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Conversion from Sole Proprietorship or Partnership to Private Company in Malaysia

The conversion is basically to incorporate a private company (Sdn. Bhd.), transfer assets over and close the business.

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Controlled Sale of Partnership Assets

The provision for controlled sale under the ITA and ITR 1969 would apply to partnership assets disposed of by a partner to an acquirer that is subject to control.

The owner / partners can transfer a partnership asset to a company controlled by him / them. The disposal of the asset to the company is a controlled sale.

“Asset” means plant and machinery used for the purposes of a business and on which qualifying expenditure has been incurred.

Controlled transfers

If assets are transferred between individuals/companies under common control, no balancing adjustments will be made. In such cases, the actual consideration for the transfer of the asset is not taken into account and the disposer/acquirer is deemed to have disposed/acquired the asset at a tax written down value.

Where a person disposes of an asset and initial allowance (IA) or an annual allowance (AA) has been claimed and allowed or could be allowed, the disposal will be subject to the control provision if –

(a) the acquirer of the asset has control over the disposer; or

(b) the disposer of the asset has control over the acquirer.

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.

However, the disposal of an asset which is subject to control under the ITA, only applies if the following conditions are complied with by the disposer and the acquirer:

(a) The disposer has claimed capital allowances on the asset disposed of; and

(b) Assets are still used for the purpose of the acquirer’s business at the end of the basis period for a year of assessment.

Tax Treatment

Where there is a disposal and an acquisition of an asset between two parties that are related in term of control, the onus of proof of the existence of control lies with the taxpayer (company/partnership).

Disposal price

The disposal price of a plant or machinery which is subject to control is deemed equal to the residual expenditure of the disposer. The actual price of the disposal of plant or machinery is disregarded.

Qualifying expenditure

The acquirer shall be deemed to have incurred QE which is equivalent to the residual expenditure of the disposer. Thus, the capital expenditure incurred by the acquirer to obtain the assets under a disposal of which is subject to control (if any) will not be considered.

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