(TAX UPDATE) Who’s Right? Lawyer Says RPGT, IRB Says Income Tax

“I already sold the property and my lawyer file RPGT already! Why are you saying my company needs to pay income tax on the gain of disposal?”

That was how a director shouted at me during a review.

I replied calmly, “Because IRB may not see your company’s sale as capital gain. They may treat it as business income.”

I followed up with this question “Why you set up this Sdn Bhd? Why you buy 5 properties under this Sdn Bhd. Profit? Right?”

This is one of the most common misunderstandings among Sdn Bhd companies in Malaysia. When disposing of land or buildings, should it fall under Real Property Gains Tax (RPGT) or Income Tax?
The answer depends on one key principle : the Badge of Trade.

What Is the “Badge of Trade”?

The Badge of Trade is a long-standing tax principle used by the Inland Revenue Board (IRB) to decide whether your company is investing or trading in properties.

IRB doesn’t just look at paperwork or lawyer opinions.
They study your company’s intent, behaviour, and pattern of transactions.

Here are the nine badges of trade they commonly refer to:

Intention at purchase – Was the property meant for long-term investment or quick resale?
Nature of the asset – Is it used for business (factory, office) or purely for resale?
Frequency of transactions – How often does your company buy and sell properties?
Modification and development – Did your company enhance, subdivide, or renovate to increase value?
Duration of ownership – Was it sold shortly after purchase?
Financing method – Was it funded by short-term borrowing or capital injection?
Circumstances of sale – Was the sale pre-planned or due to special reasons?
Supplementary work – Did your company advertise, market, or engage brokers like a property trader?
Profit motive – Was there a clear plan to earn a profit from resale?

If several of these badges point towards trading activity, IRB can disregard RPGT and reclassify your gain as income tax even if the lawyer had already filed RPGT forms.

The Malaysian Court has consistently applied the badges of trade test to determine whether property disposals should be taxed as capital gains (RPGT) or business income (Income Tax).

Why Sdn Bhd Companies Prefer RPGT

For most companies, RPGT is simpler and often cheaper.

Rates for companies:
- Within 3 years: 30%
- 4th year: 20%
- 5th year: 15%
- 6th year onwards: 10% (unlike individuals, not 0%)
Only the gain is taxed, not the full sale amount.

For many SMEs, RPGT feels fairer, one-time tax, lower tax rate.

Why IRB Prefers Income Tax

IRB’s logic is straightforward:
If your Sdn Bhd behaves like a property trader, they want income tax, not RPGT.

Corporate tax rates:

15% on first RM150,000 (for SMEs)
17% on next RM450,000
24% thereafter (standard rate)

By reclassifying your property sale as income, IRB gains flexibility to:

Reopen past accounts for reassessment.
Tax multiple transactions under “business income.”
Challenge previous RPGT filings if your pattern looks like trading.

From IRB’s point of view, a company that buys, renovates, and sells properties within a few years behaves more like a developer, not an investor.

The Current Practice in Malaysia

In recent years, IRB has become more assertive in challenging property disposals, especially when:

The property was never used for the company’s core business.
Financing came from short-term loans.
There was active marketing or subdivision before sale.

Even if the transaction was done “according to lawyer’s instruction,” IRB focuses on economic substance what actually happened in reality.

A welcome example is the Kind Action Sdn Bhd case, where the Federal Court ruled that IRB cannot impose income tax on a transaction already assessed under RPGT unless the RPGT assessment is first discharged.
This landmark decision sets a clear boundary on IRB’s power. A small but important protection for companies facing double taxation threats.

The Takeaway for Sdn Bhd Directors

Before disposing of any property, ask yourself:

“Will IRB see my company as an investor or a trader?”

That single interpretation can change everything.
The difference between RPGT and income tax could easily reach hundreds of thousands of ringgit.

Always seek a tax professional’s review before signing the Sale & Purchase Agreement.
Once IRB issues an assessment, reversing it is far more difficult than preventing it.

Read more tax insights and real Malaysian case stories at 👉 www.ktp.com.my
KTP … Trusted audit, tax, and advisory firm for SMEs in Johor and across Malaysia.

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