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

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

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

Introduction

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.

Scope

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

Key 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

Why 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.

Practical 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

Key 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.

How 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

Discussion Question

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

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