INLAND REVENUE BOARD OF MALAYSIA

PROPERTY DEVELOPMENT

PUBLIC RULING NO. 9/2022

Translation from the original Bahasa Malaysia text

DATE OF PUBLICATION: 23 DECEMBER 2022

 PROPERTY DEVELOPMENT

Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Published by
Inland Revenue Board of Malaysia

Second edition

First edition on 22 May 2009

© 2022 by Inland Revenue Board of Malaysia

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 PROPERTY DEVELOPMENT

Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

CONTENTS Page

1. Objective 1
2. Relevant Provisions of the Law 1
3. Interpretation 1
4. Date of Commencement of Business 2
5. Separate Source of Income a Property Development Project 3
6. Recognition of Income Prior to Completion of Project 4
7. Estimation Loss from Uncompleted Project 12
8. Revision of Estimate and Tax Computation 14
9. Cancellation of Purchase 17
10. Completion of Project 20
11. Adjusted Income 29
12. Development Expenditure 29
13. Tax Treatment on Stock 43
14. Other Issues Related to Property Development 44
15. Joint Venture Project 44
16. Updates and Amendments 46
17. Disclaimer 48

DIRECTOR GENERAL'S PUBLIC RULING

Section 138A of the Income Tax Act 1967 (ITA) provides that the Director General is
empowered to make a Public Ruling in relation to the application of any provisions of
the ITA.
A Public Ruling is published as a guide for the public and officers of the Inland
Revenue Board of Malaysia. It sets out the interpretation of the Director General in
respect of the particular tax law and the policy as well as the procedure applicable to
it.
The Director General may withdraw this Public Ruling either wholly or in part, by
notice of withdrawal or by publication of a new Public Ruling.

Director General of Inland Revenue,

Inland Revenue Board of Malaysia.
 PROPERTY DEVELOPMENT

Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

1. Objective

The objective of this Public Ruling (PR) is to explain the basis of ascertaining gross
income for the purpose of computing adjusted income derived from the business of
property development.

2. Relevant Provisions of the Law

2.1 This PR takes into account laws which are in force as at the date this PR is
published.

2.2 The provisions of the Income Tax Act 1967 (ITA) related to this PR are
paragraph 4(a), section 4C, paragraphs 23(a) section 24, subsections 33(1)
and 33(2), section 35, subsection 36(1), sections 39 and 91 of the ITA.

2.3 The relevant subsidiary law referred to in this PR is the Income Tax (Property
Development) Regulations 2007 [P.U. (A) 277/2007].

3. Interpretation

The words used in this PR have the following meaning:

3.1 “Progress payments” means amounts billed for work performed on properties
sold in respect of property development activities, whether or not they have
been paid;

3.2 “The DGIR” refers to the Director General of Inland Revenue Board Malaysia;

3.3 “Property developer” means a company, an individual, a partnership, a co-

operative society, a body of persons, who or which engages in or carries on
or undertakes or causes to be undertaken property development;

3.4 “Property development” means the activity of acquiring land for the purpose
of developing, constructing or causing to be constructed thereon and selling
completed residential, commercial or industrial buildings, whether as a whole
or by parcels therein, and development and sale of vacant lots for the
construction of such buildings thereon including homesteads, hobby farms,
orchards or for other similar purposes;

3.5 “Project” means a cluster of development units erected within a designated

geographical area forming a cost-accumulating centre and includes vacant
lots developed for sale, and where a cluster of development unit is erected in
more than one phase, the development units erected in each phase shall be
treated as a separate cluster of development units erected within a designated
geographical area;

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

3.6 “Development units” means units of residential, commercial or industrial

building and vacant lots developed for sale.

4. Date of Commencement of Business

4.1 The date of commencement of a property development business is a question

of fact. Generally, the DGIR deems a property development business
commences on a date when some significant activities or essential
preliminaries to the normal operations of property development are
undertaken.

Examples are the physical possession of the development site, the active
development of the land (such as levelling of land or piling) or booking of
houses by house buyers.

Example 1

Syarikat A Sdn. Bhd., a property development company, bought a piece of

agriculture land and make an application to convert the land status to
residential land. The company launched the housing project by inviting the
public to make bookings. Active development such as earthwork and piling
was carried out on the land.

The relevant information is as follows:

Details Date
Incorporation of company 02.01.2018
Purchase of land 12.02.2019
Application for conversion of land 23.06.2019
Booking of houses opened to public 11.02.2020
Active development of land 05.04.2020

Since the company is a property developer and the time interval between the
activities carried out after the purchase of land is close and consecutive, the
date of commencement of the property development business is 12.02.2019
which is the date of purchase of land.

Example 2

Syarikat B Sdn. Bhd. incorporated on 18.08.2013 has purchased a piece of

land on 13.11.2015 with the intention of carrying out the property development
business.

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

The relevant information and activities carried out by Syarikat B are as follows:

Details Date
Purchase of land 13.11.2015
Application for conversion and subdivision of
03.01.2019
land
Application for development order 03.01.2019
Application for court order to evict squatters
27.11.2019
from the land
Court order to evict the squatters 09.03.2020
Approval for development of land 30.05.2020
Signed agreement with Y Sdn. Bhd. to
27.07.2020
develop land

In this case, the date of commencement of the property development

business is not 13.11.2015 (the date of purchase of land) but 03.01.2019
which is the date of application for conversion and subdivision of land. Here,
an important element in identifying the commencement of business activity is
the commitment to the project and activities undertaken.

4.2 Notwithstanding the above paragraphs, the date of commencement of a

property development business may also fall on any other date, as the DGIR
considers appropriate and reasonable.

5. Separate Source of Income a Property Development Project

In ascertaining the gross income of a property developer from its property

development business, each property development project shall be treated as a
separate and distinct source of income of a project of the property developer
although the business as a whole still constitutes one source of income from the
property development business.

Example 3

Syarikat C Sdn. Bhd. undertakes a property development project consisting of three

phases in the year 2020. The information is as follows:

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Details Phase 1 Phase 2 Phase 3

Type of Double storey Double storey semi-
Condominium
development terrace houses detached houses
Estimated gross
profit 2,500,000 3,000,000 2,200,000
RM

Therefore, each phase shall be treated as a separate property development project

to ascertain the company's gross income for the year of assessment 2020. All
projects will be considered as one source of income from property development
business.

6. Recognition of Income Prior to Completion of Project

6.1 The taxation and recognition of gross income from a property development
business is ascertained in accordance with section 24 of the ITA, which
provides that the gross income from a business shall be assessed on a
receivable basis and the Income Tax (Property Development) Regulations
2007 [P.U. (A) 277/2007].

6.2 Income from property development business shall be recognised as

development activity progresses, by reference to the stage of completion of
the development activity at the statement of financial position date.

6.3 The stage of completion of a property development project shall be

determined using “Percentage of Completion Method”, where the project
income shall be matched with the development expenditure incurred for the
basis period for the year of assessment.

6.4 The Percentage of Completion Method of a property development project may

be determined based on-

(a) progress payments;

(b) cost incurred to date;
(c) surveys of work performed; or
(d) any other formula.

6.5 Income recognition of a property development project shall commence when

all the following criteria are met:

(a) when the sale of the development units is executed (when sales and
purchase agreements are signed); and

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

(b) upon commencement of development activities.

6.6 Gross income

The gross income of property developer for the basis period for the year of
assessment in respect of each property development project shall be the
estimated gross profit of the property developer for that period as ascertained
under paragraph 6.7 or 6.8.

Example 4

Syarikat D Sdn. Bhd. which closes accounts on 31 December each year

carries out a project with three phases in Kuala Lumpur and the estimated
gross profit from the project in the year 2020 is as follows:

Estimated Gross Profit

Details
RM
Phase 1 2,500,000
Phase 2 3,000,000
Phase 3 2,200,000
Total 7,700,000

Therefore, the gross income of the company from the property development
business for the basis year for a year assessment 2020 is RM7,700,000.

6.7 Estimated gross profit

The estimated gross profit of a property developer for the basis period for the
year of assessment in respect of a property development project shall be an
amount ascertained in accordance with the following formula:
A
X C
B
Where

A = sum of progress payments in respect of the project, received and

receivable in that basis period (the figures must reflect the actual
position prevailing at the statement of financial position date);

B= total estimated sale value of the project; and

C= total estimated gross profit from the project, i.e., the expected gross
profit to be derived from that project or phase.

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Example 5

Syarikat E Sdn. Bhd. which closes accounts on 31 December each year

commenced a housing project (single phase) in the year 2016 and estimates
that the project will be completed in the year 2019. Total estimated sale value
of the project is RM24 million and total estimated development costs is RM16
million. Therefore, the estimated gross profit is RM8 million.

Progress payments received and receivable are as follows:

Progress Payments Received and Receivable

Year
RM
2016 5,000,000
2017 8,000,000
2018 6,000,000
2019 5,000,000
Total 24,000,000
Applying the formula above, the estimated gross profit for each year of
assessment is as follows:

Computation of Estimated Gross Profit

for Year of Assessment (YA) 2016 to 2019

YA 2016 YA 2017 YA 2018 YA 2019

Details
RM RM RM RM
Estimated
gross profit for 8,000,000
the project
Total progress
payments
5,000,000 8,000,000 6,000,000 5,000,000
received and
receivable
YA 2016 YA 2017 YA 2018 YA 2019
Details
RM RM RM RM
Total
estimated 24,000,000
sales value
Estimated 5,000,000 8,000,000 6,000,000
gross profit for 24,000,000 24,000,000 24,000,000
the year of
assessment X X X 1,667,000
1&2
8,000,000 = 8,000,000 = 8,000,000 =

1,667,000 2,666,000 2,000,000

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Note
1 RM8,000,000 - (RM1,667,000 + RM2,666,000 + RM2,000,000) =
RM1,667,000
2 Upon completion of the project, this amount shall be replaced by the actual
gross profit of the project less the estimated gross profit that has been
recognised for year 2016, 2017 and 2018.
Example 6
F & F Development, a partnership that carries on a property development
business, has a project with two phases progressing concurrently. Phase 1 is
expected to be completed in the year 2019 and Phase 2 in the year 2020.The
following information is provided by the partnership:
Phase 1 Phase 2
Details
RM RM
Total estimated sales value 40,000,000 60,000,000
Total estimated development cost 32,000,000 50,000,000
Estimated gross profit 8,000,000 10,000,000

Progress payments received and receivable are as follows:

Phase 1 Phase 2
Year Ended 31 Dec
RM RM
2016 6,000,000 5,000,000
2017 14,000,000 12,000,000
2018 14,000,000 16,000,000
2019 6,000,000 20,000,000
2020 - 7,000,000
Total 40,000,000 60,000,000

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

The estimated gross profit for each year as follows:

Computation of Estimated Gross Profit

for Year of Assessment (YA) 2016 to 2019

Phase 1

YA 2016 YA 2017 YA 2018 YA 2019

Details
RM RM RM RM
Estimated
gross profit for 8,000,000
the project
Total progress
payments
6,000,000 14,000,000 14,000,000 6,000,000
received and
receivable
Total
estimated 40,000,000
sales value
Estimated 6,000,000 14,000,000 14,000,000
gross profit for 40,000,000 40,000,000 40,000,000
the year of
assessment X X X 1,200,000
3&4
8,000,000 = 8,000,000 = 8,000,000 =

1,200,000 2,800,000 2,800,000

Note
3 RM8,000,000 - (RM1,200,000 + RM2,800,000 + RM2,800,000) =
RM1,200,000
4 Upon completion of the project, this amount shall be replaced by the actual
gross profit of the project less the estimated gross profit that has been
recognised for year 2016, 2017 and 2018.

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Computation of Estimated Gross Profit

for Year of Assessment (YA) 2016 to 2020

Phase 2

YA 2016 YA 2017 YA 2018 YA 2019 YA 2020

Details
RM RM RM RM RM
Estimated
gross profit 10,000,000
for the project
Total
progress
payments 5,000,000 12,000,000 16,000,000 20,000,000 7,000,000
received and
receivable
Total
estimated 60,000,000
sales value
Estimated 5,000,000 12,000,000 16,000,000 20,000,000
gross profit 60,000,000 60,000,000 60,000,000 60,000,000
for the year X X X X 1,167,000
5&6
of 10,000,000 10,000,000 10,000,000 10,000,000
assessment
= 833,000 = 2,000,000 = 2,667,000 = 3,333,000

Note
5 RM10,000,000 - (RM833,000 + RM2,000,000 + RM2,667,000 +
RM3,333,000) = RM1,167,000
6 Upon completion of the project, this amount shall be replaced by the actual
gross profit of the project less the estimated gross profit that has been
recognised for year 2016, 2017, 2018 and 2019.

6.8 Other formula

The DGIR may allow a property developer to use a formula, other than the
formula provided in paragraph 6.7 to ascertain the estimated gross profit from
the property development project. The formula adopted shall be in
accordance with the accounting standards or practice applicable during the
basis period that relates to the project.

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Example 7

G Sdn. Bhd. has a development project for which the cost to date formula was
adopted in arriving at the percentage of completion. The financial data of the
project is as follows:

Details
Number of units built 100
Number of units sold 40
RM
Sale price per unit 300,000
Cost excluding land cost
Cost incurred to date 11,000,000
Further cost to complete 10,000,000
Total cost 21,000,000
Land cost 4,000,000
Budgeted cost per unit (included cost of land)
RM25,000,000 (RM21,000,000 + RM4,000,000) 250,000
100
Total sales value of units sold
12,000,000
40 X RM300,000
Total budgeted cost of unit sold
10,000,000
40 X RM250,000
Percentage of completion
RM11,000,000 X 100% 52%
RM21,000,0007
RM
Attributable profit or loss
Income : RM12,000,000 X 52% = RM6,240,000
Expenses : RM10,000,000 X 52% = RM5,200,000 1,040,000
Note
7 Total cost for this purpose are not include cost of land and site materials
not yet used.

6.9 In ascertaining the estimated gross profit of the property development project
according to the formula in paragraph 6.7 or 6.8, the property developer shall
ensure that is uses fair and reasonable estimates.

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INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

6.10 Consistency and fair spread

Where the estimated gross profit or revised estimated gross profit of a

property developer has been ascertained in accordance with the formula as
described in paragraph 6.7 or 6.8, the property developer shall apply the
formula consistently throughout the period of its property development
project. The result shall reflect a fair spread of the estimated gross profit for
the relevant period.

Example 8

Syarikat H Sdn. Bhd. commenced its first development project of terrace

houses in the year 2019. The company had recognised the project income by
using the percentage of completion method based on progress payments for
the project.

In the year 2020, the company undertook its second project, a condominium
project and decided to use the percentage of completion formula based on
cost incurred to date for this project.

The company may use different formulae for two projects carried out.
However, any formula adopted for each project must be applied consistently
until the project is completed.

6.11 Where the method of accounting used results in a distortion of the true and
fair spread of the estimated gross profits for taxation purposes, the DGIR may
review the assessments for all the relevant years to ensure a fair and
reasonable spread of the estimated gross profit over the duration of the
project.

6.12 This ruling explains the income tax treatment to be applied for property
development projects where the commencement and the completion date of
the project fall into different accounting periods.

6.13 Where a property developer prepares an account on a completion of contract

method, the property developer is required to compute his income tax liability
for the year of assessment by using the percentage of completion method to
determine and recognise the estimated gross profits annually. Property
developers are not allowed to defer the recognition of income in the accounts
until the property development is completed.

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

7. Estimated Loss from Uncompleted Project

7.1 Computation of estimated loss

The estimated loss of a property developer for the basis period for the year of
assessment in respect of a property development project shall be ascertained
in accordance with the formula provided for in paragraph 6.7 or 6.8. In
applying the formula, the total estimated gross profit in the formula shall be
substituted with total estimated loss from the project.

Example 9

J Sdn. Bhd. has a property development project in Ampang with several

phases which are expected to be completed in 3 years. Phase 2 which will
take three years to complete is expected to incur an estimated gross loss of
RM50,000.

Phase 2 is 20% completed in the first year. The estimated loss of Phase 2 for
the first year is computed as follows:

[20% x RM50,000] = RM 10,000

7.2 Where for a basis period for the year of assessment, a property developer
anticipates that there would be an estimated loss from one or more of its
property development projects for that basis period, the estimated loss or
aggregate of estimated loss from those projects shall be allowed to be set off
against the aggregate of the estimated gross profits from the other property
development projects of the property developer for the same basis period.

7.3 Estimated loss less than estimated gross profit

Where the estimated loss or aggregate of estimated loss from one or more
projects for the basis period is less than the aggregate estimated gross profit
from other projects, the excess of estimated gross profit is the gross income
from the property development business.

Example 10

K Development Sdn. Bhd. which closes its accounts on 31.12.2019 has a

property development project of three phases in Shah Alam. The estimated
gross profit or loss of the three phases for the year 2019 is as follows:

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Details Estimated Gross Profit or Loss RM

Phase 1 Estimated gross profit 30,000
Phase 2 Estimated loss (10,000)
Phase 3 Estimated loss (15,000)

The aggregate estimated loss from phase 2 and 3 amounting to RM25,000 is

allowed to be set off against the estimated gross profit of RM30,000 from
phase 1. The excess of estimated gross profit amounting to RM5,000 is the
gross income from the property development business for the year of
assessment 2019.

7.4 Estimated loss more than aggregate estimated gross profit

Where the estimated loss or aggregate estimated loss of the property

developer from one or more projects for that basis period exceeds the
aggregate estimated gross profit from other projects, the excess shall be
disregarded for the purposes of ascertaining the chargeable income of the
property developer for that basis period and subsequent basis periods until
the projects are completed and actual losses are ascertained.

Example 11

L Development Sdn. Bhd. which closes its accounts on 31.12.2019 has a

property development project of three phases in Kajang. The estimated gross
profit or loss for the three phases for the year 2019 is as follows:

Details Estimated Gross Profit or Loss RM

Phase 1 Estimated gross profit 30,000
Phase 2 Estimated loss (10,000)
Phase 3 Estimated loss (22,000)

The aggregate estimated loss from phase 2 and 3 amounting to RM32,000 is

more than the estimated gross profit from phase 1 by RM2,000. Hence, the
gross income for the year of the assessment 2019 from the property
development business is “Nil”. The estimated loss of RM2,000 shall be
disregarded for the year of assessment 2019 and subsequent years of
assessment until the projects for phase 2 and 3 are completed and actual loss
is ascertained. The estimated loss of RM2,000 cannot be used to offset
against other sources of income of the company.

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INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

7.5 Estimated loss shall not be allowed to be set off against actual gross profit

Estimated loss or aggregate estimated losses from one or more projects for
a basis period shall not be allowed to be set off against the actual gross profit
of other projects for the purpose of ascertaining the chargeable income of the
property developer for that basis period.

Example 12

Syarikat M Sdn. Bhd. which closes its accounts 31.12.2019 has a property
development project of three phases in Pulau Pinang. The actual profit from
the completed Phase 1 and estimated gross profit/loss from the remaining two
phases for the year 2019 as follows:

Details Estimated Gross Profit or Loss RM

Phase 1 Actual gross profit 20,000
Phase 2 Estimated gross profit 10,000
Phase 3 Estimated loss (15,000)

The gross income of the company for the year of assessment 2019 from the
property development business is RM20,000. The estimated loss of
RM15,000 from phase 3 can only be allowed to be set off against the
estimated gross profit of RM10,000 from phase 2 and the excess estimated
loss of RM5,000 is disregarded for the year of assessment 2019 and
subsequent years of assessment until the project is completed and actual loss
is ascertained.

8. Revision of Estimates and Tax Computation

8.1 In the course of a project, there may be a situation where the original estimate
made by the property developer needs to be revised .. Revision of estimate is
allowed only in the following circumstances:

(a) there is a variation in the development cost of the project;

(b) there is a variation in the selling price of the development units of the
project; or

(c) any commercial reasons as may be accepted by the DGIR.

8.2 Such circumstances may result in a change in the estimated gross profit, and
cause the existence one of the following situations:

(a) estimated gross profit is reduced;

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INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

(b) estimated gross profit becomes estimated loss; or

(c) estimated gross profit is increased.

8.3 Where the situations in paragraph 8.2 arise due to any of the circumstances
described in paragraph 8.1, the property developer may revise the estimated
gross profit for that basis period and the immediately following basis periods
by using the revised estimated sales value and estimated development cost.
Prior years’ assessments based on the original estimates should not be
reopened since the adjustments shall be made in the basis period when
project is completed by using the actual sales value and development cost.

Example 13

Syarikat N Sdn. Bhd. a property developer commenced a housing project in

the year 2017. The original estimate for the year ended 31.12.2017 at the
commencement of the project is revised in the year 2018. The reasons for the
revision are that development costs have increased while the company had
to reduce the selling price of the development units to attract more buyers.
These reasons are acceptable to the DGIR. The company provides the
following particulars:

Original Revised
Estimate Estimate
Details
RM RM
2017 2018
Total sales value of project (B) 10,000,000 9,500,000
Total development cost 7,000,000 7,500,000
Total gross profit (C) 3,000,000 2,000,000
2017 3,000,000 3,000,000
Amount
2018 3,000,000 2,700,000
receivable
2019 2,000,000 1,900,000
(A)
2020 2,000,000 1,900,000

Applying the formula in paragraph 6.7, the estimated gross profit for each year
is as follows:

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Computation of Estimated Gross Profit

for Year of Assessment 2017 to 2020

Original Estimate Revised Estimate

Year of Assessment
RM RM
2017 900,000 631,580
2018 900,000 568,420
2019 600,000 400,000
2020 600,000 400,000
Total 3,000,000 2,000,000

Since the revision is made in the year 2018, the revised estimate shall be
taken into the computation with effect from the year of assessment 2018. The
original estimated in respect of the year ended 31.12.2017 amounting to
RM900,000 is not to be adjusted. Thus, the property developer would have
been subject to tax on a total gross profit as follows:

Year of Assessment RM Note

2017 900,000 Original Estimate
2018 568,420
2019 400,000 Revised Estimate
2020 400,000
Total 2,268,420

Adjustments should be made in the basis period when the project is

completed, when the sales value, development cost and actual gross profit
can be ascertained.

In this example, assuming the project has been completed and the actual
gross profit that can be ascertained in the year of assessment 2020 is
RM2,000,000, the actual gross profit for tyear of assessment 2020 is
RM131,580 (RM400,000 – RM268,420) to reduce the estimated gross profit
of RM2,268,420 to actual gross profit RM2,000,000.

Example 14

Same facts as in Example 13 except that the company decides to use the
cumulative progress payments as follows:

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Computation of Estimated Gross Profit

(Based on Cumulative Progress Payments)
for Year of Assessment 2017 to 2020

Year of Cumulative Cumulative Profit

Assessment Progress
Payments
RM RM

2017 3,000,000 3,000,000 X 3,000,000 = 900,000

10,000,000

2018 5,700,000 5,700,000 X 2,000,000 = 1,200,000

9,500,000

2019 7,600,000 7,600,000 X 2,000,000 = 1,600,000

9,500,000

2020 9,500,000 9,500,000 X 2,000,000 = 2,000,000

9,500,000

Hence, the property developer would be subject to tax on current year profit
for each year of assessment as follows:

Year of Cumulative Cumulative Current Year

Assessment Profit to Date Profit Up to Profit
(A) Previous Year (A-B)
of Assessment
(B)
RM RM RM
2017 900,000 0 900,000
2018 1,200,000 900,000 300,000
2019 1,600,000 1,200,000 400,000
2020 2,000,000 1,600,000 400,000
Total 2,000,000

9. Cancellation of Purchases

In the case where a development unit buyer surrenders or cancels his purchase, the
buyer may lose the payment that has been made to the property developer.
Therefore, the adjustment on the purchase cancellation shall be made in the basis
period the cancellation take place.

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For example, the buyer bought a house in the year 2017 and cancelled the purchase
in the year 2018, the developer shall make an adjustment in relation to the
cancellation in the year 2018. His assessment for the year of assessment 2017 has
been finalised. Though the cancellation affected the developer’s tax liability for the
year of assessment 2017, the assessment is not to be reopened. Instead, the
adjustment shall be taken into account in computing his income tax liability for the
year of assessment 2018.

Example 15

P Development Sdn. Bhd. commenced a new project in the year 2017 to build 200
houses, scheduled to be completed in the year 2020. In the year 2017, all 200
houses were sold. When the company closed the accounts on 31.12.2018, ten (10)
buyers cancelled their purchase.

These buyers lost the payments made in the year 2017. No further payments were
made in the year 2018. The company is unable to resell the said 10 houses in the
year 2018. Other information provided by the company is as follows:

Details RM
Total sale price of 200 houses 40,000,000
Total estimated cost of development 30,000,000
Original estimated gross profit 10,000,000
Payments receivable in the year 2017 20,000,000
Payments receivable in the year 2018 10,000,000
Payments receivable in the year 2019 6,000,000
Payments receivable in the year 2020 4,000,000
Payments receivable in the year 2017 for the 10 houses 1,000,000
Payments received in the year 2017 for the10 houses 600,0008
Payments receivable in the year 2018 for the10 houses 500,000

Note
8 Forfeited in the year 2017

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Public Ruling No. 9/2022

INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Computation of Estimated Gross Profit for Year of Assessment 2017

The original estimated gross profit for the year is as follows:

RM20,000,000 x RM10,000,000 = RM5,000,000

RM40,000,000

RM5,000,000 is the company’s estimated gross profit for the year of

assessment 2017.

The company revised the estimated gross profit due to cancellation of 10 purchases
and the amount calculated as follows:

RM19,000,0009 x RM10,000,000 = RM4,750,000

RM40,000,000

Note
9 Payments receivable for the year 2017 less payment receivable for 10 houses
cancelled is RM19,000,000 (RM20,000,000 - RM1,000,000).

Therefore, the company shall make an adjustment to the estimated gross profit of
RM250,000 (RM5,000,000 - RM4,750,000) in the year ended 31.12.2018.

However, for income tax purposes, the assessment for the year of assessment 2017
based on the original estimated gross profit of RM5,000,000 cannot be revised. An
adjustment of RM250,000 shall be made in the year of assessment 2018.

Computation of Estimated Gross Profit for Year of Asessment 2018

The estimated gross profit in respect of 190 houses calculated as follows:

RM9,500,00010 x RM10,000,000 = RM2,375,000

RM40,000,000
Note
10 Payments receivable for the year 2018 less payment receivables for 10 houses
cancelled is RM9,500,000 (RM10,000,000 - RM500,000).

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For income tax purposes, the estimated gross profit of RM2,375,000 is adjusted by
deducting the amount of RM250,000 arising from the cancellation. Adjusted
estimated gross profit is RM2,125,000 (RM2,375,000 – RM250,000).

The above example should be distinguished from the case where a buyer defaults
his payments. In such a case, there is no cancellation of the purchase and the gross
profit is to be assessed in full.

For purposes of record, a full list of cancellation has to be kept and filed properly.

Payment received in the year 2017 for the 10 houses amounting to RM600,000
which was forfeited when the cancellation occurs shall be recognised as other
business income of the property development business and taxable in the year of
assessment 2018.

10. Completion of Project

10.1 Date of completion of a project

A property development project shall be deemed completed on -

(a) the date on which the Temporary Certificate of Fitness for Occupation is
issued;

(b) the date on which the Certificate of Fitness for Occupation (CFO) is
issued; or

(c) the date of any other certification which has a similar effect;

whichever is earlier

[With effect from 12 April 2007, the Certificate of Completion and Compliance
(CCC) has replaced the CFO.]

10.2 Where a phase consist of few blocks of condominiums or apartments and the
blocks are separately given CCC or vacant possession on different dates, the
date of completion for each block is deemed to be the date of CCC or vacant
possession, whichever is earlier.

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Example 16

Syarikat Q Sdn. Bhd. undertakes a condominium project consisting of three

blocks. Block 1 was completed on 01.08.2020. Due to some unforeseen
circumstances, development works on Block 2 and 3 were stopped in March
2020 when the works done had reached 50% and 30% respectively.

Block 1 is deemed completed when CCC is issued or when house puchasers

are given vacant possession of their condominium units, whichever is earlier.

10.3 Ascertainment of actual gross profit or loss

Where in a basis period for a year of assessment a property development

project is deemed to have been completed, the property developer shall
ascertain the actual gross profit or loss from the project based on the actual
sales value and the actual development costs in that basis period.

10.4 Tax treatment upon completion of project

10.4.1 Actual gross profit or loss

Upon completion of a property development project or delivery of

vacant possession of completed units, the actual gross profit or loss
for the project may be ascertained. The following situations may
arise:

(a) the actual gross profit from the project is more than the total
estimated gross profit that has been recognised as gross
income of the developer for that period as ascertained using the
formula in paragraph 6.7 or 6.8;

(b) the actual gross profit from the project is less than the total
estimated gross profit that has been recognised as gross
income of the developer for that period as ascertained using the
formula in paragraph 6.7 or 6.8; or

(c) there is an actual loss from the project.

10.4.2 Actual gross profit more than estimated gross profit

Where the actual gross profit from the project is more than the total
estimated gross profit that has been taxed in the preceding years of
assessment, the difference shall be treated as part of gross income
of the developer for the basis period of project completion.

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Example 17

Details RM RM
Actual gross profit 3,800,000
Less:
Estimated gross profit for year 1 700,000
Estimated gross profit for year 2 900,000
Estimated gross profit for year 3 1,200,000 2,800,000
Difference of gross profit 1,000,000

The difference of RM1,000,000 shall be treated as part of the gross

profit in the basis period of project completion. Prior year
assessments were not reopened or reviewed.

10.4.3 Actual gross profit less than estimated gross profit

Where the actual gross profit from the project is less than the total
estimated gross profit that has been taxed, the actual profit for that
basis period and preceding basis periods may be apportioned by
applying the formula as in paragraph 6.7 or 6.8. The assessments
that have been made can be reviewed or for the assessment to be
made can be determined accordingly with this ruling.

In applying the formula in paragraph 6.7 or 6.8, the property

developer shall use the actual sales value, development cost and
profit or loss from that project.

Example 18

A project commenced in the year 2017 and completed in the year

2020. The actual gross profit in the year the project is completed is
RM2,000,000. The estimated gross profit that has been taxed in
prior years of assessment is as follows:

Estimated Gross Profit

Year of Assessment
RM
2017 500,000
2018 1,300,000
2019 800,000
Total 2,600,000

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INLAND REVENUE BOARD OF MALAYSIA Date of Publication: 23 December 2022

Since the actual gross profit is less than the total estimated gross
profit for the years of assessment 2017 to 2019 of RM600,000, all
the prior years’ assessments may be reviewed. The actual gross
profit for years of assessment 2017 to 2020 will be ascertained as
follows:

Details RM RM
Actual gross profit 2,000,000
Gross profit for YA 2017 (20%) 400,000
Gross profit for YA 2018 (50%) 1,000,000
Gross profit for YA 2019 (25%) 500,000
Gross profit for YA 2020 (5%) 100,000
Total actual gross profit 2,000,000

However, if the company chooses not to reopen the prior years of

assessment, the DGIR may allow the company to make the
adjustment to the gross profit for the year of assessment 2020 on
condition that there are no tax implications for all the relevant years
of assessment.
10.4.4 Project with actual loss
Where a project ultimately incurs a loss, the actual loss from the
project may be apportioned to each relevant years of assessment
by applying the formula in paragraph 6.7 or 6.8.

However, if the company chooses not to reopen the prior years of

assessment, the DGIR may allow the company to make the
adjustment to the gross profit in the year project is completed on
condition that there are no tax implications for all the relevant years
of assessment.

10.5 Concurrent multiple projects

A developer may carry on a few projects concurrently, where in the same

basis period there may be projects under development, projects completed
and new projects launched.

The following example illustrates a property developer who has multiple

projects where there are situations as follows:

(a) a revision of estimated gross profit to estimated loss in the middle of the
project;

(b) actual gross profit or loss when project is completed; and

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(c) estimated gross profit for other projects being developed.

Example 19

Syarikat R Sdn. Bhd. commenced Project X in the year 2017 which is

completed in the year 2020. The original estimated gross profit for the project
was RM800,000 but revised in the year 2019 to an estimated loss of
RM200,000. In the year Project X was completed, the actual loss was
RM205,000. The revision was for reasons acceptable to the DGIR.

The distribution of original and revised estimated gross profit or loss for each
year based on the formula are computed by the company as follows:

Project X Original Revised Revised Estimated

31 Dec Estimated Estimated Gross Gross Profit/(Loss)
Gross Profit Profit/(Loss)11 (in the Year 2020 -
(in the Year Project X
2019) Completed)
RM RM RM
2017 250,00012 (62,500) (62,500)
2018 250,00012 (62,500) (62,500)
2019 150,000 (37,500) (37,500)
2020 150,000 (37,500) (42,500)13
Total 800,000 (200,000) (205,000)

Note
11 The revision was made in the year 2019. Therefore, the revised estimate
was only taken into account in the tax computation for the year of
assessment 2019.
12 The original estimated gross profit in the year 2017 and year 2018
amounting to RM250,000 respectively were not revised. The revision was
only made when the Project X was completed.
13 The adjustment of the losses shall be made in the basis period Project X
was completed when the actual loss can be ascertained.

The company appealed that the relevant prior year’s assessment relating to
Project X be reviewed. Particulars in relation to other projects including the
expenses in the statement of comprehensive income are as follows:

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2017 2018 2019 2020

Year Ended 31 Dec
RM RM RM RM
Gross profit - Project W 30,000 30,000 - -
Gross profit - Project Y - 20,000 20,000 60,000
Gross profit - Project Z 150,000 - - -
Expenses 30,000 15,000 20,000 10,000

Assuming the estimated or actual gross profit for other projects do not need
to be amended and all the expenses claimed in the statement of
comprehensive income are allowable, the tax computations for the Company
R is as follow:

Computation of Adjusted Income/ (Loss)

for Year of Assessment 2017 (Revised in the Year 2020)

Original Revised Estimated

Estimated Gross Gross Profit/(Loss)
Details Profit (in the Year 2020 -
Project X Completed)14
RM RM
Project X 250,000 (62,500)15
Project W 30,000 30,000
Project Z 150,000 150,000
Total gross income 430,000 117,50016
Expenses (30,000) (30,000)
Adjusted income/ (loss) 400,000 87,500

Note
14 The revision is made in the year 2020, in the year Project X was
completed when the actual loss can be ascertained.
15 The amount is the portion based on the revised estimated loss in the year
2019.
16 The actual loss of Project X is deducted against the actual gross profit
and the estimated gross profit of other projects in the same basis period.

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Computation of Adjusted Income/ (Loss)

for Year of Assessment 2018 (Revised in the Year 2020)

Original Revised Estimated

Estimated Gross Gross Profit/(Loss)
Details Profit (in the Year 2020 -
Project X Completed)14
RM RM
Project X 250,000 (62,500)15
Project W 30,000 30,00018
Project Y 20,000 20,000
Total gross income 300,000 (12,500)16
Expenses (15,000) (15,000)
Adjusted income/ (loss) 285,000 (27,500)17

Note
Notes 14, 15 and 16 are the same as notes under the year of assessment 2017.
17 The loss of RM12,500 and the allowable expenses of RM15,000 result in
an adjusted loss of RM27,500.
18 Project W completed in the year 2018 and in this example, no adjustment
is made to the actual gross profit for this project.

Computation of Adjusted Income/ (Loss)

for Year of Assessment 2019 (Revised in the Year 2020)

Original Revised Estimated

Estimated Gross Gross Profit/(Loss)
Details Profit19 (in the Year 2020 -
Project X Completed)
RM RM
Project X (37,500) (37,500)
Project Y 20,000 20,000
Total gross income Nil20 (17,500)
Expenses (20,000) (20,000)
Adjusted income/ (loss) (20,000)21 (37,500)22

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Note
19 Since notification of the revised estimated loss for Project X was given by
the company in the year 2019, no revision will be made to prior year
assessments i.e. years of assessment 2017 and 2018. Adjustment is only
made for the year of assessment 2019.
20 The estimated loss for Project X is allowed to be set off against estimated
gross profit for Project Y and the excess loss of RM17,500 shall be
disregarded.
21 The allowable expenses of RM20,000 become an adjusted loss for the
year of assessment 2019.
22 The adjusted business loss is RM37,500, after taking into account the
actual loss of Project X.

Computation of Adjusted Income/ (Loss)

for Year of Assessment 2020

Original Estimated Gross Profit

Details
RM
Project X (42,500)
Project Y 60,000
Total gross income 17,500
Expenses (10,000)
Adjusted income/loss 7,500

10.6 Individual developers

In the case of an individual developer or a partner in a joint venture project

which is subject to the progressive income tax rate under Schedule 1 of the
ITA, the developer is allowed to review the prior years’ assessments upon
completion of the project.

Example 20

Mr. S. an individual developer, commenced a housing project in the year 2018

which was completed in the year 2020.Total estimated sales value of the
project is RM20 million. Progress payments received and receivable are as
follow:

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Year Progress Payments Received and Receivable

RM
2018 8,000,000
2019 8,000,000
2020 4,000,000
Total 20,000,000

When the project was completed, the actual gross profit was ascertained as
RM1,500,000. The estimated gross profit taken into computation for the
project is as follows:

Year of Assessment RM
2018 750,000
2019 750,000
2020 400,000
Total 1,900,000

Since the actual gross profit is less than the estimated gross profit taken into
account for years of assessment 2018 to 2020, Mr. S may review all his prior
years’ assessments.

The actual gross profit for each year of assessment will be recomputed as
follows:

Computation of Actual Gross Profit

for Year of Assessment 2018 to 2020

Year of Assessment RM
8,000,000 x 1,500,000 = 600,000
2018
20,000,000
8,000,000 x 1,500,000 = 600,000
2019
20,000,000
4,000,000 x 1,500,000 = 300,000
2020
20,000,000

11. Adjusted Income

11.1 In ascertaining the adjusted income from the business of a property developer
for the basis period for each year of assessment, all expenses (other than any
development expenditure that has been taken into account in ascertaining the
estimated gross profit or loss of property development) that are wholly and
exclusively incurred in the production of that income during that period is

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allowed under the ITA. However, adjustments shall be made in the income
tax computation for each year of assessment for outgoings and expenses
prohibited under section 39 of the ITA.

11.2 Where there is an adjusted loss of a property development business for a

basis period, the adjusted loss shall be deducted from the aggregate income
from all sources of income in that basis period under subsection 44(2) of the
ITA. If the aggregate income from all sources of income is absence or
insufficient to absorb the adjusted loss, the loss shall be carried forward and
deducted from the total statutory income from all sources of business income
in the following basis period, as provided in subsection 43(2) of the ITA.

12. Development Expenditures

12.1 The expenses mentioned in paragraph 11.1 refer to all expenses, which are
deductible under the ITA. Such expenses include tender fees and related
expenses after the first phase/project and for subsequent phase/project in
respect of a property development project, which are incurred after the
commencement of the property development business of the developer.

12.2 In preparing the development expenditure accounts, a property developer

shall distinguish between direct expenses related to the property development
project and operating and administrative expenditure debited to the
comprehensive income statement.

12.3 Property development cost

12.3.1 Property development cost comprise all costs that are directly
attributable to development activities or that can be reasonably
allocated to such activities.

12.3.2 All direct expenses which are related to the property development
project, including infrastructure cost such as drainage, internal roads,
reservoir, oxidation ponds etc. that add value to the project shall be
capitalised in the development expenditure account.

12.3.3 Development expenditure includes –

(a) interest paid or payable on loans taken by the property

developer to finance the purchase of land or development
works of its property development project; and

(b) the proportion of the common infrastructure cost that relates to

the project.

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12.3.4 The development expenditure account for each project or phase

should be kept separately and must be prepared for each year of
assessment.

12.3.5 With regards to the cost of land capitalised in the development

expenditure account, any surplus on revaluation of land (if the cost
taken is a revalued cost) is not an allowable expense and shall be
added back proportionately when the project or phase is completed.

12.3.6 Expenses incurred prior to the date of commencement of the project

such as cost of land, survey fees, soil investigation expenses,
architect fees, etc. are cost attributable to the development project
hence is deductible. Where a project consists of more than one
phase, such development costs shall be shown separately.

12.3.7 A property developer is required to make the necessary adjustments

for expenses which are reflected in the development expenditure
account. Where items such as materials for another project and
provision for TNB substation has been included in the development
expenditure account, these expenses shall be taken out to arrive at
the allowable development expenditure to be carried forward to the
following year of assessment. This is to ensure only the final year’s
account of the project needs to be adjusted upon completion of the
project.

12.4 Allocation of land cost

Where a property development project consists of more than one phase with
different types of properties, the land cost shall be allocated according to the
land area (acreage) for each phase. This is particularly important where there
are vacant lots of land reserved for future development.

Example 21

Syarikat T Sdn. Bhd. has a 200-hectare piece of land. The company plans to
build a block of luxurious condominium on 10% of the land area while
reserving the remaining 180 hectare to build bungalow houses in the future.

The cost of the whole piece of land is RM10 million. Hence, the cost of land
to be allocated to the condominium project is RM1 million.

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Example 22

U Development Sdn. Bhd. bought a 300–hectare piece of land for RM1

million. The land is divided into 4 parcels. Parcels 1, 2 and 3 are for immediate
development whereas parcel 4 is reserved for future use. Development work
on parcel 1 commenced on 01.07.2020. The cost of each parcel is calculated
based on land area as follows:

Land Area Land Cost

Parcel
Hectarer % RM %
1 30 10 100,000 10
2 45 15 150,000 15
3 75 25 250,000 25
4 150 50 500,000 50
Total 300 100 1,000,000 100

Example 23

Syarikat V Sdn. Bhd. undertakes a mixed development project consisting of

semi-detached houses, terrace houses and condominiums on a 500-hectare
site. The condominium block consists of units with various types: one-room,
two-room, three-room and penthouse unit.

The basis of land cost allocation shall be based on the land area (acreage)
for each type of development.

However, for the condominium project, the allocation of land cost allotted for
each block of condominiums may then be divided amongst the various types
of units by using the following method:

(a) the relative sales value method; or

(b) any method that is acceptance by the DGIR such as floor area.

12.5 Allocation of common infrastructure cost

The allocation of common infrastructure cost that relates to the property

development project shall be determined consistently in accordance with:

(a) the area (acreage) method;

(b) the relative sales value method; or

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(c) any method that is acceptable by the DGIR.

The property developer who chooses to apply any of the above methods does
not need to apply to the DGIR. The developer only needs to indicate his choice
in the tax computation and ensure that the method used reflects a fair and
reasonable allocation of the costs.

Example 24

W Bhd’s development project has the following particulars:

Details
Total development area 30 hectares
Total budgeted cost incurred on common
RM9,000,000
infrastructure on 30 hectares
Actual cost incurred for common infrastructure up
RM3,000,000
to 31.12.2020
Area of phase 1 3 hectares
Date of completion of phase 1 31.12.2020

Computation of Allocation of Common Infrastructure Cost

Phase 1

Total development area of Phase 1

X Common
Total development area of all Phases infrastructure cost

3
X RM3,000,000
30
= RM300,000

12.6 Fees paid for securing projects

12.6.1 A property developer may make payments to certain parties for

securing the project. Such payments may be termed as kick-back,
commission, management fees etc. The terms of the agreement
may provide, among others:

(a) payments to be in the form of a fixed sum or a percentage or a

combination of both;

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(b) payment of such fees to be made prior to commencement of a

project, during the project period and/or after completion of
project; and

(c) payments to be made in a lump sum or in instalments or a

combination of both.

12.6.2 For income tax purposes, the deductibility of such expenses would
depend on the purpose, nature and circumstances in which such
fees arise. Where the services provided by the payee are merely to
secure the project, the fee paid would be considered a kick back and
not eligible for a deduction as allowable expenses.

12.6.3 However, where the payee is actively involved in managing and

running the project after securing it, then the fee paid is an allowable
expense and shall be capitalised in the development expenditure
account.

12.7 Defects liability expenses

12.7.1 Upon completion of the project, any defects or damage to the

development units within the period of time specified in the sale and
purchase agreement shall be repaired or fixed by the developer
within the defect liability period. All costs and expenses related to
the repairs of defects and damages shall be borne by the property
developer.

12.7.2 The defect liability expenses of a development project which are

incurred in the basis period or any following basis period shall be
allowed as a deduction against the gross income of the property
developer depending on circumstances and choices made by the
developer.

(a) Sufficient gross income from the same development project

Where there is sufficient gross income from the same

development project, the defect liability expenses shall be
allowed as a deduction against the gross income from the same
project for that basis period or that following basis periods, as
the case may be.

Example 25

X Sdn. Bhd., which closes its accounts on 31 December every

year, has a multi-phase project in Johor Bahru that is developed

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concurrently. Phase 1 of the project was completed on

30.06.2019. Gross income from the project for the years of
assessment 2019 and 2020 is RM10,000 and RM12,000,
respectively. The company incurred defects liability expenses
amounting to RM5,000 and RM3,000 as of 30.9.2019 and
30.05.2020 respectively. The computations of gross income are
as follows:

Computation of Gross Income (After Defect Liability)

for Year of Assessment (YA) 2019 to 2020

YA 2019 YA2020
Details
RM RM
Gross income from Phase 1 10,000 12,000
Less: Defect liability expenses incurred 5,000 3,000
Gross income 5,000 9,000

(b) Insufficiency or an absence of gross income from the same

development project

Where there is insufficiency or an absence of gross income from

the same development project for that basis period or that
following basis period, defects liability expenses which cannot
be deducted in full or in part shall be allowed as a deduction
against -

(i) the aggregate amount of gross income from other

development projects for that basis period or following
basis period , as the case may be ; or

(ii) the gross income from the same property development

project for the basis period preceding the basis period in
which the expenses are incurred. Where, by reason of an
absence or insufficiency of gross income from the same
project for that preceding basis period, the expenses which
have not been so deducted shall be allowed as a deduction
against the gross income from that project for the next
preceding basis period and so on for the duration of the
project.

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Where the property developer decides to elect this

method, the election is irrevocable. This election can be
made either in the tax computation for the current year of
assessment or in the revised tax computations for prior
years of assessment to the respective branch offices of
Inland Revenue Board Malaysia.

Example 26

Y Sdn. Bhd. with accounts ending on 31 December has multiple

projects in Pulau Pinang. Phase 2 of the project which started in
November 2017 was completed on 30.04.2019. Defect liability
expenses of RM3,000 were incurred on 30.09.2019 and
RM5,000 on 30.01.2020. The tax computations of gross income
are as follows:

Computation of Gross Income (After Defect Liability)

for Year of Assessment 2019 to 2020

2019 2020
Details
RM RM
Gross income from Phase 2 2,000 3,000
Less: Defect liability expenses incurred 3,000 5,000
Loss from Phase 2 (1,000) (2,000)
Less: Aggregate gross income from
4,000 1,000
other phases
Gross income 3,000 (1,000)
Less : Expenses 1,000 Nil
Adjusted income/(loss) 2,000 (1,000)

The adjusted loss of RM1,000 may be deducted from other

sources of income such as dividend, interest etc.

Example 27

Syarikat Z Sdn. Bhd. with accounts ending on 31 December has

a project with two phases. Phase 1 commenced on 01.02.2018
and completed on 10.01.2020. After serious consideration, the
company decided to make an election as described in
paragraph 12.7.2(b) above. Details of income and defects
liability expenses are as follows:

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Gross Income
Year of Assessment
RM
2018 80,000
2019 30,000
2020 10,000

Defects liability expenses of RM42,000 was incurred in the year

2020. Computation of gross income is as follows:

Computation of Gross Income (After Defect Liability)

for Year of Assessment 2020

Details RM
Gross income from Phase 1 10,000
Less : Defect liability expenses incurred 42,000
Gross income NIL

Unabsorbed defects liability expenses of RM32,000 is carried

back to the year of assessment 2019 where the tax computation
would be reviewed.

Computation of Gross Income (After Defect Liability)

for Year of Assessment 2019

Details RM
Gross income from Phase 1 30,000
Less : Unabsorbed defect liability expenses 32,000
incurred carried back from the year of
assessment 2020
Gross income NIL

Unabsorbed defects liability expenses of RM2,000 is carried

back to the year of assessment 2018 where the tax computation
would be reviewed:

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Computation of Gross Income (After Defect Liability)

for Year of Assessment 2018

Details RM
Gross income from Phase 1 80,000
Less : Unabsorbed defect liability expenses 2,000
incurred carried back from the year of
assessment 2020
Gross income 78,000

12.8 Liquidated ascertained damages (LAD)

12.8.1 A property developer has a period of time specified in the sale and
purchase agreement to complete the development unit and deliver
to the buyer. If the developer fails to deliver vacant possession within
this period, the developer shall be liable to pay to the buyer an
amount calculated at a rate as specified in the sales and purchase
agreement as LAD until vacant possession are delivered to the
buyer.

12.8.2 For income tax purposes, the provision for LAD is not an allowable
expense. A developer’s liability only arises when payment of the
LAD becomes a fact. The liability is incurred as and when the actual
amount of LAD is ascertained and agreed to between the developer
and buyers.

12.8.3 For the property developer who undertakes a single project/phase

and does not have sufficient income after the project has been
completed, the developer may claim the LAD expenses to be carried
back and allowed as a deduction against the gross income from the
same project for the basis period preceding the basis period in which
the expenses are incurred. Any expenses which cannot be fully
deducted shall be allowed as deduction for the immediate preceding
period and so on until fully deducted for the duration of the project.

12.8.4 This concession is given to a property developer who:

(a) undertakes a single project/phase;

(b) has sold all the development units in that project/phase;

(c) the business is dissolved or liquidated when the project/phase

completed; and

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(d) has insufficient or no income from the project to offset the LAD
expenses.

12.9 Land premium and strata title expenses

12.9.1 For income tax purposes, the provision for land premium and strata
title expenses are not allowable expenses. These expenses may be
allowed as a deduction against the gross income of the property
development projects only when the amount has been ascertained
by the land office and paid by the developer.

12.9.2 For the property developer who undertakes a single project/phase

and does not have sufficient income after the project has been
completed, the developer may claim the land premium and strata
title expenses paid by him to be carried back and allowed as a
deduction against the gross income from the same project for the
basis period preceding the basis period in which the expenses are
incurred. Any expenses which cannot be fully deducted shall be
allowed as a deduction for the immediate preceding period and so
on until fully deducted for the duration of the project.

12.9.3 This concession is given to the same property developer as

specified in paragraph 12.8.4.

12.10 Legal and professional fees

12.10.1 Legal and professional fees such as stamping, filing, and legal fees
incurred in connection with the arrangement of loans, including
bridging loans, are not allowable under section 39 of the ITA.

12.10.2 Costs incurred in arranging end-financing facilities for the buyer are
allowable expenses as these expenses are incurred for the
convenience and benefit of the buyer and not for the benefit of the
property developer.

12.10.3 Fees paid for the valuation of land at the time of purchase by the
property developer, legal fees paid for transfer of land titles,
subdivision and conversion of land, and compensation for eviction
of squatters are allowable expenses.

12.11 Marketing and promotional expenses

12.11.1 Marketing expenses in the form of advertisements in media,

billboards, brochures etc. are allowable as expenses under
subsection 33(1) of the ITA.

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12.11.2 Expenses such as free legal fees, free cabinets or free air
conditioners are allowable deductions as expenses incurred in the
provision of entertainment which is related wholly to sales arising
from the business of a property developer under subparagraph
39(1)(l)(vii) of the ITA.

12.11.3 Show house expenditure

(a) the show house expenditure shall be capitalised in the

development expenditure account. If the show house is built
outside the development project area, the allowable expenditure
does not include the land cost.

(b) the show house which is a trading stock and subsequently

transferred and used as a business asset of the property
developer, the tax treatment under subsection 24(2) of the ITA
is applicable.

(c) any furniture, fitting and fixture, interior design and decoration
expenses related to the show house of the development project
shall be capitalised in the development expenditure account.
Where furniture, fitting and fixture are resold as scrap, the
proceeds shall be recognised as other business income under
paragraph 4(a) of the ITA.

(d) expenditure on the construction of a sales gallery or

management office which is built in the same area or which is
connected to the show house is not an allowable expenditure
under section 39 of the ITA.

12.12 Guarantee fee

A guarantee fee paid to a guarantor in respect of a loan or facility granted to

a property developer is a capital expense for raising funds and is not
deductible.

12.13 General administrative expenses

12.13.1 Where non-allowable expenses are charged to the statement of

comprehensive income, an adjustment shall be made to the income
tax computation to disallow the expenses in accordance with the
provisions of the ITA.

12.13.2 General administrative expenses such as audit fees and bank

charges are allowable against the gross income of the property

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development business under subsection 33(1) of the ITA if they are

incurred in the production of income of the property development
business.

12.14 Interest expense

12.14.1 A property developer may charge interest expense in the:

(a) development expenditure account; and/or

(b) comprehensive income statement

12.14.2 The interest charged on loans taken to finance the purchase of land
and development works shall be capitalised in the development
expenditure account. The interest shall be allocated to all land held
during the year in proportion to the cost of each parcel.

Example 28

AA Development Sdn. Bhd. bought a 300-hectare piece of land for

RM1million financed by a bank loan. The total loan is RM1.6 million
including RM600,000 for development work on project A. The total
interest expenses in the year 2020 on the total loan is RM120,000.
Development work on project A started on 01.07.2020. For project
B, C and D, progress work has not yet begun.

The land is divided into 4 projects based on the land area as follows:

Project Land Area Land Cost

Hectar % RM %
A 30 10 100,000 10
B 45 15 150,000 15
C 75 25 250,000 25
D 150 50 500,000 50
Total 300 100 1,000,000 100

Interest expenses may be apportioned as follows:

Computation of Interest on Development Cost

Development cost
X Total interest
Total loan

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RM600,0000
X RM120,000 = RM45,00023
RM1,600,000

Note
23 Interest on the development cost loan shall be capitalised in the
development expenditure account for Project A only.

Computation of Interest on Land Cost

Land cost
X Total interest
Total loan

RM1,000,000
X RM120,000 = RM75,00024
RM1,600,000

Note
24 Interest on the purchase of land shall be distributed to each
project as follow:

Land cost
X Total interest
Total land cost

Allocation of Interest Interest

Project
RM RM
100,000 x 75,000
A 7,500
1,000,000
150,000 x 75,000
B 11,250
1,000,000
250,000 x 75,000
C 18,750
1,000,000
500,000 x 75,000
D 37,500
1,000,000
Total 75,000

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Since only Project A commenced in 2020, the interest on the

purchase of land amounting to RM 7,500 will be capitalised in the
development expenditure account of Project A. The interest for
Project B, C and D will be capitalised in the development
expenditure account of Project B, C and D and can be claimed upon
the commencement of these projects.

12.14.3 Where a property developer charges interest expenses which is not

allowable to development expenditure, adjustment has to be made
by taking out that amount of interest expenses from the development
expenditure account.

12.14.4 For income tax purposes, only interest expenses directly related to
phases/projects of development being developed are allowed to be
capitalised in the development expenditure account.

12.14.5 The interest expenses which is capitalised in the development

expenditure account shall be restricted where appropriate, in
accordance with subsection 33(2) of the ITA. If the restriction of
interest under subsection 33(2) of the ITA applies, it shall be
computed for the basis period for each year of assessment.

13. Tax Treatment on Stock

13.1 Withdrawal of stock to fixed asset

The withdrawal of stock to fixed asset is subject to income tax under

subsection 24(2) of the ITA. The market value of the stock at the time of the
withdrawal is the gross income of the property developer during that basis
period. Subsequent disposal of property is subject to tax under the Real
Property Gains Tax Act 1976(RPGT).

Example 29

BB Indah Sdn. Bhd., a property developer, withdrew several unsold houses

from the stock and transferred to fixed assets at cost at the end of the financial
year. These houses were subsequently rented out to earn rental income.

Subsection 24(2) of the ITA is applicable. The market value of the stock at the
time of withdrawal to fixed asset is the gross income of the property developer
during the basis period. To determine whether rental income from these
houses shall be taxed under paragraph 4(a) or 4(d) of the ITA, please refer to
the PR No. 12/2018 titled Income from Letting of Real Property that can be
downloaded from the Inland Revenue Board of Malaysia’s official portal at
www.hasil.gov.my.

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13.2 Stock that has not been sold but is being rented out

Where a property developer has stock that has not been sold but is being
rented out, the rental income shall be taxable under paragraph 4(a) of the ITA.

Example 30

CC Lestari Development Sdn. Bhd., a property developer, completed a project

comprising 295 units of townhouses in the year 2020. The company managed
to sell 285 units, leaving another 10 units unsold for rent. Rental income shall
be taxable under paragraph 4(a) of the ITA.

Subsection 24(2) of the ITA is not applicable in this case because there is no
withdrawal of stock to fixed assets. In the event of a subsequent sale of these
houses, the profits are subject to income tax under paragraph 4(a) of the ITA.

13.3 Stock of land not yet developed

Where the property development business has not commenced and the
property developer receives rental income from the land such as rental of
land, parking fees, etc., the rental income is subject to tax under paragraph
4(d) of the ITA, unless the facts of the case prove that the letting of the land
is a business source chargeable to tax under paragraph 4(a) of the ITA.

13.4 Stock parted with by compulsion under Section 4C of the ITA

With effect from the year of assessment 2014, for the purpose of paragraph
4(a) of ITA, any amount or compensation receivable arising from stock in
trade parted with by compulsion, including on requisition or compulsory
acquisition of the land or in a similar manner, shall be treated as gross income
of the business in the year in which the stock is parted in that manner.

13.5 Cessation of business - whether unsold development units are stock or fixed
asset

Whether the unsold development units of a property developer are to be

treated as stock or fixed assets upon the cessation of his business of property
development will depend on the facts of the case.

14. Other Issues Related to Property Development

Interest income from housing development account

Interest income derived from the housing development account should be assessed
under paragraph 4(c) of the ITA.

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15. Joint Venture Project

15.1 A joint venture project is a property development project undertaken jointly

between a landowner and a property developer under an agreement to
develop a property development project, whereby:

(a) the landowner surrenders his land to the property developer for
development and in return receives:

(i) an amount in cash;

(ii) a certain number of development units upon the completion of the

project;

(iii) a percentage of sales value of the project;

(iv) a percentage of profit sharing from the sale of development units;

or

(v) unit shares of the company

or

(b) the landowner and the property developer agree to other arrangement
under the joint venture project.

15.2 The recognition of income for income tax purposes in respect of a joint venture
project depends on the terms and conditions of the agreement signed
between the landowner and the property developer. Hence, joint venture
projects have to be dealt with according to the facts of each case.

15.3 The income tax treatment in respect of joint venture projects is as follows:

(a) where the landowner takes an active role in the property development
activities together with the property developer, the landowner is deemed
to be undertaking the business of a property development; and

(b) where the landowner does not take an active role in the development
activities and the land is not a trading stock of his business, the landowner
is deemed not undertaking the business of a property development.

15.4 The active role in property development activities for joint venture are−

(a) The land owner has significant influence, among others are:

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(i) determining the planning of property development project such as

the concept, type, nature and duration of the development project;

(ii) the appointment of contractors involved in joint venture project such

as consulting companies, contractor and subcontractor;

(iii) involve in marketing activities for the whole development project;

(iv) determining the selling price of development units;

or

(b) the existence of badges of trade in joint venture project transaction.

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16. Updates and Amendments

This PR Amendments
replaces the
PR No. The contents of this PR have been amended and updated as
1/2009 dated follows:
22 May 2009
Paragraph
Amendments
in this PR
1 Paragraph 1 is amended.

2 Paragraph 2 is amended and renumbered as

subparagraph 2.2.

New subparagraph 2.1 and 2.3 are inserted.

4 Subparagraph 4.1 and 4.2 are amended and

renumbered as paragraph 4.1.

Subparagraph 4.3 is deleted.

Subparagraph 4.4 is renumbered as

subparagraph 4.2.

Examples 1 and 2 are amended.

5 Paragraph 6 is amended and renumbered as

paragraph 5.

Example 8 is amended and renumbered as

example 3.

6 The title of paragraph 5 is amended and

renumbered as paragraph 6.

Subparagraph 5.1 to 5.7, 5.9 to 5.14 are

amended and renumbered as subparagraph 6.1
to 6.7 and 6.8 to 6.13.

Subparagraph 5.8 and 5.10 are amended and

renumbered as subparagraph 6.9.

Examples 3 to 7 are amended and renumbered

as examples 4 to 8.

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Amendments

Paragraph
Amendments
in this PR
7 Subparagraph 7.1 and 7.4 are amended.

New subparagraph 7.5 is inserted.

Examples 9, 10, 11 and 12 are amended.

8 New subparagraph 8.2(c) is inserted.

Subparagraph 8.3 are amended.

Examples 13 and 14 are updated.

9 Paragraph 9 is amended.

Example 15 is amended.

10 Subparagraph 10.1 is amended.

Subparagraph 10.2 and 10.5 are deleted.

Subparagraph 10.3, 10.4, 10.6 to 10.8 are

amended and renumbered as subparagraph 10.2
to 10.6.

Examples 16, 17, 18, 19 and 20 are amended.

11 New subparagraph 11.1 and 11.2 are inserted

12 Paragraph 11 is renumbered as paragraph 12.

Subparagraph 11.1 is deleted.

Subparagraph 11.2 to 11.15 are amended and

renumbered as subparagraph 12.1 to 12.14.

New subparagraph 12.11.3 is inserted.

Subparagraph 11.15.5 is deleted.

Examples 21, 22, 23 and 24 are amended.

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Amendments

Paragraph
Amendments
in this PR
12 Examples 25 and 26 are amended and
renumbered as example 25.

Examples 27 and 28 are amended and

renumbered as example 26.

Examples 29 and 30 are amended and

renumbered as example 27 and 28.

13 Paragraph 12 is amended and renumbered as

paragraph 13.

Subparagraph 12.1 and 12.2 are amended and

renumbered as subparagraph 13.1.

Subparagraph 12.3, 12.5 and 12.6 are amended

and renumbered as subparagraph 13.2, 13.3 and
13.5.

Subparagraph 12.4 is deleted.

New subparagraph 13.4 are inserted.

Examples 31 and 32 are amended and

renumbered as examples 29 and 30.

14 Paragraph 13 is renumbered as paragraph 14.

Paragraph 14 is deleted.

15 Subparagraph 15.1 to 15.3 are amended.

New subparagraph 15.4 is inserted.

17. Disclaimer

The examples in this PR are for illustration purposes only and are not exhaustive.

Director General of Inland Revenue,

Inland Revenue Board of Malaysia.

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