Taxation on Construction Companies

Knowledge Sharing Session by:

Linah binti Idris
Pengarah Bahagian Hartanah & Pembinaan
Cawangan Pembayar Cukai Besar
LEMBAGA HASIL DALAM NEGERI MALAYSIA
 Linah Binti Idris

Linah Idris started her career in Inland Revenue Board of

Malaysia (IRBM) in early 2004.

Her experience in IRBM covers mainly corporate tax for

both desk & field audit in various industries such as
manufacturing, services, construction, property
development, Investment holding companies and
Government-Linked Companies. She was also attached to
Multinational Tax Branch and Aggressive Tax Planning
Division for Investigation. Currently Linah is the Director
of Property Development & Construction Division , Large
Taxpayer Branch, IRBM.

She holds a Master in Business Administration (Taxation)

from Universiti Kebangsaan Malaysia and Bachelor in
Accounting (hons) from Universiti Tenaga Nasional.
 Construction Companies
vs
Trading / Manufacturing / Services

• Income Tax (Construction Contracts) Regulations 2007

• Public Ruling 2/2009: Construction Contracts
P.U.(A) 276
Income Tax (Construction Contracts)
Regulations 2007

• Interpretation
• Separate Source of Income
• Gross Income Place Your Picture Here
• Estimated Gross Profit
• Estimated Loss
• Adjusted Income
• Date of Commencement
• Date of Completion
• Deductibility of expenses incurred in respect
of warranty or defects liability
• Actual Gross Profit or Loss
PR NO.2/2009
CONSTRUCTION CONTRACTS

1. Introduction
2. Interpretation
3. Date of commencement of business
4. Recognition of income prior to completion of contract
5. Separate source of income
6. Estimated loss from uncompleted contracts Place Your Picture Here
7. Revision of estimates and tax computation
8. Completion of contract
9. Individual contractors
10. Outgoings and expenses of construction contractors
11. Other issues related to construction contractors
12. Information required for audit
Construction
Contract Commencement
Commencement of business
Involve the performance of
The following circumstances may be
construction services and are
indicative of the commencement of a
contracts specifically
construction contract business:
negotiated for the construction
i. The date on which the contract is
of an asset or combination of
secured
assets that are closely
ii. The date on which a letter of
interrelated in terms of their
award is offered
design, technology and function
iii. The date on which possession of
or their ultimate purpose or use
a construction site is obtained,
and include main & ancillary
whether in writing or otherwise; or
contracts including but not
iv. The commencement of an activity
limited to mechanical
which constitutes part of a series
engineering, electrical
of activities that are actively
engineering, public utilities
carried out in the course of a
projects, project design &
construction contract business, for
consultancy, architectural
example levelling of land.
designing and infrastructural
v. Any other date which DGIR
contracts.
consider appropriate
 Building Construction
Residential: Houses / condominiums
Non residential: Schools, shop lots, community halls, college, university

Infrastructure
Highways, roads, railways, public amenities

Types of
Construction
Industrial
Industrial wiring & installation

Others
Intercompany services & maintenance contract
 SEPARATE SOURCE OF INCOME
Each contract shall be treated as a
separate and distinct source of income.

Separate construction contract Single construction contract

(a) separate proposals have been submitted (a) negotiated as a package;

for each asset; (b) so closely interrelated that they are
(b) each asset has been subject to separate in effect part of a contract
negotiation and the contractor and with an overall profit margin; and
customer have been able to accept or (c) performed concurrently or in a
reject that part of the contract relating to continuous sequence.”
each asset; and
(c) the costs and revenues of each asset can
be identified.
SEPARATE SOURCE OF INCOME
Question 1:
Company E, a building construction contractor, entered into a contract with a university to
construct 4 blocks of buildings - a library, a hall, an administration block and a lecture
theatre?
Separate construction Single construction
contract contract

Answer:
4 different contracts.
SEPARATE SOURCE OF INCOME
Question 2:
Company F, signed a contract individually with 10 owners of vacant bungalow lots located near
to one another. The owners got together and negotiated with the contractor for a package deal to
construct their houses.
Separate construction Single construction
contract contract

Answer:
If the contractor views the individual contracts to be so closely interrelated with the effect of being
a single contract and with an overall profit margin, and that the construction can be performed
concurrently or in a continuous sequence, then all the 10 contracts should be combined and
accounted for as a single construction contract, notwithstanding the fact that different contracts
have been signed with different owners.
 RECOGNITION OF INCOME
- If the projects covered more than one YA/ accounting period
- Consistent & fair method until completion

% of Completion Method
Completion Method
vs or

% of Completion Method

Date of Completion
Contract of project is deemed completed upon:
i. The date on which the Certificate of Practical Completion (CPC) is issued;
ii. Where no such certificate is issued, the date upon which the contract work is
substantially completed, whichever is earlier
 INCOME RECOGNITION

COMPLETED
INCOMPLETE
CONTRACT
CONTRACT
(CPC / 95%)
 INCOMPLETE CONTRACT
Tax treatment for estimated profit
Example 1:
Company A, a construction contractor closes its accounts on 31 December every year. In March 2006, Company A was awarded a RM8 million contract to
construct an office building. Construction commenced on 01.07.2006 and is expected to be completed by 31.12.2008. The estimated profit for the whole
contract is RM1.2million. For tax purpose, the company has used the progress billings method to compute its estimated profit for years of assessment 2006,
2007 and 2008.

Payments received and receivable (PB) are as follows: The estimated profit for each year of assessment is computed as follows:
Year Payment Received & Receivable (RM’000) Year Estimated Profit (RM’000)

2006 1,500 2006 1,500 X 1,200 = 225

8000
2007 3,200 2007 3,200 X 1,200 = 480
8,000
2008 3,300 2008 3,300 x 1,200 = 495
8,000
Total 8,000 Total 1,200
INCOMPLETE CONTRACT
• The estimated loss or aggregate of estimated loss is
allowed to be set-off against the aggregate of the
Can / estimated gross profits from the other construction
cannot be contracts
off sett
• Estimated loss cannot be set-off against actual
gross profit

Estimated loss < The difference is the gross income from the
Estimated profit
Estimated construction contract business

loss

Estimated loss > the excess shall be

Estimated profit disregarded
INCOMPLETE CONTRACT
Question 3:
J Construction Sdn Bhd has 3 contracts with the following profit/losses for the year ended 31.12.2007

Contract RM Status
1 50,000 Completed
2 20,000 In progress
3 (25,000) In progress

Gross profit from construction business?

Aggregate estimated profit = estimated loss > estimated gain. Loss disregarded
Actual profit = 50,000
Answer: RM50,000
INCOMPLETE CONTRACT
Question 4:
J Construction Sdn Bhd has 5 contracts with the following profit/losses for the year ended 31.12.2007

Contract RM Status
1 200,000 In progress
2 (100,000) In progress
3 (50,000) In progress
4 300,000 In progress
5 50,000 Completed

Gross profit from construction business?

Gross profit from construction business:

Aggregate estimated profit = 350,000
Actual profit = 50,000

Answer: RM400,000
COMPLETED CONTRACT

The excess shall be taken as gross income for the

Actual GP > Estimated GP final basis period.

the actual profit for the final basis period and

COMPLETED Actual GP < Estimated GP preceding basis periods may be apportioned

The actual gross loss from the contract may

Actual Loss for the Contract be apportioned
 COMPLETED PROJECT
Question 5:
Contract A commenced in YA2018 and completed in YA2021 with actual profit of RM2,800,000.
Estimated GP for 2018 RM500,000
Estimated GP for 2019 RM1,300,000
Estimated GP for 2020 RM800,000

RM’000 RM’000

Actual profit for the contract 2,800

Less: applying formula

GP for YA 2018 500

GP for YA 2019 (50%) 1,300

GP for YA 2020 (25%) 800

Total 2,600

Completed in 2021, hence:

Excess GP from the contract to be taxed in YA2021 =
RM200,000
 COMPLETED PROJECT
Question 6:
Same fact as above, except that actual profit now is RM2,000,000
Since the total of the estimated gross profit for years of assessment 2018 to 2020 exceeds the final actual gross profit by RM600,000, all the prior years’
assessments may be reviewed.

The final gross profit for years of assessment 2005 to 2008 will be ascertained as follows:

RM’000 RM’000

Actual profit for the contract 2,000

Less: applying formula

What if the actual profit
is RM2,600,000?
GP for YA 2018 (20%) 400

GP for YA 2019 (50%) 1000

GP for YA 2020 (25%) 500 What if actual contract

loss of RM10,000,000?
GP for YA 2021 (5%) 100

Total 2,000
CONSTRUCTION
COST
 CONSTRUCTION COST

• All direct expenses which are

related to the construction contract
DIRECT COST
• Capitalized in the Construction
Expenditure Account
CONSTRUCTION
COST

INDIRECT COST OPERATIONAL EXPENSES(P&L)

CONSTRUCTION COST

Soild
investigation
fees

Design &
technical Land survey
fees fees

DIRECT
EXPENSES
*** **
Scaffolding Main
cost Contractor/
Subcontractor

Site
overhead
Material cost expenses
** 3rd Party Confirmation

*** replacement? 2
COST AFTER PROJECT COMPLETED
AFTER
COMPLETION COST

Defect Liability Late Ascertained Damage (LAD)

- Usually within 24 months after completion - Payment to client for late delivery/completion of contract.
- Defect liability incurred allowed as deduction - a sum calculated at a rate as stated in the contract
based on the following circumstances and choice agreement.
made by contractor - Claim under P&L or if single contract, to reopen prior year
assessment

Sufficient Income from Contract: Insufficient Income from Contract

No election Irrevocable election

defects liability shall be allowed as a
deduction against the gross income
from the contract for the basis period
or the following basis periods
i. deduction against the aggregate
gross income from the other contracts
for that basis period or any following
basis periods.
ii. If still not sufficient, against other
income of the contractor
Election to allow as a deduction against
the gross income from the same contract
for the basis period preceding the basis
period in which the expenses are
incurred. Any expenses which cannot be
fully deducted shall be allowed as a
deduction for the next preceding
period and so on for the duration of the
contract.
 CONSTRUCTION COST
Contractor need to distinguish between direct expenses which are part of the construction expenditure and expenses which
Direct Expenses are the day-to-day expenditure of the construction contractor business and debited to the Profit and Loss Account

All direct expenses which are related to the construction contract such as land survey fees, soil investigation fee, site overhead
Construction Cost expenses, design and technical fees, cost of construction materials etc. are costs attributable to the contract and should be
capitalized in the Construction Expenditure Account.

Fees paid for The deductibility of such expenses would depend on the purpose, nature and circumstances
soliciting contracts such fees arise.

For income tax purposes, the amount of the progress billings, including retention money, which becomes
Retention sum receivable has to be included in the gross income of the contractor at the date such progress billings are
issued.

LIQUIDATED The liability is incurred as and when the actual amount of liquidated damages is ascertained and agreed
ASCERTAINED DAMAGES by the contractor and his clients.

WARRANTY Defects liability expenses incurred by a construction contractor are allowed as deduction based on
circumstances & choice made by contractor
 SHARING
EXPERIENC
ES
 SEMAKAN AUDIT- PENDAPATAN
KONTRAK
LAMPIRAN 1

No Project Name Date of Date of End of Contract sum T'over T'over T'over T'over T'over
Comm YA Completion YA DLP (Letter Awards) recog before Recog Recog Recog Recog After
CPC date 2015 YE 2015 YE 2016 YE 2017 YE 2018

1 SEMUA PROJEK STATUS COMPLETED

2 DAN UNCOMPLETED
3
4
5
6
7
8
9
10

Total recog as per Income Stm

CONSTRUCTION COST
CONTOH LAMPIRAN 2
DEVELOPMENT EXPENDITURE/ CONTRACT COST
SYARIKAT XXX SDN. BHD.
CONSTRUCTION & COMPLETION OF INFRASTRUCTURE WORKS FOR:
PROJEK A, FASA XX

TAHUN TAKSIRAN 2016 2017 2018 Total

Cost b/f
Cost incurred during the year
Materials purchased
Payment to subcontractors
Machinery & vehicle rental
Wages, overtime & allowance
Water, electricity & allowance
Contract agreement processing fee
Insurance - contractors' all risks
Site photographs
Refreshments
Running capicitor
Paints and paints brushes - wheel broom
Oil filter
Levy fee
Glass
First aid kit and safety shoes
Bank guarantee charges
Workshipping expenses
Hardwares & batteries
Compression test on concrete cubes
Detergent & etc
VCD rental
Labour charges
Wheel barrow
Survey fee
Total cost during the year
SEMAKAN AUDIT
CONTOH LAMPIRAN 4
Construction Contracts for the year ended 2017 (SATU TAHUN SATU SHEET)

P1 P2 P3 P4 TOTAL
PROJECT
Completed Uncompleted Uncompleted Completed
INCOME STATEMENT
Total contract revenue recognised (A x D) f1 0 0 0
Contract revenue recognised in prior year f2 0 0
Income recognised for the period/year (f1- f2) F 0 0 0

Cost incurred to date (BxD) g1 0 0 0

Cost recognised in prior year g2 0 0

Cost to be recognised for the period/year (g1- g2) G 0 0 PINDAH

0
KE PNL
Total profit recognised to date (b1/B x C) H
Profit recognised in prior year 0 0
Profit recognised for the year/period I 0 0 XXXXXXXX

BALANCE SHEET
Contract cost incurred todate (b1) CTD CTD 0
Attributable profit / (loss) todate (H) 0 0 0
Contract revenue recognised todate 0
Progress billings todate (E) 0 0 0
Due from customers 0 0 0
Due to customers 0 0 0
Net due from / (to) customers
KONTRAK TELAH SIAP (TARIKH CPC / 95% SIAP)
KAEDAH PENGIKTIRAFAN PENDAPATAN

KENALPASTI JUMLAH
KONTRAK/CONTRACT
SUM KENALPASTI
(Rujuk Statement of Final KEUNTUNGAN SEBENAR
Account) / Letter of Award (Rujuk Akaun Penamat/Final
Account)

KONTRAK
TELAH SIAP

KENALPASTI KOS
SEBENAR
(Rujuk kos terperinci)
 CONTOH FORMAT AKAUN PENAMAT & PELARASAN AUDIT
Akaun Penamat

Projek 1(Tahun Taksiran projek siap peraturan 10 P.U

(A) 276)
Final
Account
@
Last Billing
Thank
You