Unfair taxation of bonus shares of ‘Real Property Company’
TTCS Virtual Sharing Session on Indirect Tax

17 July 2023

IF YOU hold shares in a company that principally owns real estate (value of real estate exceeds 75% of the total tangible assets of the company), the shares are classified as “Real Property Company (RPC) shares”, they will always remain as RPC shares even though the company may no longer be classified as a RPC. You will be subject to Real Property Gains Tax (RPGT) when you sell the shares.

This provision to tax RPC shares (Paragraph 34A, Schedule 2 of the RPGT Act 1976) was introduced on Oct 211988 to curb RPGT avoidance by selling company shares instead of the property held by the company.

Although the intention was good in introducing Paragraph 34A, the legislation has led to unfair taxation of taxpayers, and an example is the treatment on the taxation on the disposal of bonus RPC shares.

What is the problem with bonus shares?

The fundamental principle is bonus shares are derived from the holding of existing shares.

Bonus shares do not increase the shareholding percentage by the shareholder. Bonus shares do not involve any transfer of shares, and they merely are issued generally out of retained earnings.

When a company becomes an RPC, the deemed acquisition price of the shares will be based on the value of the real estate held by the company at that point in time. Bonus shares issued subsequently is regarded by the IRB as an acquisition of new RPC shares, but the cost of the real estate will not be distributed to the bonus shares.

When shares are sold (which includes the bonus issues), the total proceeds are segregated between the number of original shares and the bonus shares acquired subsequently. This is where the unfair treatment arises.

Now you have a situation where the sales proceeds will be allocated to the bonus shares received free of charge, and the gains will be calculated without the benefit of the cost being given to the taxpayer. The Inland Revenue Board (IRB) is unwilling to apportion the costs of the original shares between the bonus shares and the original shares.

There is another fundamental error in the interpretation of this legislation which leads to the unfair taxation.

IRB takes the position that the issuance of bonus RPC shares is a transfer of real property from one person to another (i.e. from the company to the shareholder). This cannot be the case as any transfer will involve one party moving an asset to another party. In this case, the bonus issue is not a transfer, but merely a split of the original shares without changing the percentage of ownership by the shareholder.

If there is no transfer of shares, then the bonus issue should be treated as part and parcel of the original shares and the gain should be calculated in totality, rather than splitting the sales proceeds between the bonus shares and the original shares.

It is time IRB looked at the actual substance of the transaction (i.e. the bonus issue is merely a split of the original shares and it cannot be treated as a separate real property). The law as it stands may permit IRB to interpret it the way it is being interpreted now, but it is leading to additional taxation where the taxpayer is paying tax on sale proceeds without being able to claim any costs on acquisition.

This piece of legislation has other pitfalls, and it is time that Paragraph 34A should be relooked and revamped such that it does not unfairly bring sales proceeds to taxation.

This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (

This article was originally published on the Sun daily.

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