deceased, otherwise than to a legatee, within five years of death, that is a chargeable disposal on which the market value at the date of death is deemed to be the acquisition price.

Example

At the time of his death on 15 May 2005, Samuel owned two commercial properties. He bequeathed the one in Ipoh to his son James and the executor transferred it to James on 1 February 2006 when its value was RM2 million.

James sold the property for RM3 million on 30 November 2010 incurring incidental costs of RM30,000. The property in Seremban, which was valued at RM2.75 million at the date of Samuel’s death was sold by the executor to a third party at arm’s length for RM4 million on 30 September 2010.

James has a liability to real property gains tax because he sold the Ipoh property within five years of his deemed acquisition date (1 February 2006). The tax is calculated as follows:

No tax is payable on disposal of the property at Seremban as the sale took place more than five years after the deemed date of acquisition (15 May 2005).

INCOME TAX - THE DECEASED

The executors are assessable and chargeable to tax on income of the deceased for the year of assessment in which he died and, where necessary, any previous year.  Any income of the deceased received by the executors, which would have been the individual's chargeable income if he had not died and had received it himself at the same time is also included. Different kinds of income are dealt with in different ways. Income from rents, interest and dividends is not apportioned and is treated as income at the time when it becomes receivable (provided that it is eventually received).

Example

Mr. Tan, who passed away on 4th March 2011, owned one property, a bungalow, which he had rented out on a two-year tenancy with a rent of RM5,000 per month payable monthly in advance on the first day of each month. The rent due on 1st March 2011 was paid late and it was collected by the executor after the date of death.

The executor should include the whole of the 1st March rent item, once it is received, as income of the deceased as it was receivable during Mr. Tan’s lifetime. It is not apportioned. The rents due from 1st April onwards will be income of the executor.

Deductions are given for property expenses in the normal way.

Where the deceased carried on the letting of property as a business, rents and expenses are included on the accruals basis. Where the deceased was in business as a member of a partnership, the death has the effect of terminating the partnership but the remaining partners will normally continue the business under a new partnership.

All rights and duties, which would have attached to the deceased with respect to his chargeable income pass to his executors. This means that the executors have the right to claim deductions for such items as are appropriate on his behalf including personal deductions for wife, children etc and to be taxed at graduated rates if the individual was resident in Malaysia. The personal deductions are given for a full year and not apportioned up to the date of death

Assessment of any income of the deceased must be made by the end of the third year of assessment following the year of death. However, the executor is required to submit a self-assessment return and any income so reported is deemed to be assessed automatically. The executor must retain and not distribute any assets of the estate unless he has provided in full for any tax which he knows or might reasonably expect to be payable by him. However, he can only take responsibility for what comes into his hands and, for this reason, he is only liable to the extent of what is received by him. 

INCOME TAX – THE EXECUTOR AND THE ADMINISTRATION PERIOD

Traditionally, the executor is given one year, known as the administration period, in which to take charge of the assets, administer the estate and pay all debts, but this period may be shorter or longer than one year. The executor is liable to income tax on the income of this period. When the administration is completed the executor will hand over to the beneficiaries their shares of assets including any income which the executor has received during the administration period. No tax is payable by the beneficiaries on this income.

Where assets are not to be distributed to beneficiaries but are to be held in trust, the provisions relating to trusts will commence to operate at the end of the administration period.

If the deceased person was domiciled in Malaysia at the time of his death, the personal deduction is currently at RM9,000, but no other personal deduction is given for each year of assessment during the administration period. Tax is charged at the graduated rates applicable to a resident individual.

Richard Thornton is author of 100 Ways to Save Tax in Malaysia for Property Investors (ISBN978-983-2631-83-5) and 100 Ways to Save Tax for Malaysian Investors (ISBN978-967-5040-42-9) published by Sweet & Maxwell Asia. See http://malaysiaauthorindex.com/wiki/Richard Thornton. He is also a Fellow of the Chartered Tax Institute of Malaysia.

The two works referred to immediately above contain some valuable insights on how to achieve legitimate tax savings for investors in property and other assets as well as dealing with complex issues such as “When can an investor be taxed as a dealer?” and “Is it a good idea to use a company?” Written in clear simple language, the books contain helpful examples to explain how the tax planning ideas can be put into action. They can be obtained from most book stores, or from the author at ricton100@gmail.com

You would not feel happy if you could not find the clothes you intended to wear because you wardrobe had become untidy or if your beautiful Jimmy Choo shoes were not fit to wear because they had been left out in the rain, would you? Tidiness, like virtue, is its own reward.

In the same way, you might be severely inconvenienced if you had not kept safely and in good order any information and documents which might be pertinent to your tax affairs. Self-assessment for tax purposes means that you are not required to submit any back up information or documents at the time when you submit an income tax return so there is no independent check to see whether those things are in order. However, this should not lead to complacency. Supporting information can be required many years after the tax return is submitted and when it is found to be missing or inadequate additional tax assessments and penalties can be imposed.

DUTY TO KEEP DOCUMENTS

How long you need to keep your documents depends upon whether you submit an income tax return or not. When you do, the retention period is seven years from the end of the year of assessment concerned (i.e. 31 December 2017 in the case of a tax return for 2010). If you do not submit a return for a particular year, it is seven years from the end of the year in which you do submit the missing return. Any documents relating to income in Malaysia, including income from property situated in Malaysia, are required to be kept in Malaysia. All of this applies to companies as well as individuals.

The documents referred to are:

Separate details should be kept for each property owned and it would be appropriate to ensure that legal documents such as sale and purchase agreements, tenancy agreements and agency agreements are kept safely. The Inland Revenue worksheet HK-4 is a convenient form in which to keep statements of income and expenditure. The law allows for information to be stored in electronic form provided that it can be printed when required.

Keeping things tidy is not only a sensible precaution but also a legal requirement. Failure to keep the records as required can be punished by a fine of up to RM10,000 or imprisonment for up to one year or both. Obviously such a harsh punishment would only be meted out in extreme cases.

TAX AUDIT

Not everybody gets audited. The Inland Revenue selects cases for audit through the computerised system based on risk analysis criteria. In particular cases, this may arise through suspicious fluctuations in the level of income disclosed or expenses claimed by a taxpayer. However, the selection of audit cases is not confined to selection by the computerised system; cases can also be selected based on information received from various sources including agents and tenants claiming a deduction for rent paid.

Desk audits are normally concerned with straightforward issues or tax adjustments which are easily dealt with via correspondence. A taxpayer may be called for an interview at the Inland Revenue’s office if further information is required. Generally, a desk audit involves checking all information on income and expenses as well as various types of claims made by a taxpayer in his income tax return.

Beyond this level is the field audit which will be carried out on the taxpayer’s premises and is more stringent. However, this kind of audit is usually only employed for company and business cases.

If you have all the information at hand, an audit should be no cause for concern but do bear in mind that memory can play tricks. After a year or two, you might have forgotten why you dealt with a particular item of income or expense in the way you did even though your treatment was justified at the time. It is a good idea to get into the habit of making and retaining explanatory notes to help jog your memory.

Access To Buildings, Documents And Information

The Director General of Inland Revenue is given wide powers. He has at all times full and free access to all kinds of lands, buildings and places and to all books and  documents. This applies not only to the premises of the taxpayer but to those of any other person. Needless to say, he must use his powers bona fide, reasonably, without negligence and only for the purpose for which they were conferred. Of course, it should not be necessary for him to use these powers at all if taxpayers are fully co-operative in the first place.

In addition to his statutory power to search, the Director General of Inland Revenue is empowered to require any person to give orally or by notice in writing such information or particulars as may be demanded of him for the purposes of the tax.

Both of these powers may be used to obtain information for the purposes of real property gains tax as well as for income tax but the powers are much wider in the case of real property gains tax. The reason is that third parties such as purchasers, agents, solicitors and lenders may have relevant information about a property or share transaction which would not otherwise be forthcoming. 

How Does This Affect Non-Residents?

Income derived from land situated in Malaysia is liable to tax in Malaysia even if the owner is non-resident. The responsibility for making a return of income, for keeping records and providing information when it is required falls on the non-resident owner. Where he is absent or otherwise fails to comply he may be taxed in the name of any person who is in receipt of his income, such as an agent. That is why agents often prefer to retain a part of the rents they collect to cover any tax payable by them. In the case of a person who is chargeable to real property gains tax, he is initially responsible for making a return and paying any tax but, if he is absent, any other person may be appointed by the Director General as an agent and such person can be required to pay any real property gains tax due out of any monies that he holds for the principal.

Richard Thornton is author of 100 Ways to Save Tax in Malaysia for Property Investors (ISBN978-983-2631-83-5) and 100 Ways to Save Tax for Malaysian Investors (ISBN978-967-5040-42-9) published by Sweet & Maxwell Asia. See http://malaysiaauthorindex.com/wiki/Richard Thornton. He is also a Fellow of the Chartered Tax Institute of Malaysia.

The two works referred to immediately above contain some valuable insights on how to achieve legitimate tax savings for investors in property and other assets as well as dealing with complex issues such as “When can an investor be taxed as a dealer?” and “Is it a good idea to use a company?” Written in clear simple language, the books contain helpful examples to explain how the tax planning ideas can be put into action. They can be obtained from most book stores, or from the author at ricton100@gmail.com

In the early days of real property gains tax, a common way to avoid the tax was to place the land interest inside a company. In that way the shares in the company could be sold instead of the asset itself and no tax would be payable. Of course if the company under its new ownership disposed of the land, it could become liable to tax itself. Usually, the objective was to ensure that the company would hold the land for long enough to reduce the tax rate to an acceptable level.

To overcome this form of avoidance, a new tax (share transfer tax) was introduced in 1984, although it was soon replaced by a modification of the RPGT which allowed the tax to be levied on a gain on the disposal of shares in a company which was a “real property company” (RPC). Under the present law, RPGT is levied at an effective rate of 5% on gains realised on the disposal of an asset held for more than five years.

Shares includes loan stock and debentures, a member's interest in a company not limited by shares and any option or other rights in, over or relating to shares.

It seems to make no difference whether the company holds real property as an investment or as trading stock. This interpretation has been challenged on appeal but so far with only limited success.

WHAT IS A REAL PROPERTY COMPANY

If a company is a controlled company and it satisfies the prescribed test as to ownership of real property and RPC shares it will be a RPC. A controlled company is one having not more than 50 members which is controlled by not more than 5 persons. Any two or more persons satisfying the requirements are taken to have control of the company.

The ownership test is based on the company owning real property and RPC shares to the extent of at least 75% of its ‘total tangible assets’. A controlled company becomes a RPC by meeting this test on 21st October 1988 or, if not then, at any later date on which it acquires real property or RPC shares or both.

Example

Zenith Sdn Bhd, a controlled company, had the following net assets position on 21st October 1988:

As the defined value of real property and RPC shares (RM1,200,000) is not less than 75% of the defined value of ‘total tangible assets’ (RM1,600,000), Zenith Sdn Bhd is a RPC as from 21st October 1988.

For real property, the 'defined value' is market value; for RPC shares it is the acquisition price as determined below.

The meaning of tangible assets is not given but it is regarded as including, in addition to items such as plant, machinery, stocks and cash, current assets such as debtors and prepayments. It does not include true intangibles like patents, trade marks, know-how and goodwill. Liabilities are not taken into account.

ACQUISITION OF SHARES IN A REAL PROPERTY COMPANY

The date of acquisition of RPC shares and the determination of the acquisition price depends upon the timing of the acquisition.

All shares in a RPC held at the date when the company first becomes a RPC (whether 21st October 1988 or later) are deemed to have been acquired on that date. In that case the acquisition price is determined by the formula

A x C
B                     where

A =      the number of shares in the company which are deemed to be a chargeable asset
B =      the total number of shares issued by the company at the deemed date of acquisition
C =      the defined value of real property or RPC shares or both owned by the company at the deemed date of acquisition, determined in the same manner at that date.     

Where shares in a RPC are acquired after the date when the company first becomes a RPC, the normal rules about date of acquisition and acquisition price apply.

CEASING TO BE A REAL PROPERTY COMPANY

The process of becoming a RPC can be reversed. It happens when a RPC disposes of real property or RPC shares or both so that, after the disposal, the defined value of real property and RPC shares is less than 75% of its ‘total tangible assets’.  It will also happen if and when the company ceases to be a controlled company.

It should be noted that shares in a RPC do not cease to be RPC shares when the company ceases to be a RPC. So long as they are still held by the same person, a gain on disposal can be charged to real property gains tax.

Liquidation of a RPC will extinguish the asset, i.e. the shares, without any disposal taking place.

It should be noted that, except on 21st October 1988, a company can neither become nor cease to be a RPC merely by examining the value of its assets.

CHARGEABLE GAINS

Tax on the chargeable gain is calculated in the normal way having regard to the period of ownership and to any exemptions or reliefs which may apply to the disposer.  However, for RPC shares:

Example

Ridzwan held 25,000 shares in Syarikat Bersih Sdn Bhd, which had been a RPC for many years. He purchased them from his brother on 30th September 2008 for RM5 each, paying stamp duty of RM1,200 on the transfer to himself. The market value at the time was RM15 each. On 16th October 2009, Syarikat Bersih Sdn Bhd gave a bonus issue of three shares for every one held. Ridzwan disposed of his 100,000 shares as follows:

As Ridzwan’s acquisition from his brother was a non-arms length transaction, he is deemed to have acquired the shares at market value. He has the following disposals:

              25,000 at deemed cost of RM15 each + RM1,200 = RM376,200
              25,000 at no cost

             50,000 at no cost

On the sale of his 50,000 shares, Ridzwan received RM450,000.

Ridzwan’s chargeable gain will be RM66,420 (RM450,000 – RM376,200 = 73,800 less the 10% exemption). The effective rate of tax will be 5% (Disposal within five years of acquisition). On the gift to his son, the disposal price is deemed to be equal to the acquisition price so Ridzwan will have no liability to RPGT.

Richard Thornton is author of 100 Ways to Save Tax in Malaysia for Property Investors (ISBN978-983-2631-83-5) and 100 Ways to Save Tax for Malaysian Investors (ISBN978-967-5040-42-9) published by Sweet & Maxwell Asia. See http://malaysiaauthorindex.com/wiki/Richard Thornton. He is also a Fellow of the Chartered Tax Institute of Malaysia.

The two works referred to immediately above contain some valuable insights on how to achieve legitimate tax savings for investors in property and other assets as well as dealing with complex issues such as “When can an investor be taxed as a dealer?” and “Is it a good idea to use a company?” Written in clear simple language, the books contain helpful examples to explain how the tax planning ideas can be put into action. They can be obtained from most book stores, or from the author at ricton100@gmail.com

A review of the second edition of this popular book which sets out to arm property investors with new tax-saving ideas

The returns from property investment can certainly be maximised where a potential earning leakage in the form of tax is effectively handled. For the astute investor who has recognised this fact, the publication of the new second edition of 100 Ways to Save Tax in Malaysia for Property Investors by popular tax author, Richard Thornton, is certainly to be welcomed. Some four years after the initial publication of this book, the time is ripe for an update to arm property investors with new tax-saving ideas.

The book is prepared in very simple and engaging language. It makes taxation so simple and manageable and is sure to change the perception held by many about taxation. Complementing the clear text are useful and instructive examples which help to enhance the understanding of the various taxation principles and rules as well as tax mitigation ideas. To ensure that readers do not miss any keys points “Simple Planning Ideas” are highlighted in most chapters.

Comprehensive Guide

100 Ways to Save Tax in Malaysia for Property Investors is a comprehensive guide to the tax implications of property investment. As a work that collects together in one source all of the tax issues relevant to property investment, it is an invaluable tool to help investors in their vital decision-making processes. It is a companion work to 100 Ways to Save Tax in Malaysia for Individuals and 100 Ways to Save Tax in Malaysia for Small Businesses by the same acclaimed tax author. The book covers the specifics of the taxation of property income, which is in many ways distinct from the taxation of other kinds of income. The availability of deductions against rental income is discussed with clear examples. In addition to dealing with the taxation of property income, the book covers other areas of taxation including investment holding companies, real estate investment trusts and assessment tax which have relevance for the property investor. Tax-saving strategies which include tax deferment, tax reduction and elimination of tax liability are explored with practical illustrations. The chapter on this provides examples which are really useful to help property investors appreciate the actual possibilities that lie behind proper tax planning.

Mitigating RPGT

Besides a wealth of tax-saving ideas for long term investors, the book also has useful tips for people seeking to exploit the property market by realising short term gains and some useful strategies for mitigating real property gains tax. The revised and expanded chapter on RPGT also includes the calculation of the tax, family gifts and the potential trap, computations through the exempt period, the 2% withholding tax and the new loss relief. With RPGT very much in the mind of investors again, this more detailed coverage of the topic should be most welcomed.

For the unwary investor who might otherwise stray over the line by dealing with properties in such a way that a profit on sale becomes liable to income tax, useful guidelines and examples are provided. Stamp duty which is a significant cost for property investors is also covered by the book including the implementation of advance stamp duty. A new chapter on assessment tax highlights the impact of rates charged by local authorities which are often overlooked as a form of tax by property investors.

For the easy reference of readers, appendices to the book provide the applicable tax rates, relevant Inland Revenue Board Public Rulings as well as the meaning of certain important expressions. 

Whether you are a new property investor or an experienced one, a Malaysian or a foreign investor, an individual or a corporate investor, this book contains a wealth of ideas to help you to minimise the taxes you have to pay and to plan your future actions so as to pay as little tax as possible. This book aims to make the understanding of tax issues affecting property investment easy by using simple everyday language and practical examples to illustrate them. It is certainly a book not to be missed by property investors, tax consultants, real estate consultants, estate agents, lawyers, landlords and anyone with an interest in property income.

It is understood that this book will hit the bookstores in early February 2011. Grab it when it is available. It is worth every bit of the RM60 that it costs. For further information, contact the publishers Sweet & Maxwell Asia at (T) 603-56330622, (F) 603-56330657, or visit its website www.sweetandmaxwellasia.com.my.

Richard Thornton is author of 100 Ways to Save Tax in Malaysia for Property Investors (ISBN978-983-2631-83-5) and 100 Ways to Save Tax for Malaysian Investors (ISBN978-967-5040-42-9) published by Sweet & Maxwell Asia. See http://malaysiaauthorindex.com/wiki/Richard Thornton. He is also a Fellow of the Chartered Tax Institute of Malaysia.

The two works referred to immediately above contain some valuable insights on how to achieve legitimate tax savings for investors in property and other assets as well as dealing with complex issues such as “When can an investor be taxed as a dealer?” and “Is it a good idea to use a company?” Written in clear simple language, the books contain helpful examples to explain how the tax planning ideas can be put into action. They can be obtained from most book stores, or from the author at ricton100@gmail.com

CAPITAL ALLOWANCES FOR PROPERTY INVESTORS