This case touches something many property and land based businesses face. When the Ministry of Finance grants a tax exemption for a specific project, and later sends a follow up letter, does that later letter change how income already earned should be taxed? This case gives a clear answer, and it matters to any business relying on a government tax incentive letter.

𝐁𝐚𝐜𝐤𝐠𝐫𝐨𝐮𝐧𝐝 𝐨𝐟 𝐭𝐡𝐞 𝐜𝐚𝐬𝐞 Senai Airport City Sdn Bhd is the master developer of a large industrial project in Johor. In 2013, it leased land to Hershey Malaysia and also gave Hershey a call option over an adjacent piece of land. In 2016, Hershey paid RM1.4 million for that call option. Separately, also in 2016, the Minister of Finance approved a tax exemption for income from disposing of rights over value added land within the project. The company treated the RM1.4 million as covered by this exemption. In 2019, the Ministry issued a further letter on the same incentive. LHDN then took the position that the option fee was taxable, since Hershey never actually exercised the option, and raised an additional tax assessment for 2016 together with a penalty. The Special Commissioners of Income Tax sided with the company, and LHDN appealed to the High Court.

𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐭𝐚𝐱𝐩𝐚𝐲𝐞𝐫 Senai Airport City argued that granting the call option meant it had given up part of its rights over the adjacent land, and this counted as a disposal of rights over value added land under the 2016 exemption. It also argued that the 2019 letter came after the transaction had already happened in 2016, so it could not be used to change the tax treatment of income already earned. Since the underlying assessment was wrong, the penalty on top of it should also fall away.

𝐏𝐨𝐬𝐢𝐭𝐢𝐨𝐧 𝐨𝐟 𝐋𝐇𝐃𝐍 LHDN's position was that a call option is only a contractual right, and since Hershey never went on to exercise it, no real disposal of land rights ever took place. Without an actual disposal, the exemption should not apply. LHDN also argued that the 2019 letter clarified the scope of the original exemption to cover only actual sales or leases, and that this clarification should apply to the case.

𝐃𝐞𝐜𝐢𝐬𝐢𝐨𝐧 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐨𝐮𝐫𝐭 The High Court dismissed LHDN's appeal. It found no error in the earlier decision that granting the call option was itself a disposal of rights, since it gave Hershey real and enforceable rights while limiting what the company could do with the land. The court also held that the 2019 letter could not retrospectively change how a 2016 transaction should be taxed. The additional assessment and the penalty were both set aside, and LHDN was ordered to pay costs of RM15,000 to the company.

Tax exemptions and Ministry approval letters can be tricky to interpret, especially when timing and wording are involved. Our CFO advisory team helps businesses stay ahead of regulatory changes without disruption. Reach us on WhatsApp at 010-246 2151.