(Tax Update) Understanding Controlled Transfers in Taxation: A Guide for Businesses

Controlled transfers, as outlined by the Inland Revenue Board of Malaysia, refer to the disposal and acquisition of assets between related parties under common control. This blog post explains the significance of these transfers, particularly in relation to plant and machinery, within the context of Malaysian tax law.

Objective:

Our aim is to demystify the tax implications of controlled transfers, helping businesses and accounting professionals grasp how such transactions affect their tax calculations and obligations.

What is a Controlled Transfer?

A controlled transfer occurs when assets are transferred between parties that are related or under common control. This could be due to ownership, partnership shares, or company management structures. In taxation terms, such transfers are handled uniquely to ensure tax fairness and prevent manipulation of tax liabilities.

Tax Implications of Controlled Transfers:

Tax neutrality

In controlled transfers, the actual sale price is often disregarded. Instead, tax calculations are based on the residual expenditure of the asset, ensuring that tax outcomes remain neutral regardless of the transaction price.

Capital Allowances

The buyer in a controlled transfer inherits the seller's tax basis in the asset. This means the buyer steps into the shoes of the seller regarding capital allowances, which can impact the buyer's future tax deductions.

Avoidance of Balancing Charges

Normally, when an asset is sold for more than its tax-written value, a balancing charge arises, increasing taxable profits. However, in controlled transfers, these balancing charges (or allowances) are typically not recognized, avoiding unexpected tax liabilities.

Where a disposal of an asset is subject to control, the sale price and the purchase price are ignored and no balancing allowance or balancing charge is imposed on the disposer. The qualifying expenditure (QE) incurred by the acquirer and the date the asset is deemed to have been acquired by the acquirer is determined.

Benefits for Business Planning

Understanding these rules can significantly aid in tax planning, particularly for groups of companies or partnerships where assets frequently change hands internally. Strategic planning of asset transfers can optimize tax positions across the group without triggering additional tax costs.

Conclusion

Controlled transfers, while complex, offer a mechanism for businesses to manage their assets within a controlled group without adverse tax consequences. By aligning with a knowledgeable tax agent, businesses can ensure compliance and optimize their tax positions effectively.

Source

IRB Public Ruling 1/2018 Disposal of Plant and Machinery Part II - Controlled Sales https://phl.hasil.gov.my/pdf/pdfam/PR_1_2018.pdf