Question

piece of land owned by two brothers, Alvin (lecturer) and Alex (engineer) was disposed of land for RM 1 million. The land was purchased in 2012 when a friend of Alex informed him of a sales advertisement in the newspaper. The brothers thought it would be a good idea to build homes for their families and their children’s families upon their retirement. Alvin withdrew money from the employees Provident Fund while Alex withdrew money from savings to pay for 80% of the cost of the purchase. The remaining 20% was financed a ten- year bank loan jointly taken out by the brothers.

Two years after the purchase the brothers were approached by a used car dealer who wished to buy the land. The brothers declined the offer to sell the land but agreed to rent it out for a period of three years. Upon the expiry of the tenancy agreement a portion of the land was planted with fruits which were distributed among the brothers’ relatives and friends.

In July 2019 the land was sold in order to settle the debts owed by Alex as well as to pay for the overseas education of Alvin’s children. This was Alvin and Alex first transaction of real estate.

Required:

Determine, with brief explanation and by reference to the badges of trade, whether or not the profit from the above disposal is liable to income tax.

Answer 1

The badges of trade with respect to real estate shall be explained as below :

1. Subject Matter

The subject matter in real estate is property. Property is possible to be purchased for investment as well as for trading.

2. Length of period of ownership

The longer the period of ownership, less likely that it is treated as trading

3. Circumstances responsible for realisation

Circumstances leading to sale of the property is an important consideration. If the sale is meant to realise profit, then there is an element of trading.

4. Motive

Motive or reason for acquisition will determine the purpose of the purchse, If the purpose is for trade, then the profit may be subject to tax.

5.Supplementary work done

If there is supplementary work done in connection with the realisation, possibility of trading will be higher

6.Frequency of similar transactions

If the sale is an isolated transaction, then it is unlikely that it is treated as Trading.

Considering the above pointers, we can conclude that the purchase of Land by Alvin and Alex are not for trading purposes. They had to sell the plot in order to repay the existent debt. The initial motive for the purchase is to build home on the Land.

Therefore, the profit realised shall not be taxed as per the provisions adhered to for the taxation of business activities. However, Capital Gain tax may be applicable.