RM44,000 tax saved across three years of assessment: defending interest on a factory awaiting its licences
KTP won back RM44,000 in disallowed interest deductions after showing LHDN that a timber manufacturer's empty factory was awaiting licences, not sitting idle by choice.
When LHDN disallowed term loan interest on a newly built factory that was still unoccupied at the time of its audit visit, KTP set out why the delay was beyond the company's control and why the interest remained deductible. LHDN accepted the company's position for all three years of assessment.
The result
LHDN accepted the company's explanation and withdrew the adjustments for years of assessment 2012 to 2014, a total tax saving of RM44,000. The matter was resolved at LHDN review level, without going to the Special Commissioners of Income Tax.
At a glance
Client: Malaysian timber products manufacturer, operating since 2009
Issue: Disallowance of term loan interest on a factory not yet in operational use
Years of assessment: 2012 to 2014
Tax saved: RM44,000
Service: Written submissions on audit findings, Form Q appeal and representation before LHDN
The challenge
The company had bought a property, financed by a term loan, to expand its processing and trading of timber products. Construction was certified complete at the end of November 2014. The company could not lawfully occupy the premises until it had its licences: a manufacturing licence, local authority business and signage licences, and import duty and sales tax exemptions on raw materials.
The licensing took far longer than expected. MIDA took the view that the new premises, in a light industrial area, were not suitable for an activity involving chemicals. The company had to file its manufacturing licence application under its existing premises and add the new property as a branch afterwards. The licence was not approved until May 2016.
When LHDN officers visited in March 2016, the factory was empty. LHDN questioned whether interest on a loan for an unused property could be deducted, and disallowed it.
Our approach
KTP responded to the audit findings with detailed written submissions and filed a formal appeal on Form Q, backed by the certificate of completion and the licensing correspondence, on three points:
Purpose. The property was acquired for the company's principal activity, processing and trading timber products, and for nothing else.
Timing. The factory stood empty because construction had to be completed and statutory licences obtained first. These were external steps the company could not speed up. It was not idle by choice.
Tax treatment. Under LHDN's own public ruling on interest expense, interest on money borrowed and laid out on assets used or held for producing gross income is deductible. The property was held for that purpose throughout.
We then represented the company in discussions with LHDN officers, answering their queries on the property's status and when it would come into use, until the adjustments were withdrawn.
Why this matters today
Timing and form still decide these cases. An appeal against an assessment is valid only if submitted on Form Q within 30 days of the notice of assessment. Appeals made by ordinary letter or verbally are invalid. Once an appeal is lodged, LHDN has 12 months to review and decide it under Section 101 of the Income Tax Act 1967.
KTP's View
An empty factory is not an empty argument. What LHDN questioned was not the interest itself but why it was incurred on a building nobody was using yet. The company won because it could prove its purpose and show that the delay was outside its control. Keep that evidence as the project happens, not after the audit letter arrives.
