This article is part one of a two-part article on the concept of supply for GST purposes and is relevant for candidates preparing for P6 (MYS), Advanced Taxation. The article is based on prevailing laws as at 31 March 2015.
The article is written on the assumption that candidates have a basic understanding of the GST principles in Malaysia. It covers the concept of supply and when a deemed supply will arise. In addition, it addresses transactions which are not regarded as a supply for GST purposes, particularly focusing on the transfer of a business as a going concern (TOGC). The second part of the article will address the four key concepts of supplies – namely type, place, time and value of supply.
Concept of supply
GST is to be charged and levied on:
- any taxable supply of goods or services made in Malaysia by a taxable person in the course of their business and
- any importation of taxable goods and services into Malaysia.
It should be appreciated that the applicability of GST is based on the presence of supply. Unlike income tax which is applicable on a receipt of income, GST would only apply if there is a supply.
In general, the definition of supply for GST purposes covers all forms of supply where goods and services are supplied in return for a consideration. Under the GST Act, 2014 (GST Act), supply means all forms of supply, including supply of imported services, done for a consideration and anything which is not a supply of goods but is done for a consideration is a supply of services.
The definition in the legislation appears to be rather convoluted; essentially it means that for a supply to occur, the following two ingredients must be present:
- It must involve the transfer of ownership of goods (a supply of goods) or be for something that is done or to be done (a supply of services)
- It involves a consideration.
Examples of supply include sale, barter, exchange, license, rental, lease and right to use.
Consideration is defined to include any payment made or to be made, whether in money or otherwise, or any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of the supply of goods or services, whether by the person or by any other person. As such, consideration received can be in monetary form or in kind or both.
Happy Sdn Bhd, which makes up its accounts to 31 December every year, gave a hamper worth RM200 to Angry Sdn Bhd, one of his customers, in June 2015.
As Happy Sdn Bhd gave the hamper to Angry Sdn Bhd without any consideration, there is no supply for GST purposes and therefore, Happy Sdn Bhd is not required to account for GST on the free hamper.
Generally, any goods or services supplied without consideration are regarded as not a supply and are, therefore, not subject to GST. Unfortunately, the rules are not as simple as this as the legislation then provides that, under certain circumstances, a supply of goods or services:
(a) without consideration may be deemed to be a supply, or
(b) with consideration may be deemed not to be a supply
We will first address when a transaction may be deemed to be a supply notwithstanding that there is no consideration and then we will also address the situations where transactions with consideration may be deemed not to be a supply.
Deemed supplies – goods
There are different deemed supply rules applicable for goods and services.
In the case of goods, where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, where or not for a consideration, the transfer or disposal is a supply of goods by the person. The exceptions to this are as follows:
- A gift of goods made in the course or furtherance of the business made to the same person in the same year where the total cost to the donor is not more than RM500. This is normally known as the gift rule. In other words, any gift to a person which is less than RM500 per annum is not regarded as a supply subject to GST, or
- A gift, to an actual or potential customer of the business, of an individual or commercial sample in a form not ordinarily available for sale to the public.
The above provision does not deem anything done not for a consideration as a supply except where the person who is carrying on a business is entitled to credit of input tax on the supply or importation of the goods.
Happy Sdn Bhd presented a gift of a computer to its retiring sales manager. The company acquired the computer for a cost of RM3,000 inclusive of GST from a GST registered vendor. The open market value of the computer at the date of gift was RM2,000
As the total cost of the computer to Happy Sdn Bhd is more than RM500, the gift of computer is deemed to be a supply and is therefore, subject to GST. In this instance, Happy Sdn Bhd would be required to account for GST on the deemed supply based on the open market value of the gift. The amount of output tax to be accounted for by Happy Sdn Bhd would be as follows:
Deemed output tax
= Open market value x 6/106
= RM2,000 x 6/106
The facts are the same as in Example 2 except that the computer is purchased from a non-registered vendor. The invoice amount of the computer remains RM3,000.
Under this scenario, as Happy Sdn Bhd is not entitled to claim the input tax on the purchase of the computer, the subsequent gift of the goods is not regarded as a deemed supply. There is, therefore, no requirement for the company to account for deemed output tax on the gift of computer.
Following on from Example 1, in addition to the free hamper given in June 2015, Happy Sdn Bhd also presented a free microwave oven worth RM400 to Angry Sdn Bhd in October 2015.
Time of gift
Cost of gift
Time of supply
Not deemed to be a supply in June 2015
Output tax = RM600 x 6/106
Assumption: The cost of the gift is equivalent to the open market value of the gift.
In June 2015, as the cost of the gift of goods to Angry Sdn Bhd is only RM200, this would not be deemed to be a supply. However, in October 2015, Angry Sdn Bhd received an additional gift worth RM400, giving a total cost of gifts received from Happy Sdn Bhd during the year of RM600. Since the total cost of the gifts made by Happy Sdn Bhd to Angry Sdn Bhd is now more than RM500, the deemed supply rule is now applicable. It should be noted that the RM500 threshold is calculated based on the total gift cost and not on an individual gift basis. In this instance, not only would be second gift be subject to GST but rather the total gifts (ie the hamper and microwave oven) of RM600 would be subject to GST. Based on the above example, the deemed output tax of RM34 would need to be reported in October 2015. There is no requirement for the GST return relating to the taxable period covering June 2015 to be revised to take into account the deemed supply of the hamper.
In practice, businesses would require a proper tracking system to ensure that its gifts are tracked and GST is accounted for when the RM500 gift threshold is reached.
Deemed supplies – services
The above deemed supply rule applies to the provision of goods without consideration. When it comes to the provision of services, the threshold of RM500 mentioned above is not relevant. In the case of a provision of services without consideration, there would be no deemed supply unless the following circumstances apply:
- Business assets put to private or personal use, used for the purpose other than business or made available for another person’s use but not done in the course or furtherance of the business of the owner of the goods, whether or not there is a consideration.
- Supply of services without consideration by a taxable person to a connected person.
A person is deemed to be connected if:
(a) they are officers or directors of one another’s business
(b) they are legally recognised partners in business
(c) any one person directly or indirectly owns, controls, or holds 5% or more of the outstanding voting stock or shares of both of them’
(d) one of them directly or indirectly controls the other
(e) both of them are directly or indirectly controlled by a third person
(f) together they directly or indirectly control a third person, or
(g) they are members of the same family.
Happy Sdn Bhd owns a van which is used to transport its workers to customers’ premises. During one weekend, the van was used by its finance director to ferry his relatives for a family outing.
As the van is used by the finance director for his personal use – ie business assets put into private use, this would be deemed as a supply of services to the finance director. In this regard, the provision of free usage of the van is regarded as a deemed supply of services. The value of supply would be based on the open market value of the usage of the van.
Happy Sdn Bhd provides management services without charge to Joy Sdn Bhd. Happy Sdn Bhd has a 30% shareholding in Joy Sdn Bhd.
As Happy Sdn Bhd has more than a 5% shareholding in Joy Sdn Bhd, both Happy Sdn Bhd and Joy Sdn Bhd are regarded as connected person. The provision of free services to Joy Sdn Bhd would be a deemed supply of services. In such a case, Happy Sdn Bhd would be required to account for the deemed output tax.
Supply with consideration not regarded as a supply
There are some activities with a consideration which can also be treated as not a supply. The following are some of the examples of a supply with a consideration which are treated as neither a supply of goods nor a supply of services:
- Transfer of a business as a going concern basis (TOGC) subject to fulfilment of certain conditions
- Contribution by an employer or an employee to a pension, provident or social security fund
- Supply of goods where the taxable person is not entitled to input tax credit on the acquisition of the goods (eg blocked input tax items)
The next section of the article looks specifically at one scenario relating to the transfer of a business as a going concern basis (TOGC) which is part of the syllabus of P6 (MYS), Advanced Taxation.
Transfer of a business as a going concern basis (TOGC)
Strictly, the transfer of business would be regarded as a taxable supply and therefore, subject to GST. However, the GST legislation provides for a specific TOGC rule which acts as a facility to both the transferor and transferee involved in the transfer or sale of business so that:
- the transferee need not pay input tax on the transferred assets and thus alleviates his cash flow burden
- the transferor need not account for output tax on the transferred assets, and
- the Government’s revenue base is safeguarded on the output tax which the transferor may otherwise default in paying when he ceases business
Under the GST provisions, when a supply of business assets is made as a TOGC, such supply of assets by a taxable person (the transferor) to another taxable person (the transferee) is treated as neither a supply of goods nor a supply of services. Consequently, the transferee who receives such a transfer of assets shall be deemed to have incurred input tax on the value of the assets supplied to him and to have deducted such deemed input tax from any output tax due from him on the day of the supply made.
It should be noted that TOGC may involve the transfer of a whole or part of a business as a going concern from a taxable person to another taxable person and, in the case where only part of the business is transferred, that part of the business must be capable of separate operation. The following situations of business transfers may qualify under the TOGC rules:
(a) The business assets of a taxable person are taken over by another taxable person due to death or retirement of the transferor
(b) A taxable person sells his business assets or part of his business to another taxable person who carries on the business as a going concern, or
(c) The legal entity of a business has changed, for example, a partnership becomes a private limited company.
The following situations are not regarded as a transfer of business subject to TOGC:
- A mere sale or transfer of capital assets
- Transfer of shares which do not change the legal entity of the business. It should be noted that the transfer of shares is not subject to GST in the first place
- A series of immediate consecutive transfers of the same business
- A purchaser of a business who makes an immediate sale of the business to another party is deemed to have not carried out the business immediately sold on. This would make both his purchase and the subsequent sale to be outside the scope of TOGC.
Where the TOGC rules do not apply, the normal rules of GST would apply.
Conditions for application of TOGC
In order for the TOGC rules to apply, the following conditions must be met:
- both the transferor and transferee must be GST registered persons (ie. taxable persons) before the transfer of the business or part of the business is carried out. It should be noted that a transferee who is not a registered person but would become one upon taking over the transferor’s business must register as a registered person before the transfer of the business takes place
- the business transferred must be a going concern before and immediately after the transfer. Any business which has actually ceased operations before the transfer would not qualify under the TOGC rules. However, a short period of break or temporary closure immediately after the transfer to facilitate the smooth transfer might be permissible
- the transferee must use the transferred assets to continue with the same kind of business operated by the transferor
- if only part of the business is sold or transferred, that part of business must be capable of separate operation. However, it does not matter whether the transferee will operate the transferred business separately from any other businesses that they are already operating.
Joy Sdn Bhd acquired a trading business from Sad Sdn Bhd on 1 February 2016. Both companies are registered person for GST. Upon the sale of its business, Sad Sdn Bhd will cease to trade. Joy Sdn Bhd will integrate the business acquired into its existing trading business and continue to carry on the business.
On the basis that the business is transferred to Joy Sdn Bhd on a going concern basis and the transferred assets are continued to be used in the same kind of business as they were when Sad Sdn Bhd carried on the business, the TOGC rules should apply. Moreover, both Joy Sdn Bhd and Sad Sdn Bhd are GST registered person.
The facts are the same as in Example 7 except that Sad Sdn Bhd is not registered for GST.
As Sad Sdn Bhd is not registered for GST, the TOGC rules do not apply and, therefore, the normal GST rules would apply. As Sad Sdn Bhd is not a registered person, there is no requirement for Sad Sdn Bhd to impose GST on the sale of the business.
Implications arising from the application of the TOGC rules
The transfer of a business or part of a business which comes within the scope of TOGC is treated as neither a supply of goods nor a supply of services. Thus, there would be no output tax charged or received by the transferor on such transfer of a business. On the other hand, the transferee is deemed to have incurred input tax on the supply and at the same time claimed the deemed input tax. Therefore, there is no payment of GST by the transferee to the transferor for the transfer of business or part of a business falling under the TOGC rules.
The TOGC rules are premised upon the principle of continuity. This means that if there is any input tax incurred which has not been claimed by the transferor on the date of transfer, it is claimable by the transferee. However, if there is any output tax which has not been accounted for and paid by the transferor on the date of transfer, it becomes the liability of the transferee to account and pay for the tax.
Following from Example 7, upon the transfer of business, Joy Sdn Bhd received a tax invoice issued to Sad Sdn Bhd dated 15 January 2016. The invoice was received by Joy Sdn Bhd on 10 February 2016. The tax invoice is for trading goods supplied by a vendor.
The question then is whether Joy Sdn Bhd will be able to claim input tax on the tax invoice received. Applying the principle of continuity, Joy Sdn Bhd would be able to claim input tax on the tax invoice as if the tax invoice was issued to it rather than Sad Sdn Bhd.
Written by a member of the P6 (MYS) examining team