(TAX UPDATE) Practical Completion Can Trigger Tax Completion Before Final Account Is Signed

01(TAX UPDATE) Practical Completion Can Trigger Tax Completion Before Final Account Is Signed

(Public Ruling No. 5/2025; YA 2023 onwards)

02Introduction

LHDN has clarified that for construction contracts, a project may be treated as “completed” for tax purposes before the Final Account is agreed or signed. Once the project is deemed completed, a recognition timeline applies, including a 12-month rule (from YA 2023 onwards) where final accounts are delayed.

Key message is the final account timing does not control tax completion. Operational milestones and cost thresholds may.

03Scope

This alert is relevant to:

• Main contractors, subcontractors, developers with construction contracts
• QS teams, commercial teams, project managers
• Finance and tax teams responsible for revenue and profit recognition

04Key Tax Clarification (Public Ruling No. 5/2025)

When is a construction contract deemed “completed” for tax?

For tax purposes, a construction contract is deemed completed at the earlier of:

1. Certificate of Practical Completion (CPC), or
2. 95% of total estimated construction costs incurred

Once either trigger is met, the project is considered completed for tax. This can occur even if:

• Final Account is still under negotiation
• VO is still being finalised
• Subcontractor claims are still being reconciled

YA 2023 onwards: Recognition where Final Account is delayed

From YA 2023 onwards, where the Final Account is not finalised promptly, actual gross profit or loss must be recognised at the earlier of:

1. 12 months after completion, or
2. When Final Accounts are agreed

05Why This Matters (Operational + Tax Risk)

This change creates direct tax impact on commercial processes.

VO timing becomes tax-sensitive

• VO delays may lead to revenue not captured on time, while costs continue to be recognised.
• This increases exposure to tax adjustments during audit.

Subcontractor delays can distort taxable profit

• Late certification or late claims can shift costs into a later period, while the completion timeline continues.

High-risk audit pattern

A common audit red flag is:

• Costs recognised early (supported by invoices/claims), but
• VO/revenue deferred (pending approval / negotiation)
  This mismatch is often challenged as it can understate taxable profit in the earlier period.

06Practical Recommendations (Controls & Governance)

Contract completion tracking

Implement a CPC / 95% cost threshold tracker for each project to identify:

• Completion trigger date
• “12-month” deadline date
• Status of Final Account / VO / outstanding claims

Strengthen VO governance

• Set a monthly VO cut-off and escalation process
• Track VO submission date, response date, approval status
• Document reasons for delay (variation disputes, measurement issues, client instructions)

Subcontractor claim discipline

• Standardise claim timelines and certification windows
• Maintain accrual support documentation (measurement sheets, site records, correspondence)

Documentation pack for tax defence

Maintain an audit-ready file including:

• CPC and supporting certificates
• Cost-to-complete estimates (basis, revisions, approvals)
• VO register and correspondence
• Final Account status tracker and dispute evidence
• Management explanations for timing differences

07Key Takeaway

This is a quiet but significant shift in practice:

Tax completion is driven by CPC / cost threshold
Not driven by when Final Account is signed

QS and commercial teams are now managing tax-sensitive timelines, not only measurements and payments.

08How KTP Can Help

We can assist to:

• Review your current construction contract recognition approach
• Design a CPC-to-12-month tracking template for your projects
• Identify audit-risk patterns (VO vs cost timing) and strengthen documentation
• Support responses to LHDN queries during audit / review

09Discussion Question

How is your organisation tightening VO and Final Account workflows to meet the CPC / 12-month tax timeline without slowing down project delivery?

Visit Us

• Wisma KTP, 53 Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru
• Wisma THK, 41, Jalan Molek 1/8, Taman Molek, 81100 Johor Bahru

KTP (Audit, Tax, Advisory)

An approved audit firm and licensed tax firm operating under the KTP group based in Johor Bahru providing audit, tax planning, advisory and compliance services to clients

• Website www.ktp.com.my
• Instagram https://bit.ly/3jZuZuI
• Linkedin https://bit.ly/3sapf4l
• Telegram http://bit.ly/3ptmlpn

THK (Secretarial, Bookkeeping, Payroll, Advisory)

A licensed secretarial firm in Johor Bahru providing fast reliable incorporation, secretarial services, corporate compliance services, outsourcing bookkeeping, and payroll services to clients

• Website www.thks.com.my
• Facebook https://bit.ly/3nQ98rs

KTP Lifestyle

An internal community for our colleagues on work and leisure.

• Tiktok http://bit.ly/3u9LR6Q
• Youtube http://bit.ly/3ppmjyE
• Facebook http://bit.ly/3ateoMz
• Instagram https://bit.ly/3jZpKLo

KTP Career

An external job community on vacancies in Johor Bahru for interns, graduates & experienced candidates.

• Instagram https://bit.ly/3u2PxHg
• Facebook http://bit.ly/3rPxz9o

#Thk

#KTP