New Chapter 9: Section 65C – Gains or profits from the Disposal of Capital Asset – Interpretation

Finance (No. 2) Bill 2023 proposes that New Chapter 9 be introduced.

Part III of the Income Tax Act 1967 is amended by inserting after Chapter 8 the following chapter: “Chapter 9 – Gains or Profits from the Disposal of Capital Asset“

Interpretation of Chapter 9

Section 65C. In this Chapter, unless the context otherwise requires—

“consideration” means consideration in money or money’s worth;

“disposal” means to sell, convey, transfer, assign, settle or alienate whether by agreement or by force of law and includes a reduction of share capital and purchase by a company of its own shares;

“shares” means all or any of the following:

1. stock and shares in a company;
2. loan stock and debentures issued by a company or any other corporate body incorporated in Malaysia;
3. a member’s interest in a company not limited by shares whether or not it has a share capital;
4. any option or other right in, over or relating to shares as defined in paragraphs (a) to (c).

Overview

The Finance (No. 2) Bill 2023 introduces a new chapter, Chapter 9, into the Income Tax Act 1967, focusing on gains or profits from the disposal of capital assets.

This chapter provides a framework for determining the chargeable income of entities such as companies, limited liability partnerships, trust bodies, or co-operative societies arising from the gains or profits obtained through the sale or transfer of capital assets.

Section 65C – Interpretation of Chapter 9:

This section defines key terms in Chapter 9.

Notably, it clarifies the meaning of “consideration,” “disposal,” and “shares.” Understanding these terms is crucial for the accurate application of the chapter.

let’s break down the definitions provided in Section 65C with some illustrative examples:

1. Consideration:

• Definition:
  • Consideration of money or money’s worth.
• Illustration:
  • Suppose Company A sells a capital asset to Company B for RM 100,000. In this case, the RM 100,000 is the consideration in money.
• Another Example:
  • If Company C exchanges a capital asset X with Company D for capital asset Y, and both parties agree that the fair value of the capital asset X and capital asset Y is RM 80,000 each, then the consideration in money’s worth is RM 80,000.

2. Disposal:

• Definition:
  • To sell, convey, transfer, assign, settle, or alienate, including a reduction of share capital and purchase by a company of its own shares.
• Illustration:
  • Company X decides to sell a capital asset to Company Y. The act of selling the capital asset is a disposal. It could also include scenarios where a company transfers ownership of its capital asset to another entity.
• Another Example:
  • If a shareholder transfers their shares to another person, it is considered a disposal of shares. This could happen through a sale or a gift.

3. Shares:

• Definition:
  • Includes various types of interests in a company such as stock, shares, loan stock, debentures, a member’s interest not limited by shares, and any option or other right in, over, or relating to shares.
• Illustration:
  • Stock and shares:
    • Company P issues common shares to investors, representing ownership in the company.
  • Loan stock and debentures:
    • Company Q issues bonds or debentures to raise capital, considered loan stock.
  • Member’s interest:
    • In a partnership, a member may be interested in the business’s profits, not necessarily represented by shares.
  • Option or other right:
    • A person holds an option to buy shares in a company at a predetermined price.

Understanding these terms is crucial for accurate application within Chapter 9 of the Income Tax Act 1967, particularly when dealing with the taxation of gains or profits from the disposal of capital assets.

Tax Impact:

The introduction of Chapter 9 clarifies the taxation of gains or profits from the disposal of capital assets.

Entities subject to this chapter must meticulously calculate their adjusted income, considering various factors.

The new provisions aim to ensure a fair and comprehensive assessment of tax liabilities associated with the disposal of capital assets, promoting transparency and accuracy in taxation. Affected entities must familiarise themselves with these provisions to comply with the updated tax regulations and make informed financial decisions regarding the disposal of capital assets.