The High Court in New Club Taiping v Ketua Pengarah Hasil Dalam Negeri (WA-14-38-07/2020) held that Section 53A of the Income Tax Act 1967 (“ITA”) only applicable to the transaction between members of a club and cannot be extended to transactions with a non-member.

The salient facts of New Club Taiping (supra) are as follows:

1. a) The Taxpayer is a recreational club registered in Malaysia with the Register of Societies and has obtained license from the Ministry of Finance to operate slot machines within the premises of the club.
2. b) The slot machines located in a room within the club and only accessible by the club’s members.
3. c) The Taxpayer entered into an agreement with TT Digital Sdn Bhd (“TTD”) where TTD will be granted the right to operate and manage the Taxpayer’s slot machines (“Agreement”) where TTD will deposit all monies collected from the members into the Taxpayer’s bank account.
4. d) Under the Agreement, the Taxpayer is entitled to take first bite of the cherry of RM18,000.00 per month from the monies collected (“Income”) and the excess monies will be TTD’s service fees.
5. e) Pursuant to a tax audit, the Inland Revenue Board of Malaysia (“IRB”), in February 2013, issued notices of additional assessment (“Forms JA”) for the years of assessment (“YAs”) 2006 to 2010 on the basis that the Taxpayer failed to declare the Income received from TTD in its tax returns.
6. f) The Special Commissioners of Income Tax (“SCIT”) ruled in favour of the IRB and the Taxpayer appealed against the SCIT’s decision before the High Court.

 In dismissing the Taxpayer’s appeal, the High Court held that, amongst others:

1. a) The Taxpayer had committed negligence as the Taxpayer failed to obtain advice from tax agent or IRB and subsequently failed to declare the Income received from TTD in its tax returns.
2. b) The Taxpayer’s negligence only discovered by the IRB after the tax audit and thus the issuance of the Forms JA by the IRB is valid and not time barred.
3. c) Under the Agreement, the Taxpayer received monthly net income from TTD, which is not a member of the club and thus Section 53A of the ITA does not apply on the Income received from TTD.
4. d) The source of Income received by the Taxpayer was from TTD and not from contributions of the club members.

Comments

This case is probably the first case which addressed the application and limitation of Section 53A of the ITA. The High Court in New Club Taiping (supra) made it very clear that Section 53A of the ITA only applicable to the transaction between members of a club and cannot be extended to transactions with a non-member.

It is not uncommon for club or association to outsource certain activity of the club or association to a third party as it makes perfect commercial sense to resort to the outsourcing approach. However, the club or association must make sure that they control the transactions with their members at all material times. The outcome of New Club Taiping (supra)would be drastically different if the Taxpayer operates the slot machines itself but paid service fees to TTD in managing the slot machines. The importance of tax advice and tax planning.

Another key takeaway from New Club Taiping (supra) is that the High Court appears to be suggesting that a taxpayer may not be committing negligence if the taxpayer had obtained advice from or consulted tax agent or the IRB on a tax issue during the preparation of their tax returns. Here, we can see again, the importance of getting a tax advice.

This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.

About the Author
Desmond Liew Zhi Hong
Partner
Tax
Halim Hong & Quek
desmond.liew@hhq.com.my