Many SME owners are also directors of their own companies, and it is common for a company asset such as property to eventually be sold to one of its directors. What often gets overlooked is that this kind of sale is not treated the same way as a sale to an unrelated buyer.

Under Sections 140(1) and 140(6) of the Income Tax Act 1967, LHDN has the power to disregard or adjust a transaction between related parties if it is not conducted at arm's length. Arm's length simply means the price and terms are what two unrelated parties would reasonably agree to in the open market. The reason this power exists is straightforward. Without it, a company could sell valuable assets to its own directors at a steep discount, reducing the company's declared profit and quietly shifting value out of the business in a way that distorts the true tax position.

A discount by itself does not automatically fail this test. A reasonable discount can be accepted where there is genuine commercial justification for it, such as a legitimate business reason tied to the circumstances of the sale. What tips a transaction into non arm's length territory is usually a combination of two things, a discount that is unusually large compared to market value, and no credible reason offered for why that discount was given.

There is a second, related principle worth understanding here too. When a company provides for a future statutory payment, such as stamp duty, and wants to claim it as a deduction, the timing matters. A provision is only deductible once an actual legal obligation to pay exists. For statutory payments, that obligation typically only arises when the relevant authority issues a formal demand, not simply when an agreement is signed or a transaction is planned. Claiming the deduction earlier than that can result in the deduction being disallowed, even if the payment is genuinely owed later.

These principles played out together in one dispute, Silverdrum Corporation Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri. I will be sharing the case separately soon.

If your business is planning a related party transaction or unsure when a provision becomes deductible, our team at August Advisory can help you think it through properly. WhatsApp 010-246 2151.