Control sales

Outline
• Introduction
• Control sales situations
• Definition of control
• Disposer
• Disposer’s final period
• Tax implication
• Other tax issues
Introduction
• Disposal of a qualifying asset to a related party, known as
controlled sales or controlled transfer

• Relevant statutory provisions

• Para 38-40 of Sch 3, ITA
• Income Tax (Capital Allowances and Charges) Rules
1969
Control sales situations
38. (1) Paragraphs 39 and 40 shall apply where a person disposes of an
asset in relation to which an initial or annual allowance or an agriculture
allowance or forest allowance has been made or would have been made, if
claimed, to him and at the time of the disposal—
(a) the disposer of the asset is a person over whom the acquirer of the
asset has control;

(b) the acquirer of the asset is a person over whom the disposer of the
asset has control;

(c) some other person has control over the disposer and acquirer of the
asset;

(d) the disposal is effected in consequence of a scheme of reconstruction

or amalgamation of companies; or

(e) the disposal is effected by way of a settlement or gift or by devolution

of the property in the asset on death,
the disposer of the asset, the asset in question and the acquirer of the
asset being in those paragraphs referred to as the disposer, the asset and
the acquirer respectively.
Definition of Control
38. (2) In this paragraph "control", in relation to a
company, means the power of a person to secure, by
means of the holding of shares or the possession of voting
power in or in relation to that or any other company, or by
virtue of any powers conferred by the articles of association
or other document regulating that or any other company,
that the affairs of the first-mentioned company are
conducted in accordance with the wishes of that person,
and, in relation to a partnership, means the right to a share
of more than one-half of the assets of the partnership, or
to more than one-half of the divisible profits of the
partnership.
Example 1
D 2000

DXYA ABC Sdn

3000
Sdn Bhd Bhd
XYA SdnBhd 5,000 10,000
15,000
6000
2000

5000
2000

A C
2000 8000

X B
Y
Disposer
39. (1) Subject to any rules made under paragraph 40,
the disposal of the asset shall be deemed to have taken
place on the first day of the disposer's final period for a
sum equal to the disposer's residual expenditure on that
day.

(2) In this paragraph "the disposer's final period" means,

in relation to the disposal and acquisition of the asset,
the basis period (appropriate to the disposer's business
for the purposes of which qualifying expenditure has been
incurred in relation to the asset) for the year of
assessment which coincides with the first year of
assessment for which an initial or annual allowance may
be made to the acquirer in relation to the asset if it is
used for the purposes of a business carried on by the
acquirer or as an industrial building.
Disposer’s final period
Example A

A Sdn Bhd (YE 31/12) sold an asset on 1

Nov 2014 to B Sdn Bhd (YE 30/9). A and
B are related companies.
Disposer’s final period
Example A

B Sdn Bhd will claim CA starting from YA

2014 (1/10/14-30/9/15)

Disposer’s final period is YA2015 (1/1/15-

31/12/15). The disposal would be deemed
to have taken place on 1 January 2015
which is the first day of the disposer’s
final period.
Disposer’s final period
Example A

Since the 1/11/14 (actual date of

disposal) is earlier than 1/1/15, the
disposer is deemed to have used the
asset prior to 1/1/15 so A Sdn BHd
will be able to claim capital
allowances for YA2014 (1/1/14-
31/12/14)
Disposer’s final period
Income Tax (Capital Allowances and Charges) Rules 1969

5. Where there is an interval between the actual date of

disposal of the asset and the first day of the disposer’s final
period and that day falls after the date of disposal, the
asset shall be deemed to have been owned by and in use
by the disposer for the purposes of the disposer’s business
(in relation to which the asset was in use at the date of
disposal) at the end of the basis period in relation to that
business for the year of assessment which immediately
precedes the year of assessment to which the disposer’s
final period relates.
Disposer’s final period
Example B

A Sdn Bhd (YE 30/9) sold an asset on 1

Dec 2013 for RM10,000 to B Sdn Bhd (YE
31/3). A and B are under common
control. A Sdn Bhd acquired asset at
RM15,000 on August 2011.
Disposer’s final period

Example B

B Sdn Bhd will claim CA starting from YA 2014

(1/4/13 -31/3/14)

Disposer’s final period is YA2014 (1/10/13-

30/9/14)
The disposal would be deemed to have taken
place on 1 October 2013 which is the first day of
the disposer’s final period
Disposer’s final period
Income Tax (Capital Allowances and Charges) Rules 1969

3. Subject to paragraph 4, for the purposes of paragraph

40 of the Schedule, the qualifying expenditure deemed to
have been incurred by the acquirer shall be treated as
having been incurred on the first day of the disposer’s final
period.
Tax implication
Income Tax (Capital Allowances and Charges) Rules 1969

7. Except in a disposal to which paragraph 6 applies, no

balancing allowance nor balancing charge shall be made in
relation to the business of the disposer in relation to the
asset.

8. In any case to which paragraph 3 or 5 applies –

(a) no initial allowance shall be made to the acquirer in
respect of the qualifying expenditure incurred by him in
relation to the asset; and

(b) paragraphs 14 to 18 of the Schedule shall apply for the

determination of any annual allowance to be made to the
acquirer as would have been made to the disposer for any
year of assessment.
Example B (con’d)
A Sdn Bhd
Qualifying expenditure 15,000
YA 2012 IA (20%) 3,000
AA (10%) 1,500 (4,500)
YA2013 AA (10%) (1,500)
YA2014 AA (10%) (1,500)
Residual expenditure 7,500
Disposal value (7,500)
Nil

B Sdn Bhd
Qualifying expenditure 7,500
YA2015 AA (10%) (1,500)
YA2016 AA (10%) (1,500)
Disposer’s final period
Example C

D Sdn Bhd (YE 31/1) sold an asset on 4

June 2013 for RM70,000 to E Sdn Bhd (YE
30/6). D and E are related party. D Sdn
Bhd acquired asset at RM82,000 on 10
January 2013.
Disposer’s final period

Example C

E Sdn Bhd could claim CA starting from YA 2013 (1/7/12-

30/6/13)

Disposer’s final period is YA2013 (1/2/12-31/1/13)

The disposal would be deemed to have taken place on 1
February 2012 which is the first day of the disposer’s final
period, however the asset was not bought yet (i.e. actual
date 10 January 2013)
Disposer’s final period
Income Tax (Capital Allowances and Charges) Rules 1969

4. Where the disposer incurred qualifying expenditure in

relation to the asset on or after the first day of the
disposer’s final period, paragraph 3 shall not apply and that
qualifying expenditure shall be deemed to have been
incurred by the acquirer at the time that it was incurred by
the disposer.
Disposer’s final period

Example C (con’d)

Therefore, D Sdn Bhd is deemed to acquire asset

at 10 January 2013

No initial allowance or annual allowance for D

Sdn Bhd but E Sdn Bhd could claim initial and
annual allowance
Disposer’s final period
Income Tax (Capital Allowances and Charges) Rules 1969

6. For the avoidance of doubt, it is hereby declared that

paragraph 39 of the Schedule shall not apply where the
asset is not subsequently used for the purposes of the
business of the acquirer after its disposal by the disposer
and any balancing allowance or any balancing charge shall
be made in relation to the business of the disposer as if
the disposal had not been a disposal to which paragraph
38 of the Schedule applies.
Other tax issues
• Disposal of asset acquired under control transfer to a
third party
• Disposer sells or transfers an asset to a business outside
Malaysia (which is controlled by the disposer)
• SEOD Co S. A. v Ketua Pengarah Hasil Dalam Negeri
(1996) MSTC 2782
Comprehensive example
ABC Sdn Bhd (YE 30/6) XYZ Sdn Bhd (30/9) are
under common control. ABC Sdn Bhd
purchased a machine on 5 May 2011 for
RM10,000 and sold to XYZ Sdn Bhd for
RM8,000 on 6 June 2013. Subsequently, XYZ
sold this asset to Lily Enterprise (31/12) for
RM11,000, who has no association with either
company, on 15 November 2015.
Required
Calculate capital allowances that each party could
claim.
Suggested solution

XYZ could claim capital allowances in YA 2013, basis period

1/10/12-30/9/13

Disposer’s final period is YA 2013 (1/7/12-30/6/13), the

disposal would be deemed to have taken place on 1 July
2012 which is the first day of the disposer’s final period
Suggested solution

ABC Sdn Bhd (YE 30/6)

Qualifying expenditure 10,000

YA 2011 IA (20%) 2,000

AA (10%) 1,000 (3,000)

YA2012 AA (10%) (1,000)

Residual expenditure 6,000

Disposal value (6,000)

Nil
Suggested solution (con’d)

XYZ Sdn Bhd (YE 30/9)

Qualifying expenditure 6,000
YA2013 AA (10%) (1,000)
YA2014 AA (10%) (1,000)
YA2015 AA (10%) (1,000)
Residual expenditure 3,000
YA 2016 Sales proceeds (11,000)
Balancing charge 8,000
(restricted to RM7,000)
Comprehensive example (con’d)

Lily Enterprise (YE 31/12)

Qualifying expenditure 11,000
YA 2015 IA (20%) 2,200
AA (10%) 1,100 (3,300)
YA2016 AA (10%) (1,100)