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The Sun Daily: Capital vs revenue: Simple yet complicated
Repost of publication on The Sun Daily on 29 March 2021.
MALAYSIA does not tax capital gains except gains from property disposals under the Real Property Gains Tax Act (RPGT). Malaysia only taxes revenue that is of income nature that arises in in the country. The problem here is, what falls within the meaning of the word "income" and where is the dividing line between income and capital. Income is taxable and revenue expenditure is deductible. On the reverse, capital gains are not taxable and capital expenditure is not deductible. There is no definition of "income" in our tax legislation.
Capital is akin to a tree and income is equivalent to the fruits of the tree. Effectively, capital is the source and the produce from the source is income.
The criteria for determining income
The most important criterion is the recurring characteristic versus capital which is usually one-off in nature. An example of a capital gain would be a windfall, such as lottery win, or a gain from sale of an investment, such as a property that has been held for a long-term.
The other criteria that one should take into account are the length of the period an asset has been held (the longer you hold it, the stronger the argument that it is capital), intention at the time of purchase of the asset (was it for speculation or investment purposes), the frequency or how often you have been buying and selling the goods or properties, and the method of financing the acquisition.
Inheritance, gifts and gratuitous payment
If you received any monies from inheritance, gifts or gratuitous payment whereby the giver does not expect anything in return and it is voluntarily being given or it is being transferred automatically via inheritance, such monetary receipts are not income.
Sale of shares
If you are a speculator, regularly buying and selling shares and conducting the activity in an organised way, then such income will be subject to tax. However, if you are an investor who holds the shares for a longer term and earns dividends from the shares, and subsequently sells the shares, the sale receipts will likely be regarded as capital.
Compensation income and payments
To determine whether it is capital or revenue, one needs to understand the underlying nature of the transaction. If the payment is given to a business to permanently restrict or prohibit the business from carrying out an activity, such payment will be regarded as capital. Similarly, payments made to individuals to prohibit them from exercising their profession would be of capital in nature.
Disposal of properties
Generally, individuals who acquire and dispose of properties will be regarded as investors and therefore the gains should be treated as capital gains. The reason being, individuals will normally acquire properties as investments to grow their capital base and generate rental income as part of their retirement portfolio.
The exception will be if the individuals are buying and selling properties in an organised way and the holding period of the properties are short (perhaps less than a year or even eighteen months). Such activity will attract income tax.
What do you need to do?
If you believe that your receipts are of capital nature, whether it is a gift, voluntary payment or any other type of payment, you should ensure that you have the supporting documentation to prove the nature of the transaction.