Module Study Guide
Taylor’s University
Undergraduate Business Program
ACC60704
MALAYSIAN TAXATION
March 2023
Table of Contents
Topic No.
Topics
1.
Sources of revenue law
Types of Taxation
Individual resident status
2.
Employment income
3.
Other sources of income
4.
Reliefs, rebates and assessment
5.
Capital allowance and restructuring company
6.
Business income
7.
Tax audit and investigation, Tax haven, Passwords/authentication, Email filter, firewalls,
access control for Tax Departments
8.
Corporate taxation
9.
Real Property Gains Tax
10.
Withholding tax
11.
Goods and Service Tax
1
1.
Sources of revenue law, Types of taxation and Individual resident status
Learning Outcome:
After studying this topic you should be able to:
1.
Explain the background, purposes, concepts and criteria in setting good system of tax;
distinguish between among progressive, proportional and regressive methods of taxing.
2.
Distinguish between direct and indirect tax.
3.
Elaborate scope of tax and distinguish between revenue receipt and capital receipt.
4.
Explain the tax administration in term of basis of assessment, the guideline to
distinguish between tax evasion and tax avoidance, and self-assessment system.
5.
Determine individual and company resident status.
Required Reading:
Jeyapalan Kasipillai (2017), Chapter 1
Choong Kwai Fatt (2022), Chapter 1
2
Introduction to the Malaysian Tax
• What is taxation?
Taxation is a source of revenue to the government collected from various types of person,
based on their income. Person includes individuals, companies, trust bodies, partnership etc.
• Objective of taxation
To finance government expenditure such as to pay for security, infrastructure development,
redistribution of society’s wealth, economic and social development and to maintain the
stability of a country’s economy.
Direct and Indirect Taxes
• Direct Taxation
Tax paid directly to the government by the persons on whom it is imposed (e.g. income tax /
corporate tax). Responsibility vests on the individual or company.
• Indirect Taxation
Tax imposed on the ultimate consumer of the goods and services but businesses are
responsible to collect and remit tax to government. Responsibility vests on the organization
providing the service (e.g. sales tax imposed in McDonald). McDonald is responsible to collect
and pay the tax to the government
Historical Background
• Income tax was introduced by the British in Malaysia before independence w.e.f 1/1/1948.
• This was in the form of “Income tax ordinance 1947” designed by the British as a base for
tax law for British Colonies. The model of legislation was subsequently repealed and
replaced by the income tax act 1967 which came in to effect from 1/1/1968.
• Today our tax law unless stated otherwise is based on the 1967 income tax act.
• What is the Act Governs the imposition of income tax?
• The main legislation that governs taxation in Malaysia is consolidated in Income Tax Act
1967.
• The Malaysian Tax law is based on:(i) Act of Parliament 1967 (legislation) (statute law)
(ii) Gazetted case law (using decided cases) i.e. using the principle of doctrine of precedent
• What is IRB?
The abbreviation of IRB is known as Inland Revenue Board of Malaysia. It is the revenue
collecting agencies of the Ministry of Finance. The IRB has been given the full autonomy
especially in financial and personnel management as well as to improve the quality and
effectiveness of tax administration including assessing, collecting and enforcing payment of tax.
Scope of Taxation
There are 3 bases which can be used to determine the scope of taxation of a taxpayer in
Malaysia.
(i) Worldwide basis – Income arising throughout the world taxed (e.g. BISA).
(ii) Territorial basis – Tax on income accruing in or derived from Malaysia.
3
(iii) Remittance basis - Originally taxed on Resident – currently exempted if income is remitted.
Companies w.e.f year of assessment 1995 and individual w.e.f year of assessment 2004
Classes of Income
• Income Tax is a tax on ‘income’, but ‘income’ has not been defined in the Act. In practice it
is generally taken as a “recurring” flow of monies and yet this may not be so.
• However, the Income Tax Act 1967 sets out ‘income’ in classes under section 4 of the
Income Tax Act 1967.
• Sources of Income
The sources of revenue receipts liable for Income Tax under section 4:Section 4
(a) Gains / profit from business income
(b) Income from employment
(c) Dividend, Interest or discounts
(d) Rents, Royalties or Premiums
(e) Pensions, Annuities
(f) Other income
Section 4 (A)
(i)
Amount paid in consideration of service rendered by the person or his employees or
rights belonging to, or the installation or operation of any plant, machinery or other
apparatus.
(ii)
Amount paid in consideration of technical advice
(iii) Assistance or services rendered in
connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project
or scheme.
Revenue v Capital Receipts
• Income tax is imposed on revenue receipts i.e. on gains of recurring nature.
• Income tax not imposed on capital receipts. (E.g. onetime payment)
Basis of Assessment - Current Year Basis (CYB)
• Income tax was introduced in Malaysia in 1947, the first year of assessment being 1948.
After independence it was consolidated later in section S3 of Income Tax Act 1967. The
basis of assessment for salaried group is on a calendar year basis. But
• Those who are solely dependent on business income will be assessed based on accounting
year end basis.
Tax Attributes
•
Capital Tax
•
Income Tax
•
Corporate Tax
•
Consumption Tax
4
• In Malaysia the tax system mainly falls under the following ambits:
1) Income Taxes - Individual /Income Tax and Companies/Corporate Tax
2) Wealth/Capital Taxes - Real Property Government Tax, Stamp duty, Council, Land Tax
3) Indirect tax
Tax Base
•
The rules used to decide on what to tax or
•
Not to tax under each of the above categories is called the tax base.
Tax Burden
The tax burden placed by a tax system on a taxpayer depends on the tax structure, which can
be either:
(a) Progressive
(b) Proportional
(c) Regressive
Progressive Tax rates - As income increases the rate of tax increases too but beyond a certain
amount the rate is fixed. In Malaysia the rates ranges from 0% to 28% (max)
Proportional Tax Rates - The % of the tax paid in relation to chargeable income
Regressive Tax Rates
Initially the tax rate is higher, when income increases beyond certain level the rate of tax falls.
This sort of rates is given to encourage the tax payer to work harder.
Adam Smith’s 4 characteristics method called Canon of taxation.
1)
Equity - Tax should be seen to be fair in its impact on all individuals
2)
Certainly - Taxes should not be arbitrary taxpayer should know his/her tax liability
3)
Convenience - It should be easy for the taxpayer to pay what they owe
4)
Economic efficiency – Reduce distortion and reliance on externalities
Avoidance v Evasion
Avoidance is to pay lower tax which involves tax planning, considered to be legal, allowed
under the statute.
Evasion is to pay lower tax or totally not paying anything. This is not permitted under the law as
it is illegal.
Evasion is unlawful and unethical.
Ethical and Professional Approach in which tax professionals operates
• The ethical environment in which tax professional operate is complex. Tax advisor, as well
as their clients must be aware of this environment. There are two aspects of professional
5
•
•
•
•
•
code of ethics: able to determine what is right or wrong, good or bad; and committing to
doing what is right and good. Committing to doing what is right and good means:
Undertaking ethical actions
- Doing what is right and good
- Avoiding what is wrong or bad
- Walk the talk
Ethics can be seen as a subset of values concerned with decisions about right and wrong.
Values include other beliefs and attitudes that guide behavior, e.g. integrity. Integrity can be
seen as quality of excellence manifested in a holistic and integrated manner in individuals
based on ethics and noble values and these include;
- Harmony between what an individual says and does
- Act in accordance with moral and ethical principles, laws and regulations
Deterioration of integrity can arise from individual weakness such as:
- Low education and poor values
- Poor work ethics
- Greed
- Life demands
Culture that does not give importance to integrity, include:
- Fear of consequences of lodging reports
- Indifferent attitude
- Refusal to act as whistleblower
- The ‘yes-man’ attitude and ‘apple-polishing syndrome’
Consequences of poor ethical tax practices include- Economic and social decline/ Less tax
revenues-/Low compliance.
Tax Residence Status of an Individual
• Income tax is imposed on a territorial basis. A flat tax rate of 28% is imposed on a nonresident but a tax resident is subject to scale rates (as discussed earlier i.e. progressive rates
of 0% to 28%)
• The tax resident status of an individual in Malaysia is a quantitatively determined. There are
tests under which an individual may qualify as a tax resident; section 7(1)(a),(b),(c) and (d).
Tax resident status applies to all individuals satisfying any of the four tests i.e. citizen of
Malaysia and non citizen.
• A non citizen with tax resident status will not be eligible for permanent resident (PR) or
citizenship.
• Citizenship and P.R. status are solely based on Immigration Act.
Residence – Section 7(1)(a) of the ITA:
If he/she is in Malaysia for a period of >= 182 days in a calendar year. The days need not be
continuous, will be treated as a tax resident under sec 7(1)(a) Physical Presence Test (PPT)
Residence Sec 7(1)(b)
He /she is in Malaysia in that basis year for a period of less than 182 days and that period must
be linked by immediately preceding year of 182 or more consecutive days or linked to the next
6
subsequent year with 182 or consecutive days. These periods may include “temporary period of
absence”.
Temporary Absences
These periods of absence is deemed as period of presence under S 7(1)(b) only.
Temporary period of absence include:i. Connected with his service in Malaysia and owing to service matters or attending
conferences or services or study abroad.
ii. Owing to ill-health involving him or immediate family members.
iii. In respect of social visits not exceeding 14 days.
Section 7(1)(c)
•
He/she is in Malaysia in the current basis year for > 90 days or more and in the last
immediately 4 preceding years, physically stayed > 90 days or more in any of those 3
years.
Section 7(1)(d)
•
If he/she is a tax resident for each of the basis years and the 3 immediately preceding
years and the following year, automatically resident in the current year, even he/she
never stayed at all.
Section 7(1B)
•
A Malaysian citizen is deemed a resident in Malaysia for the basis year for a particular YA if he is:
o i) employed in the public services or service of a statutory authority in Malaysia; and
o ii) not in Malaysia at any day in the basis year for that particular YA by reason of:
1. having or exercising his employment outside Malaysia; or
2. attending any course of study in any institution or professional body outside
Malaysia which is fully sponsored by the employer.
Difference between Resident and Non-Resident
Resident (Individual)
Non-Resident (Individual)
Scope of charge
Income deemed to be Income deemed to be derived
Malaysia
derived in Malaysia
in Malaysia
Personal Relief
Available
Not Available
Rebates
Chargeable
income Not Available
=<RM35,000
Employment
Taxable
Exempt
Income for Short Period < 60
days
Tax Rates
Scale rates
Fixed at 30%
7
2.
Employment income
Learning Outcome:
After studying this topic, you should be able to:
1.
Distinguish between employment and self-employment.
2.
Identify exempt benefits.
3.
Analyze various categories of employment income.
4.
Compute individual income tax.
5.
Assess employment income under Section 13 (1)(a), (b), (c), (d) and (e)
6.
Identify deductible expenses to deduct against employment income.
Required Reading:
Jeyapalan Kasipilai (2017), Chapter 4
Choong Kwai Fatt (2022), Chapter 5 & 6
Public rulings
8
Employment Income - S. 13 (1) (a) (b) (c) (d) (e) ITA 1967
• Employment income is an important source of revenue to the government and it is
assessable under section 4(b) of the income Tax Act 1967. The assessment of employment
income is further categorized under section 13(1)(a) to section 13(1)(e).
• Employment Income (Governed under Section 4 (b) Income Tax Act 1967)
• Employment is defined in the ITA as:
• Where a relationship of master and servant exist
• Any appointment or office whether public or not for which remuneration if payable.
• General Rule
• A person receiving income from a contract entered can be distinguished / differentiated
between: • contract of service (employment)
• contract for service (self-employment)
• The following guideline is used to determine employment or self-employment.
• Master and Servant relationship. (as per definition)
• Extent of control by employer as to how the work is to be performed and the manner it
is to be done.
• Defined hours of work
• Provision of own tools and equipment in the performance of duty would indicate
whether employed / self-employed. (Reason: to stop one from deducting a lot of
expenses)
• Restriction on contract of service rather than for service.
Section 13(1)(a)
Under this section gross employment income includes:
a)
Wages, salary and remuneration – gross amount
b)
Leave pay – Section 25(6)
c)
Fee, commission
d)
Bonus - use accounting period if any.
e)
Exemption of gratuity from income tax
1.
If the retirement is due to ill-health.
2.
If the retirement takes place on or after reaching the age of 55, or on reaching
the compulsory age of retirement from an employment which has lasted 10
years with the same employer or with companies in the same group. The ten
years period must be continuous period immediately prior to retirement.
3.
For government employee:
i.
Gratuity received on retirement or by way of payment in lieu of leave
paid out of public funds.
ii.
On termination of contract.
iii.
Gratuity paid out of public funds.
4.
Retirement gratuity or termination payment other than gratuity, which is fully
exempted, up to an amount not exceeding RM1,000 per completed year of
service
9
f)
g)
Perquisite - loan and shares (employee scheme)
Allowances
Section 13(1)(b)
•
Gross employment income includes an amount equal to the value of the use or
enjoyment by the employee of any benefit or amenity (not convertible into money)
provided for the employee by or on behalf of his employer.
•
The types of income assessable under this section are as follows:
•
car benefit
•
fuel benefit the rate as stated in the table
•
furnishing benefit
•
driver - RM600 per month
•
gardeners - RM300 per month
•
utilities bills (paid by employer)
•
guard - RM400 per month
•
domestic servants - RM400 per month
•
insurance premium
•
membership fees
•
Tax exempt benefits
1.
Free transport – refers to factory bus provided to workers to factory.
2.
Food and drinks provided or subsidized by employer.
3.
Medical, dental treatment and child care benefit.
4.
Leave passage for employee and his immediate family is tax exempt subject to
the limit of:
a)
3 leave passages for travel Malaysia.
b)
One leave passage for travel between Malaysia and any place outside
Malaysia subject to maximum amount of RM 3,000 per family.
Section 13 (1)(c)
•
An amount in respect of the use or enjoyment by the employee of living
accommodation.
•
Employee or service director
Assessable value of living accommodation is either:
a)
Defined value of living accommodation.
b)
30% of the employees’ gross income under section 13(1)(a). Whichever is lower.
The assessable value will be apportioned:
a)
If accommodation is provided for less than 12 months.
b)
If shared with other employees.
Section 13(1)(d)
•
Withdrawal from an unapproved pension or provident fund.
•
The assessable income will be on:
a)
employer’s contribution to the employment.
b)
Any interest, bonus, etc earned and credited to the employees.
10
Section 13(1)(e)
•
Compensation received for loss of employment.
•
Exemption from tax
•
Service director/ Employee:
a)
Full exemption – if due to ill-health.
b)
Partial exemption – RM 10,000 for each completed year of service with the same
employer or companies in the same group.
Non service director – no exemption given at all.
•
Types of Income Assessed under Section 4(b) will be classified under:
RM
Section 13 (1) (a) - Salary/ wages/ bonus/ allowances/
gratuity/ tips/ shares etc.
xxx
Section 13 (1) (b) - Benefit in kind (BIK), asset given
by for employee’s use
xxx
(except accommodation)
Section 13 (1) (c) - Accommodation (house / hotel /
hostel)
xxx
Section 13 (1) (d) - Any returns (income) arising from
contribution to unapproved fund in
respect of employer’s contribution only
xxx
Section 13 (1) (e) – Compensation for employment
xxx
Less: Deductible Expenses
Subscription
(xx)
Rent paid to employer
(xx)
Entertainment expenses
(xx) (xx)
Statutory employment income
xxx
•
Deductibility of Employment Income
•
Wholly Exclusively Necessarily
•
If employment expenditure was wholly, exclusively and necessarily incurred in
the performance of employment duties it can be deducted.
•
Travelling expense, home to work not allowed as work starts when office is
reached.
•
Travelling expense office to clients place allowed.
•
Private expenses not allowed.
•
Fees paid to employment agencies disallowed.
•
Cost of maintaining technical efficiency allowed but not for obtaining
qualification unless it is necessary to obtain such qualification.
•
Costs of attending court proceeding allowed.
11
3.
Other sources of income
Learning Outcome:
After studying this topic you should be able to:
1)
Explain single tier system in relation to dividend income
2)
Discuss exempted interest income
2)
Determine adjusted rental income
3)
Determine adjusted royalty income
4)
Determine other income S 4 (f)
Required Reading:
Jeyapalan Kasipilai (2017), Chapter 5
Choong Kwai Fatt (2022), Chapter 8 - 12
12
Dividend 4(c)
•
Dividend paid under a single tier system - exempt
•
Dividend paid under S108- taxed in the hands of shareholders.
•
Basis of Assessment – Individual: Dividend received in the calendar year assessed is
under S108 if not under single tier
•
Basis of assessments – companies: Dividend is taxed based on financial year basis.
Single tier dividend system
•
The income tax paid by the company is final tax. Dividend distributed to shareholders
will be tax exempted in the hands of the shareholders
•
The single tier dividend system allows any amount of dividend paid as tax exempt to
shareholders.
•
Therefore, shareholders need not required to report the dividend income in the return
form B, BE or C. However, documentary evidence of receipt of dividend needs to be
maintained for 7 years to substantiate this income in event of Audit check carried out of
IRB.
•
However the old system, S108 will continue until the balance comes to NIL or till Dec
2013 whichever occurs earlier.
•
W.e.f January 2014 all companies will be paying a dividend under the single tier system.
•
Single tier dividend ‘exempted’ & expenses disallowed
•
Franked dividend-‘taxable’ & expenses allowed
•
Interest income deemed derived in Malaysia if:
a)
The Government/state government - local authority is responsible for payment
of interest; or
b)
Interest is paid by a resident; and
c)
The interest is paid in respect for money borrowed by that person and employed
in or laid out on assets used in or held for the production of gross income
derived from Malaysia; or
d)
The debt in respect of which the interest is paid is secured by any property or
asset situated in Malaysia; or
e)
Where the interest is charged as an outgoing expense against any income
accruing in; or
f)
Derived from Malaysia;
•
Basis of Assessment- Interest Income
•
Individual- Calendar year basis
•
Company- Financial year end basis
Royalty 4(d)
•
Royalties received for the use of or the right to use copyrights, artistic or scientific
works, patents, designs or models, plans, secret processors or formulae, trademarks or
tapes/CD/VCD/DVD for radio/ TV broadcasting, motion pictures, films or other rights
and know-how, or information concerning technical, industrial, commercial or scientific
knowledge, experience or skill and copyright royalties for authors.
13
•
Basis of Assessment
4(d) - Royalty income is charged to the tax under 4 (d) and it is assessed on a calendar
year basis, for Individuals. Companies are assessed on a financial year basis.
4(a) - Royalties can fall within the business source of income under S 4 (a) if they
possess the characteristics of a business, use accrual basis.
4(e) - Monthly pension received during the Calendar year is taxable on a current year
basis (CYB) but lump sum pension received is a capital receipt, hence is not
subject to Income tax
Rent Income S4(d)/4(a)
•
Section 2: Definition- Any sum paid for the use or occupation of any premises or past
thereof or the hire of anything
•
S4(d) assesses rental income from movable or immovable property.
•
If letting is on a commercial basis i.e. including the provision of maintenance, then it is
more likely taxable under S 4 (a)
•
Deposits placed by tenants are not rental income.
•
Basis of assessment – S 4 (d)
•
Individual- Rental income is assessed using calendar year basis
•
Company- rental income is assessed based on accounting year end
•
Dissimilar profit/ (loss) arising on property cannot be pooled together. Profit is
taxed.
•
Loss (deficit) cannot be carried forward or set off against other property income
•
Expenses that are deducted from rental Income must be revenue in nature:
•
Allowable:
Supervision cost
Legal expenses to collect rental
Normal wear & tear (Repair & Maintenance)
•
Disallowed:
Cost of Fire Insurance
Bad debt
Interest cost paid on the properties loan
Initial advertisement
Initial le.g.al fee on lease agreement
Repairs & Maintenance (improvement/enhancement/capital expenditure)
Other income Section 4(f)
Any income not falling under S 4 (a) to 4(e) will be taxed under S(f) exclude lottery winnings,
windfall gains, gifts, betting etc. S 4(f) assesses income from commission received, introduced
fee, articles published, TV/stage appearances.
14
4.
Reliefs, rebates and assessment
Learning Outcome:
After studying this topic you should be able to:
1)
Distinguish between relief and rebates.
2)
Distinguish between joint assessment and separate assessment.
3)
Compute relief and rebates in both joint assessment and separate assessment.
Required Reading
Jeyapalan Kasipillai (2017), Chapter 9
Choong Kwai Fatt (2022), Chapter 19
15
Tax Relief for Resident Individual
Available from IRB’s website: https://www.hasil.gov.my/en/individual/individual-life-cycle/how-todeclare-income/tax-reliefs/
Rebates
Chargeable income not exceeding RM35,000:
•
Individual RM400
•
Rate for an individual entitled to a deduction in respect of a spouse or a former wife
RM800
Joint and Separate Assessment
•
An individual resident taxpayer in Malaysia is entitled to claim personal relief from his
total chargeable gross income generated from various sources. The resulting income
becomes the chargeable income on which the individual is taxed at graduated scale
rates.
•
The income tax act provides various reliefs from the total income of an individual. The
chargeable income of a resident individual for a year of assessment depends on the
reliefs which are granted according to the rules existing in the relevant year of
assessment (YA).
Tax rates
https://www.hasil.gov.my/en/individual/individual-life-cycle/how-to-declare-income/tax-rate/
16
5.
Capital allowance
Learning Outcome:
After studying this topic you should be able to:
1)
Define plant, machinery and industrial buildings.
2)
Compute and manage capital allowances and industrial building allowances.
Required Reading:
Jeyapalan Kasipilai (2017), Chapter 12
Choong Kwai Fatt (2022), Chapter 15 & 16
17
Tax Depreciation vs. Accounting Depreciation
•
This is given in respect of purchase of fixed assets – satisfying the definition of plant and
machinery. Therefore, capital allowance (tax depreciation) replaces accounting
depreciation / amortization.
•
Definition: Plant and machinery is defined as – All apparatus used by the businessman
permanently in carrying on his business. It includes all apparatus whether fixed or
movable, live or dead. It excludes stock in trade bought for resale.
•
As per Yarmouth vs France ; in this case, a horse was used to transport goods, the horse
was taken as plant and machinery, capital allowance can be claimed on the cost of the
horse.
•
Note:
•
Human beings are not treated as plant and machinery, no capital allowance for
work performed by humans.
•
There is no statutory definition for plant and machinery, case law (Yarmouth vs.
France) is taken to establish the meaning of plant and machinery. In addition to
this, an asset bought to be used in business should also satisfy the Functional
Test.
•
Any asset which is taken as part of the setting in which business is carried on, will not be
eligible for capital allowance, i.e. it would not be treated as plant and machinery.
•
Functional Test is where it plays a role in the production of income directly.
•
Definition satisfied + Functional Test satisfied plus asset used in business= Claim C/A
Example: Functional test
•
In a hotel business, if decorative lighting is used, this is to attract customers.
Therefore, it will be part of the function of the business, treated as plant and
machinery.
•
Setting Test:
No capital allowance is given for any asset satisfying the setting test only.
Example: Attractive lightings used in an Educational business will not be part a function
instead taken as setting, therefore no capital allowance.
•
The following are taken as qualifying cost for plant and machinery – QPE (Qualifying
Plant Expenditure). It includes the following, i.e.
i.
Cost of plant and machinery
ii.
Installation costs
iii.
Alteration of an existing building or structure for installation
iv.
Reconstruction of plant and machinery, and
v.
Preparation of site costs, i.e. cost of cutting, tunnelling, levelling the land to
install plant and machinery but:
•
Only allowed if its costs is below 10% of total costs. (excluding cost of
land and building)
•
Total cost will be item (i) to (v) inclusive.
18
Rates
Initial allowance – 20% unless specifically specified
Annual allowance:
(i)
Office equipment, furniture and fittings, others
(ii)
Plant and machinery (general)
(iii)
Heavy machinery, motor vehicle, ICT equipment and software
(iv)
Industrial building
Computation
RM
Adjusted Income
(+) Balancing charge
10%
14%
20%
3%
RM
XXX
XXX
XXX
(-) Capital allowance b/f
Capital allowance
current year
Balancing Allowance
STATUTORY INCOME
XX
XX
XX
(XX)
XXX
Test to observe
•
It must not be part of the premises or place in which business is conducted. (Premise
Test)
•
It must be used for carrying on business (Business Test), i.e. Functional Test (not setting)
•
It must not be stock in trade (goods bought for resale).
Note: I.A. / A.A. is always given in full
Assets bought under Hire Purchase
•
Capital allowance cannot be claimed on interest, only on cash amount
•
The acquirer of hire purchase asset is the deemed owner. Acquirer can claim capital
allowance on capital portion repaid including initial deposit paid.(Para 46 SCH 3)
•
Any balance outstanding amount will only be eligible for capital allowance if instalment
is repaid. (Note: capital portion only qualifies for capital allowance)
Balancing Allowance, Balancing Charges
•
Balancing allowance ~ Loss
•
Balancing charges ~ Gain
Industrial Building Allowance
Commencing year of assessment 2005, paragraph 3, Schedule 3 of the ITA was amended to give effect
that the QBE for a purchased building is the purchase price of the building.
19
6.
Business income
Learning outcomes:
After studying this topic you should be able to:
1)
Discuss badges of trade.
2)
Computed adjusted business income.
3)
Compute and managed current year and unabsorbed business loss.
Required Reading:
Jeyapalan Kasipilai (2017), Chapter 6, 8, 10
Choong Kwai Fatt (2022), Chapter 13, 14, 18
20
BADGES OF TRADE
An intention to make a profit supports trading, but by itself
is not conclusive.
Evidence that the sole object of acquiring an asset was to
re-sell it at a profit, without any intention of holding it as
an investment, is a pointer to the conclusion that a trade is
being carried on. However, the presence of a profitseeking motive is not necessarily a decisive pointer to the
existence of a trade. It is only one factor to be weighed
along with all the other relevant factors.
Some assets are more likely to be held as investments than
others are. For example, shares may be bought with the
intention of making a profit. However, because of the
inherent investment nature of shares, in the absence of
enough of the other badges of trade, the purchaser will be
making and realising capital investments and not trading.
1. Profit-seeking motive
/Intention of taxpayer
In Salt v Chamberlain [1979] 53TC143 which concerned
losses made by an individual through the buying and
selling of quoted securities with the intention of making a
profit, Oliver J said at page 154:
Where the question is whether an individual engaged in
speculative dealings in securities is carrying on a trade, the
prima facie presumption would be that he is not.
Despite a claim that other badges of trade were present,
the General Commissioners held that the transactions
were not a trade and the court declined to disturb their
finding.
The existence of a profit-seeking motive is a question of
fact that is not necessarily determined by the person’s
professed intentions. Where appropriate it can be inferred
from the surrounding circumstances.
In Rutledge v CIR [1929] 14TC490 the Lord President said at
page 496:
It has been said, not without justice, that mere intention is
not enough to invest a transaction with the character of
21
trade. But, on the question whether the appellant entered
into an adventure or speculation, the circumstances of the
purchase, and also the purchaser's object or intention in
making it, do enter, and that directly, into the solution of
the question.
In CIR v Hyndland Investment Co Ltd [1929] 14TC694 he
also said at page 699:
The question is not what business the taxpayer professes
to carry on, but what business does he actually carry on.
Systematic and repeated transactions will support 'trade'.
A single isolated transaction can amount to the carrying on
of a trade for tax purposes, but it is generally not easy to
show that that is the case. The transaction, if it is to be
trading for CT purposes, has to be
•an adventure or concern in the nature of trade
(ICTA88/S832 (1)) for Corporation Tax or
•for Income Tax, a venture in the nature of trade
(ITA/S989).
2. The number of
transactions /
Frequency of
transactions
Test to be applied
The test to be applied is whether the operations involved
in the transaction are of the same kind or character, and
carried on in the same way, as those which are
characteristic of ordinary admitted trading in the line of
business in which the transaction was carried out. See CIR
v Livingston and Others [1926] 11TC538 at page 542. This
test requires an examination of all the badges of trade to
evaluate the extent to which they characterize the facts of
the case under consideration.
This approach was adopted in CIR v Fraser [1942] 24TC498.
Fraser, who was a woodcutter, had bought a consignment
of whisky in bond and sold it through an agent at a profit.
Although many of the badges of trade were either neutral
or favourable to the taxpayer, the court said at pages 502
and 503:
The purchaser of a large quantity of a quantity of a
commodity like whisky, greatly in excess of what could be
22
used by himself, his family and friends, a commodity which
yields no pride of possession, which cannot be turned to
account except by a process of realization, I can scarcely
consider to be other than an adventurer in a transaction in
the nature of a trade… Most important of all, the actual
dealings of the respondent with the whisky were exactly of
the kind that take place in ordinary trade.
See also Rutledge v CIR [1929] 14TC490 for a closely
parallel case.
Is the asset of such a type or amount that it can only be
turned to advantage by a sale? Or did it yield an income or
give 'pride of possession', for example, a picture for
personal enjoyment?
A single isolated transaction can amount to the carrying on
of a trade for tax purposes, but it is generally not easy to
show that that is the case. The transaction, if it is to be
trading for CT purposes, has to be
3. The nature of the asset
/ Subject matters of
transactions
•an adventure or concern in the nature of trade
(ICTA88/S832 (1)) for Corporation Tax or
•for Income Tax, a venture in the nature of trade
(ITA/S989).
Test to be applied
The test to be applied is whether the operations involved
in the transaction are of the same kind or character, and
carried on in the same way, as those which are
characteristic of ordinary admitted trading in the line of
business in which the transaction was carried out. See CIR
v Livingston and Others [1926] 11TC538 at page 542. This
test requires an examination of all the badges of trade to
evaluate the extent to which they characterise the facts of
the case under consideration.
This approach was adopted in CIR v Fraser [1942] 24TC498.
Fraser, who was a woodcutter, had bought a consignment
of whisky in bond and sold it through an agent at a profit.
Although many of the badges of trade were either neutral
or favourable to the taxpayer, the court said at pages 502
and 503:
The purchaser of a large quantity of a quantity of a
23
commodity like whisky, greatly in excess of what could be
used by himself, his family and friends, a commodity which
yields no pride of possession, which cannot be turned to
account except by a process of realisation, I can scarcely
consider to be other than an adventurer in a transaction in
the nature of a trade… Most important of all, the actual
dealings of the respondent with the whisky were exactly of
the kind that take place in ordinary trade.
See also Rutledge v CIR [1929] 14TC490 for a closely
parallel case.
Transactions that are similar to those of an existing trade
may themselves be trading.
If there is an existing trade, then a similarity to the
transaction under consideration may be a pointer to that
transaction having a trading character.
4. Existence of similar
trading transactions or
interests
In Harvey v Caulcott [1952] 33TC159 a builder claimed that
certain properties that he had built and then sold many
years later were investments and not part of his trading
stock. On the facts of his case he succeeded but the court
commented at page 165:
Such a case as the present is always coloured by the fact
that the man is a builder. That no doubt puts a peculiar
onus on him, to show that the profit from the sale of some
property is profit from an investment, or profit from
something which is not trading stock. That onus is not
incapable of discharge.
The courts in other cases have also considered possible
connections with a person's main trade. In CIR v Fraser
[1942] 24TC498 (see BIM20230) the court commented at
page 502:
It is in general more easy to hold that a single transaction
entered into by an individual in the line of his own trade
24
(although not part and parcel of his ordinary business) is an
adventure in the nature of trade than to hold that a
transaction entered into by an individual outside the line of
his own trade or occupation is an adventure in the nature
of trade.
More recently in Marson v Morton and Others [1986]
59TC381 the court posed the question, at page 391G:
Is the transaction in question in some way related to the
trade which the taxpayer otherwise carries on? For
example, a one-off purchase of silver cutlery by a general
dealer is much more likely to be a trade transaction than
such a purchase by a retired colonel.
Was the asset repaired, modified or improved to make it
more easily saleable or saleable at a greater profit?
What happens to the asset pending resale may be a
relevant factor. There may be modifications to the asset by
way of processing or manufacture, or some kind of
adaptation to make it more readily marketable. All these
actions are typical of trading activities.
5. Changes to the
asset/alterations to
properties
For example, in CIR v Livingston and Others [1926]
11TC538 a sea vessel was purchased as a joint venture by
three individuals. The Lord President stated, at pages 542
and 543:
The Respondents be.g.an by getting together a capital
stock sufficient (1) to buy a second-hand vessel, and (2) to
convert her into a marketable drifter. They bought the
vessel and caused it to be converted at their expense with
that object in view, and they successfully put her on the
market. From beginning to end, these operations seem to
me to be the same as those which characterise the trade of
converting and refitting second-hand articles for sale… The
profit made by the venture arose, not from the mere
appreciation of the capital value of an isolated purchase
for resale, but from the expenditure on the subject
purchased of money laid out upon it for the purpose of
making it marketable at a profit. That seems to me of the
very essence of trade.
25
Breaking down of assets into smaller lots
Similarly, the breaking down of assets into smaller lots to
facilitate a sale may be a pointer to a trading motive, as in
Edwards v Bairstow & Harrison [1955] 36TC207.
For example, in Cape Brandy Syndicate v CIR [1921]
12TC358 the work on a large quantity of Cape brandy to
ship it to the UK, blend it expertly with French brandy, recask it and sell it in numerous lots was all part of the
evidence on which the Commissioners were entitled to
find that a trade was carried on.
Expenditure on an asset after purchase and before sale
Expenditure on an asset after purchase and before sale is
not always strong evidence of a trading motive. You must
have regard to the nature and scale of the expenditure.
For example, insurance against loss, normal maintenance
to prevent deterioration, or the cost of repairing some
fault, which prevents the asset carrying out its normal
function, may have little or no relevance when considering
a question of trading. This sort of expenditure is the type
that any owner would incur. They are not coloured with a
strong trading character.
No modifications to the asset
If an asset does not need any modification or other work,
then absence of any modification etc is neutral.
Was the asset sold in a way that was typical of trading
organizations? Alternatively, did it have to be sold to raise
cash for an emergency?
6. The way the sale was
carried out /
Circumstances
responsible for
realization
organisation of the activity
It is a pointer towards trade that the transactions are
carried out in the same manner as those of an undisputed
trader.
In CIR v Livingston and Others 11TC538 at page 542 Lord
Clyde stated:
I think the test, which must be used to determine whether
a venture such as we are now considering is, or is not, ‘in
the nature of trade’, is whether the operations involved in
26
it are of the same kind, and carried on in the same way, as
those which are characteristic of ordinary trading in the
line of business in which the venture was made.
In CIR v Fraser [1942] 24TC498 the fact that the whisky was
sold in exactly the same way as would be adopted in the
course of an ordinary trade in that commodity was an
important pointer in favour of a finding that Fraser was
trading.
In Ensign Tankers (Leasing) Ltd v Stokes [1992] 64TC617,
the Vice Chancellor at page 721G supported the views in
Livingston and Fraser.
Was money borrowed to buy the asset? Could the funds
only be repaid by selling the asset?
7. The source of finance /
Financing
arrangements
8. Interval of time
between purchase and
sale / Period of
ownership
The method of financing should be examined. The
purchaser of an asset may have to borrow money in
circumstances that indicate that, from the first, he has to
sell the asset to repay the loan. That is, the purchase is
undertaken in the expectation that the asset will be paid
for out of the proceeds of the sale.
For example, in Wisdom v Chamberlain [1968] 45TC92 the
taxpayer was held to be trading in relation to profits made
from the purchase and sale of silver bullion. His normal
occupation was not in that sort of activity. The purchase of
the bullion was financed by loans at a high rate of interest
in circumstances that made it clear that it was necessary to
sell the asset in the short term, to repay the loan and
eliminate the interest obligation.
Assets that are the subject of trade will normally, but not
always, be sold quickly. Therefore, an intention to resell an
asset shortly after purchase will support trading. However,
an asset, which is to be held indefinitely, is much less likely
to be a subject of trade.
The interval of time between purchase and sale may be
important. A person who buys an asset and holds it for
many years before disposing of it may be in a stronger
position to argue that this is the realisation of an
investment, than if the sale follows very soon after
27
purchase. Similarly if you can show an intention, at the
time of purchase, to sell quickly, that supports the idea of
trading because trading implies the idea of turning over
assets for profit. Even if no such intention is admitted or
demonstrable, the fact that a sale did actually take place
after a short period of ownership will help the trading
inference if you can find sufficient of the other badges of
trade.
The short period of ownership in Wisdom v Chamberlain
[1968] 45TC92 was a factor in favour of trading as was the
fact that, in Johnston v Heath [1970] 46TC463, the
individual had contracted to sell the asset before he had
acquired it.
In Marson v Morton and Others [1986] 59TC381, at page
392, the vice chancellor said, when discussing the badges
of trade:
What were the purchasers’ intentions as to resale at the
time of purchase? If there was an intention to hold the
object indefinitely, albeit with an intention to make a
capital profit at the end of the day, that is a pointer
towards a pure investment as opposed to a trading deal.
On the other hand, if before the contract of purchase is
made a contract for resale is already in place, which is a
very strong pointer towards a trading deal rather than an
investment. Similarly, an intention to resell in the short
term rather than the long term is some indication against
concluding that the transaction was by way of investment
rather than by way of a deal.
He went to say that this factor was in no way decisive by
itself.
An asset that is acquired by inheritance, or as a gift, is less
likely to be the subject of trade.
9. Method of acquisition/
Subject matters of
transactions
The way in which an asset was acquired must be
considered. If it is by gift or inheritance it will be difficult,
although not impossible, to show that a subsequent sale is
by way of trade.
If the asset were acquired by purchase the circumstance,
28
for example the market in which it was bought or the
correspondence leading up to purchase, may tend to show
either that it was being bought for resale or that it was
wanted for private use or as an investment.
If an asset acquired as a capital asset, for example by gift
or inheritance, is later sold at a profit you can only succeed
in taxing that profit under Case I if you can show that, at
some point before sale, the asset became trading stock of
a trade. This is the concept of supervening trading.
Megarry J expressed the concept most clearly in Taylor v
Good [1974] 49TC277 at page 287E:
Even if the house was purchased with no thought of
trading, I do not see why an intention to trade could not be
formed later. What is bought or otherwise acquired (for
example, under a will) with no thought of trading cannot
thereby acquire immunity so that, however filled with the
desire and intention of trading the owner may later
become, it can never be said that any transaction by him
with the property constitutes trading. For the taxpayer a
non-trading inception may be a valuable asset: but it is no
palladium. The proposition that an initial intention not to
trade may be displaced by a subsequent intention, in the
course of the ownership of the property in question, is, I
think, sufficiently established.
An argument that there has been a change of intention, if
it is to succeed, must be demonstrable.
It may be difficult to distinguish between actions that show
a change of intention and those which merely serve to
maximise the asset's realisable valuable as a capital asset.
Sometimes the documentation connected with the
transaction will show that the person formed the intention
of setting up a trading venture and contributed the asset
to that venture.
However, if such overt indications are not present, the
inference of change will have to come from other sources.
These other indications of a change of intention will
depend on the nature of the asset and may well be
29
physical.
For example, work done on the asset may help the
inference. The approach to the problem should include the
application of the 'badges of trade' to the circumstances
before and after the alleged change to help demonstrate:
•that a change has or has not in fact taken place, and, if it
has,
•the date of the change.
The owner of an asset will sometimes make the assertion
of a change of intention. This may be part of a contention
that a capital asset has been appropriated to trading stock,
or vice versa, in order to crystallise a trading loss, a capital
loss, or to convert a capital loss into a trading loss. The
difficulties of establishing that there has been a change of
intention are as great for the vendor as for HMRC and it
may be appropriate to question the assertion.
Supervening trading, as with all questions of trading,
requires an investigative approach and a firm view should
only be taken once all the facts have been found.
Supervening trading has possible CGT effects. This depends
on the nature of the asset and whether or not a gain on
disposal would be within the scope of that tax. There could
be a deemed disposal for CGT purposes at the moment the
appropriation takes place and this will have implications
for valuation of the asset and the allowable expenditure
for Case I purposes, including pre-trading expenditure.
Supervening trading for profitable transactions is usually
only worth pursuing if the amounts involved are
substantial and there is evidence of a clear change of
intention.
10. Formation of Company
It is a settled law that in the case of a company
incorporated for the purpose of making profits for its
shareholders, any gainful use to which it put any of its
assets prima facie.
Amounts to the carrying on of a business. (ALB Co Sdn Bhd
V DGIR [1979] 1 MLJ1) (PC). As such, a company may hold a
property for a long period of time, any subsequent disposal
may still be viewed as business income because such a
30
long holding may be viewed as waiting for the right
opportunity to realize profits.
11. Accounting evidence
It is a settled law that accounting evidence is not
conclusive to whether the taxpayer is trading or not, it
being merely a factor to be taken into consideration. [CGIR
V LFY Sdn Bhd [1983] 1 MLJ 43 (FC)].
Capital Receipts Vs Revenue Receipts
Income tax is levied on the total income of the tax payer; the method of computing tax on
different sources of receipts is different. Often revenue receipts are considered as business
income and it is arises because of business transactions. While calculating net income of a
person only the expenses in revenue nature are allowed to deduct from the revenue receipts.
Whereas capital receipts are non-business income and it arises independently, that are not
considered as business income and treated as capital gain. This gives a clear distinction
between the capital and revenue receipts.
Criteria to distinguish
It is difficult to say the difference between capital receipts and revenue receipts. Based on
certain points usually the income-tax and accounting authorities used to differentiate the
receipts.
Nature of receipts
If a receipt is related to fixed asset, the receipts are considered as capital receipts. Fixed asset is
giving the long-term benefit to the proprietor. It has long life for example land and buildings,
plant and machinery etc. If the income is arises out of sale of fixed assets is taken as capital
receipts. Perhaps the income earned in the form of selling plant and machinery by the motor
dealer is taken as business income, hence included in revenue receipt.
Revenue receipt is related with the current or circulating assets, it is derived from the sale of
the circulating asset. It is the main purpose of the business. For example the income arises
through buying yarn and selling the same in the form of cloth is revenue receipt.
It is difficult to say the difference between capital receipts and revenue receipts. Based on
certain points usually the income-tax and accounting authorities used to differentiate the
receipts.
Termination income
Salary received from the employer is a revenue receipt in the hands of the employee. But when
this extended to compensation received at the time of termination of the employee from
services is deemed as capital receipt. The income from the premature termination of lease or
contract also capital receipt.
31
Income from sale of shares
Buying and selling of shares is the common activity for all. But for income-tax point of view, the
income earned from the buying and selling of share is treated as business income as well as
capital gain. If the shares held by any person for the purposes of his business or profession and
any profit arises from this purchase of sale it is revenue receipts. If the share is not connected
with his business or profession it is capital receipt.
Capital receipts
The following are the best examples of capital receipts:
•
Insurance claim received as compensation for the damaged asset.
•
Conversion of capital asset into business asset. The difference between the market
value and cost price is taken as capital receipt.
•
Any other income received apart from the regular business is deemed as capital receipt.
Revenue receipts
Any income received by the way discharging usual business is revenue profit.
Non-allowable expenses
Non-allowable expenses that are shown in the profit and loss account are non-tax deductible.
Such expenses have to be added back. Non-allowable expenses can be categorised into four
groups:
(a) Expenses that are not incurred:
(i)
General provision for bad and doubtful debts;
(ii)
Provision for gratuity / retirement benefits;
(iii) Provision for warranty cost, stock obsolescence;
(iv) Depreciation;
(v)
Amortization for renovation of premises, amortization;
(vi) Unrealized exchanged loss in relation to acquisition of raw materials;
(vii) Provision for repair and maintenance;
(viii) Preliminary expenses written off.
(b)
Capital expenditure:
(i)
Cost of printing and distribution of annual reports;
(ii)
Stamp duty and secretarial fees for increased share capital;
(iii)
Stock listing expenses;
(iv)
Pre-commencement business expenses;
(v)
Entrance fees to club;
(vi)
Legal and professional fess relating to violation of laws, capital structure of
company, acquisition of loan or assets;
(vii) Donations (irrespective of whether approved or unapproved donations);
(viii) Lump sum payment for early termination of lease;
(ix)
Loan written off in relation to that of employees’ or suppliers’,
(x)
Fine imposed for violation of law;
32
(xi)
(xii)
(ix)
(x)
(xi)
(i)
Penalty on withholding tax;
Foreign exchange gain/loss on acquisition of plant and machinery, repayment of
foreign loan;
Registration of trademark;
Fees for designing company logo;
Compensation to competitor to restrict competition (restrictive covenant);
Loss on disposal of long-term investments.
(c)
Expenses related to investment income
The Act requires adjusted income of each sources of income to be computed separately.
Therefore, any expenses relating to the investment income is not deductible against business
income. It has to be added back. These expenses will be set off against individual investment
source of income.
(d)
Section 39 prohibited expenses
(i)
Private and domestic expenses (dual purpose);
(ii)
Expenses that are not wholly and exclusively laid out or expended for the
purpose of producing gross income, for e.g. excessive remuneration paid to
family members;
(iii)
Capital employed or money withdrawn as capital;
(iv)
Contribution to unapproved pension / provident / saving scheme;
(v)
Withholding tax and penalty on late payment on withholding tax imposed on
interest, royalty, contract payment, S. 4(f) payment (to non-resident) not paid to
the tax authorities;
(vi)
Leave passage (other than yearly leave passage provided to employees);
(vii) License or permit fees to extract timber to persons other than State
Government, statutory authority or body approved by Minister;
(viii) Lease rental exceeding RM 50,000 (or RM 100,000 in special circumstances) in
aggregate on passenger vehicle;
(ix)
Entertainment to non-employees (including reimbursement to staff in relation to
entertainment of client or entertainment allowance to employees) is given 50%
deduction. However, entertainment which is related wholly to sales will be fully
deductible.
Capital asset expensed off to profit and loss account
Capital assets are not deductible for tax purposes. Thus, this capital expenditure expensed off
to the profit and loss account has to be excluded. Some of the examples are:
(a)
Renovation of factory, office premises;
(b)
Improvements for repairs;
(c)
Small value capital items e.g. chairs, calculators, etc;
(d)
Installation cost of machines charged in repair and maintenance account;
(e)
Cost of stand used in advertising;
(f)
Deposits paid for telephone or utilities;
(g)
Replacement of electrical alarm system.
33
Section 33
Revenue Expenses “Wholly & Exclusively” incurred in the production of income are deductible,
therefore no deduction for capital expenditure.
Test: Section 33
-Deductibility Wholly and exclusively
Quantum of money expended with the sole purpose of promoting the business or profit
earning capacity
Reference to principle of ordinary commercial dealing
The effect of disbursement is not relevant
Direct purpose
Incurred
Undischarged accrued liability
Payment is not relevant
Not merely contingency / provision
Liability definitely committed
In the production of income
Business must have commenced
Not necessary to produce current income
Direct connection between expenses and income
Deductible Expenses – Allow (√) Disallow (X)
•
Repair (not improvement)
(√)
•
Bad debt (trade) (not taken over)
(√)
•
Bad debt allowance (provision)
Specific (Allow)
(√)
General (Disallow)
(X)
•
Bad debt (Advance)
Business
(√)
To secure contacts
(X)
To secure raw materials
(X)
•
Employer’s contribution EPF (max 19%)
(√)
•
Le.g.al & professional expenses
Tax appeal
(X)
Violation of law
(X)
•
Advances to employee
Loan
(X)
Terms of contract
(√)
•
Defalcation by employees
(√)
•
Keyman insurance
(√)
•
Expenses under section 33 prohibited by section 39 (X)
•
Duality expenses
(X)
•
Salary in excess of market value
(X)
•
Capital withdrawn
(X)
34
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Contribution to unapproved fund
(X)
Sums payable to use license or permit
to extract timber (other than to
Government)
(X)
Lease rental: - Allowed
Car (max RM 100,000, (if cost is= < RM150,000)
Car (max RM 50,000, (if cost is > RM150,000)
No restriction or commercial vehicle
(e.g. lorry, van, bus etc)
Entertainment (WEF) Y/A 2004 provided:
- To boost sales (100% Allow)
- Otherwise (50% Allow)
- For employees in the course of business
(√)
Promotion of sample
(√)
Leave passage – WEF Y/A 2007
- Within Malaysia
(√)
(Including immediate family members)
Special deduction; if it brings:
- Social benefit to public
(√)
Replanting expenses
(√)
Provision of equipment & renovation
of building for disabled person –
full deduction instead of capital
allowance
(√)
Social responsibility payment – cash / kind:- Charity / community project /
preservation of environment
(√)
Recipient – charity centres / schools / hospitals etc
Infrastructure expenses for public facility
– company only WEF Y/A 2008 – e.g. car park,
toilet, garden etc.
(√)
Child care centre
- Maintenance costs
(√)
Musical & cultural group – expense
incurred in managing (approved by Ministry)
(√)
Arts & cultural society
- Sponsoring local art / heritage activity –
max RM500,000)
(√)
- Foreign art / heritage activity max RM200,000
(√)
Scholarship expense (company only)
(√)
- Income of parents < RM 5000 per month
- Institution registered in Malaysia
- Studying full time (diploma to PHD)
Halal certification (company only)
(√)
35
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
double deduction, if for recognized quality
systems & standards
Practical training to non employees
- Given to graduates
(√)
International standardization activities
(company only):
- WEF Y/A 2004 conference / workshop
local and overseas
(√)
Information technology expense
- Improvement of production process
(√)
Personal computer (not hand phone)
(√)
Monthly broadband subscription fee
registered in the name of employer
during Y/A 2008 – Y/A 2010
(√)
Audit fee
(√)
Incorporation Expenses
- Authorized capital > RM 2-5 million
(X)
- Authorized capital < RM 2-5 million
(√)
Pre trading Expenditure
- Recruitment of employee
(√)
- Other expenses
(X)
AGM expenses
(X)
Interest on guarantee fees
(√)
Compensation paid to dismiss employee
(√)
Cultural & arts: If Approved
- company giving
cash sponsorship to perform in KL,
with foreign artistic, provided
foreigners has performed 3
countries, other their own
country
(√)
Cost of issuance of Islamic
securities
(√)
Employees benefits
- e.g. – Bills, including telephone and
its bill
(√)
- car expense, travel
registration of trade mark <RM2.5 mil capital
(√)
Refurbishment or renovation (until Dec 2022)
(√)
- up until RM300,000
- incurred between 01/03/2020-31/12/2022
Rental expense – accommodation for employees (√)
- not exceeding RM50,000
- for manufacturing/manufacturing related services
36
Unabsorbed Business Loss
Current business losses can be utilized against aggregate income. Brought forward business
losses can be utilized against only current year business adjusted income.
PARTNERSHIP
A partnership is defined by the Act as an association of any kind between parties who have
agreed to combine any rights, powers, property, labour or skill for the purpose of carrying on a
business and sharing the profits there from, but excludes a Hindu joint family although such a
family may be partner in the partnership.
A partnership is usually formed by at least two persons but not exceeding twenty persons
agreeing to carry on a business with a view of making profits. A partnership is usually indicated
with the existence of a Deed of partnership. However, in certain circumstances, a partnership
exists even though there is no Deed of partnership.
The guidelines to determine a partnership are as follows:
1) Profit and loss sharing.
2) Manner of operating the bank account and limitations to signing of cheques.
3) Name used in carrying the business as shown in-trade directories and business
correspondence.
4) Partners’ remuneration, drawings, capital contributed, and interest allowed for Capital.
Certain circumstances not prima facile
In determining whether a partnership does or does not exist, regard shall be had to the
following rules:
(a) joint tenancy, tenancy in common, joint property, common property, or part ownership
does not of itself create a partnership as to anything so held or owned, whether the tenants
or owners do or do not share any profits made by the use thereof;
(b) the sharing of gross returns does not of itself create a partnership, whether the persons
sharing such returns have or have not a joint or common right or interest in any property
from which or from the use of which the returns are derived;
(c) the receipt by a person of a share of the profits of business is prima facie evidence that he is
a partner in the business, but the receipt of such a share, or of a payment contingent on or
varying with the profits of a business, does not of itself make him a partner in the business;
and in particular—
i. the receipt by a person of a debt or other liquidated amount, by instalments or
otherwise, out of the accruing profits of a business does not of itself make him a partner
in the business or liable as such;
ii. a contract for the remuneration of a servant or agent of a person engaged in a business
by a share of the profits of the business does not of itself make the servant or agent a
partner in the business or liable as such;
iii. a person being the widow or child of a deceased partner, and receiving by way of
annuity a portion of the profits made in the business in which the deceased person was
a partner, is not, by reason only of such receipt, a partner in the business or liable as
such;
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iv.
v.
the advance of money by way of loan to a person engaged or about to engage in any
business on a contract with that person that the lender shall receive a rate of interest
varying with the profits, or shall receive a share of the profits, arising from carrying on
the business, does not of itself make the lender a partner with the person or persons
carrying on the business or liable as such: Provided that the contract is in writing and
signed by or on behalf of all the parties thereto; and
a person receiving, by way of annuity or otherwise, a portion of the profits of a business
in consideration of the sale by him of the goodwill of the business is not, by reason only
of such receipt, a partner in the business or liable as such.
Postponement of rights of person lending or selling in consideration of share of profits in case
of bankruptcy
In the event of the bankruptcy of any person to whom money has been advanced by way of
loan upon such a contract as is mentioned in subparagraph 4(c)(iv), or of any buyer of a
goodwill in consideration of a share of the profits of the business, the lender of the loan shall
not be entitled to recover anything in respect of his loan, and the seller of the goodwill shall not
be entitled to recover anything in respect of the share of profits contracted for, until the claims
of other creditors of the borrower or buyer for valuable consideration in money or money’s
worth have been satisfied.
Meaning of firm and firm name
Persons who have entered into partnership with one another are, for the purposes of this Act,
called collectively a firm, and the name under which their business is carried on is called the
firm name.
Power of partner to bind firm
Every partner is an agent of the firm and his other partners for the purpose of the business of
the partnership; and the acts of every partner who does any act for carrying on in the usual way
business of the kind carried on by the firm of which he is a member bind the firm and his
partners, unless the partner so acting has in fact no authority to act for the firm in the particular
matter, and the person with whom he is dealing either knows that he has no authority or does
not know or beli.e.ve him to be a partner.
Partners bound by acts on behalf of firm
An act or instrument relating to the business of the firm and done or executed in the firmname, or in any other manner showing an intention to bind the firm, by any person thereto
authorized, whether a partner or not, is binding on the firm and all the partners: Provided that
this section shall not affect any general rule of law relating to the execution of deeds or
negotiable instruments.
Partner using credit of firm for private purposes
Where one partner pledges the credit of the firm for a purpose apparently not connected with
the firm’s ordinary course of business, the firm is not bound, unless he is in fact specially
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authorized by the other partners; but this section does not affect any personal liability incurred
by an individual partner.
Effect of notice that firm will not be bound by acts of partner
If it has been agreed between the partners that any restriction shall be placed on the power of
any one or more of them to bind the firm, no act done in contravention of the agreement is
binding on the firm with respect to persons having notice of the agreement.
Liability of partners
Every partner in a firm is liable jointly with the other partners for all debts and obligations of
the firm incurred while he is a partner; and after his death his estate is also severally liable in a
due course of administration for such debts and obligations, so far as they remain unsatisfied
but subject to the prior payment of his separate debts.
Liability of firm for wrongs
Where, by any wrongful act or omission of any partner acting in the ordinary course of the
business of the firm or with the authority of his co-partners, loss or injury is caused to any
person not being a partner in the firm, or any penalty is incurred, the firm is liable therefore to
the same extent as the partner so acting or omitting to act.
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7.
Tax audit and investigation, Tax haven, Passwords/authentication, Email filter,
firewalls, access control for Tax Departments
Learning Outcome:
After studying this topic you should be able to:
(1)
Understand the statutory obligations imposed in a given situation, including any time
limits for action and advise on the implications of non-compliance.
(2)
Understand the Inland Revenue enforcement procedures by way of tax audit and
investigation.
(3)
Be aware of the significance of the general and specific tax anti-avoidance provisions in
the Income Tax Act.
Required Reading:
https://www.hasil.gov.my/en/legislation/tax-audit/
https://www.oecd.org/ctp/harmful/list-of-unco-operative-tax-havens.htm
https://www.oecd.org/tax/forum-on-tax-administration/publications-andproducts/49428035.pdf
https://asset.mkn.gov.my/wp-content/uploads/2020/10/MalaysiaCyberSecurityStrategy20202024.pdf
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Tax audit
A tax audit is an examination of a taxpayer’s business accounts and financial affairs to ascertain
that tax reported and paid are correct and are in compliance with tax laws and regulations. IRB
carries out 2 types of audit, namely desk audit and field audit.
Available from IRB website:
http://phl.hasil.gov.my/pdf/pdfam/BI_PanduanAuditCukai.pdf
Tax investigation
One of the methods of enforcement carried out by IRBM is tax investigation. A taxpayer who is
convicted of an offence is liable to a penalty, fine and / or imprisonment. Tax investigation is
examination of books, documents, objects, articles, materials and things (hereinafter referred
to as 'documents') relating to a taxpayer’s business and financial matter, including personal
documents. This examination is carried out to determine that the correct amount of income is
reported and the tax thereon is charged and paid in accordance with the tax laws and
regulations.
Available from IRM website:
http://phl.hasil.gov.my/pdf/pdfam/Tax_Investigation_Framework_2020_2.pdf
Tax haven
A tax haven is an offshore country that allows wealthy individuals and business owners to bank
with the country’s local institutions in order to avoid paying home country taxes on gains or
profits. These tax haven countries offer the benefit of little to no tax liability, and company
owners or consumers with considerable wealth do not usually need to be citizens to take
advantage of this kind of tax loophole.
As a result of this tax haven structure, business owners and wealthy consumers pay little or
even no taxes on their profits or personal finances. In other words, tax havens offer a way for
companies and affluent individuals to avoid higher corporate tax rates or income tax in their
home countries.
According to the Corporate Tax Haven Index, the top tax haven countries include:
- British Virgin Islands
- Bermuda
- Cayman Islands
- Netherlands
- Switzerland
- Luxembourg
- Jersey, a dependency of the United Kingdom in the Channel Islands
- Singapore
- Bahamas
- Hong Kong
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Passwords/authentication, email filter, access control for tax departments
The "AAA" concept is the cornerstone of any systematic discipline of security (IT or otherwise).
It is composed of:
- Access control- Manages which individuals or accounts may interact with specific
resources, and governs what kinds of operations such individuals or accounts may
perform on those resources. Access controls usually rest on some notion of identity,
which may be associated with a specific individual or account, or with a group to which
that individual or account belongs.
- Authentication- Process of verifying a user's identity through the use of a shared secret
(such as a password), a physical token (such as a key), or a biometric measure (such as a
fingerprint).
- Accounting- Systematically tracks and records the operations and activities undertaken
by individuals or accounts while they're active in a system or working environment
(accounting).
Firewall
A firewall is a device that enforces security policies at the boundary between two or more
networks. Firewalls are especially important at the boundary between the enterprise network
and the Internet. A firewall has a set of rules that specifies which traffic should be allowed or
denied.
A static stateless packet-filter firewall looks at individual packets and is optimized for speed and
configuration simplicity. A stateful firewall can track communication sessions and more
intelligently allow or deny traffic. For example, a stateful firewall can remember that a
protected client initiated a request to download data from an Internet server and allow data
back in for that connection. A stateful firewall can also work with protocols, such as active
(port-mode) FTP, that require the server to also open a connection to the client.
Another type of firewall is a proxy firewall. Proxy firewalls are the most advanced type of
firewall but also the least common. A proxy firewall acts as an intermediary between hosts,
intercepting some or all application traffic between local clients and outside servers. Proxy
firewalls examine packets and support stateful tracking of sessions. These types of firewalls can
block malicious traffic and content that is deemed unacceptable
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8.
Corporate taxation
Learning Outcome:
After studying this topic you should be able to:
1) Compute income tax and design tax planning for company.
2) Discuss implications of tax planning at company level.
Required Reading:
Jeyapalan Kasipilai (2017), Chapter 12
Choong Kwai Fatt (2022), Chapter 21
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Residence Status
A company is tax resident in Malaysia if its management and control is exercised in Malaysia.
Management and control is normally considered to be exercised at the place where director’s
meetings are held.
Submission of returns and assessment
Under the self-assessment system for companies, returns are required to be submitted within 7
months from the date of closing of accounts. Particulars required to be specified in the return
include the amount of chargeable income and tax payable by the company.
On the submission of the return, an assessment is deemed to have been made on the company.
The return is deemed to be a notice of assessment, which is deemed to be served on the
company on the day that it is submitted.
• Collection of tax
• Self assessment
Payment of tax by 12 equal monthly installments has to be made, beginning from the second
month of the company’s basis period (financial year). An estimate of tax payable for the year of
assessment must be furnished to the Director General one month before the beginning of the
basis period. From YA 2008, a newly established company with paid-up capital of RM2,500,000
and less is exempted from this requirement for 2 years, beginning from the YA in which the
company commences operation subject to certain conditions.
• The balance of tax payable by a company is due to be paid on the last day by which the
return must be submitted (see “Submission of returns and assessment” above).
• In general, tax on all income other than income from a business or employment source,
or dividends received by non-resident companies are collected by means of withholding
tax. The withholding tax is payable within one month of crediting or paying the nonresident company.
Profit distribution
From YA 2008, the imputation system of taxation was replaced by a single-tier system of
taxation which came into effect from 1 January 2008. Under this system, tax on a company’s
profits is a final tax and dividends are exempt in the hands of shareholders. Companies are no
longer required to deduct tax at source from dividends distributed to shareholders. A transition
period of 6 years is provided for implementation of the single-tier system. All companies will
move to the single-tier system on 1 January 2014 even though they may still have unutilized
franking credits as at 31 December 2013.
Losses
Business losses can be set off against income from all sources in the current year. Any
unutilized losses can be carried forward for 10 years to be utilized against income from any
business source.
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However, from YA 2006, companies are not allowed to deduct a loss brought forward from a
prior year against income of a particular year of assessment if the shareholders of the company
at the beginning of the basis period for that year of assessment are not substantially the same
as the shareholders of the company at the end of the basis period for the (prior) year of
assessment in which the loss was initially ascertained.
The Ministry of Finance has issued guidelines which state that the above rule restricting carryforward losses based on the shareholder continuity test would only apply to dormant
companies.
Loss carry-back
Taxpayers can make an election to carry back current year loss for deduction against income of
the immediately preceding year subject to a maximum deduction of RM100,000. The election
may be made for YA 2009 and YA 2010 only.
Group Relief
From YA 2006 group relief is available for all incorporated resident companies provided that the
conditions for eligibility are met.
A company that qualifies may surrender a maximum of 50% of its adjusted loss for a year of
assessment to one or more related companies.
With effect from YA 2009, the maximum percentage of loss that can be surrendered is
increased to 70%.
To be eligible for group relief, claimant & surrendering companies must meet the following
conditions:
• Must be resident and incorporated in Malaysia.
• Each has a paid-up capital of ordinary shares exceeding RM2.5 million at the
beginning of the basis period.
• Both companies must have same (twelve-month) accounting period.
• They are “related companies” as defined in the law, and must be “related”
throughout the relevant basis period as well as the 12 months preceding that basis
period.
• Companies currently enjoying certain incentives such as pioneer status, ITA,
reinvestment allowance etc, are not eligible.
Tax rates
https://www.hasil.gov.my/en/company/tax-rate-of-company/
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9.
Real Property Gains Tax
Learning Outcome:
After studying this topic you should be able to:
1)
Define real properties.
2)
Compute Real property Gain Tax.
Required Reading:
Jeyapalan Kasipillai, (2017), Chapter 12
Choong Kwai Fatt (2022), Chapter 34
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Taxation of chargeable gains
• A tax, to be called real property gains tax, shall be charged in accordance with this Act in
respect of chargeable gain accruing on the disposal of any real property (hereinafter
referred to as "chargeable asset").
• Subject to this Act, the tax shall be charged on every ringgit of the total amount of
chargeable gains accruing to a chargeable person in a year of assessment in respect of each
category of disposal of chargeable assets specified in Schedule 5.
Chargeable persons
• Subject to this Act, every person whether or not resident in Malaysia for a year of
assessment shall be chargeable with the tax in respect of a chargeable gain accruing to him
in that year on the disposal of any chargeable asset.
• The supplementary provisions in Schedule 1 shall have effect with respect to persons
chargeable with the tax.
Chargeable gains, allowable losses and tax relief for allowable losses.
• Where a chargeable asset is disposed of, then(a) if the disposal price exceeds the acquisition price, there is a chargeable gain;
(b) if the disposal price is less than the acquisition price, there is an allowable loss; and
(c) if the disposal price is equal to the acquisition price, there is neither a chargeable gain
nor an allowable loss.
• An allowable loss means a loss suffered on the disposal of chargeable assets which, if it had
been a gain, would have been chargeable with the tax.
• Subsection (1) shall be subject in its operation to Schedule 2, which shall have effect for
computing acquisition and disposal prices and otherwise as provided therein.
• Where there is an allowable loss in respect of a disposal, tax relief shall be allowed in
respect of such allowable loss in an amount equal to the sum arrived at by applying to every
ringgit of such allowable loss the appropriate rate of tax specified in Schedule 5 in respect of
the category of disposal giving rise to that allowable loss as a deduction from the total tax
assessed for the year of assessment in which the disposal was made; and
• where, by reason of an insufficiency or absence of total tax assessed for the year of
assessment in which the allowable loss arose, effect cannot be given or cannot be given in
full to paragraph (a), the tax relief which has not been so allowed (or so much thereof as has
not been so allowed for that year) shall be allowed for the first subsequent year of
assessment for which there is total tax assessed and so on for subsequent years of
assessment until the whole amount of the tax relief to be allowed has been allowed.
Private residence
Subject to Schedule 3, a gain shall be exempt from the tax if it accrues to an individual who is a
citizen or an individual who is not a citizen but is a permanent resident in respect of the
disposal by him of his private residence.
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Exemptions
(1) Notwithstanding any other provision of this Act, the gains specified in Schedule 4 shall be
exempt from the tax.
(2) The Dewan Rakyat may by resolution delete any item in Schedule 4 or add any further item
or items thereto.
(3) The Minister may by statutory order exempt any person or class of persons from all or any
of the provisions of this Act.
(4) Any order made under subsection (3) shall be laid before the Dewan Rakyat.
Year of assessment
The first year of assessment shall be a period beginning on 7 November 1975 and ending on 31
December 1976 and thereafter the year of assessment shall be the calendar year starting with
the calendar year 1977.
Chargeable person to be assessed on chargeable gains
A chargeable person shall be assessed for any year of assessment in respect of the total amount
of his chargeable gains as ascertained under section 3 (2) in that year.
Returns
(1) Every chargeable person who disposes of a chargeable asset and every person who acquires
the asset so disposed of shall, within one month (or such further period as the Director General
may allow on a written request being made to him) of the date of disposal of that asset, make a
return(a) specifying in respect of the asset disposed of the acquisition price, the disposal price and
the gain or loss on the disposal;
(b) furnishing all information necessary to determine the acquisition price and disposal
price of the asset disposed of; and
(c) where the market value of the asset is to be taken for the purposes of this Act, submit a
written valuation of the asset by a valuer.
(d) (2) Every nominee shall, within one month (or such further period as the Director
General may allow on a written request being made to him) of the date of disposal by
him of a chargeable asset on behalf of any person, make a return specifying(a) the name and address of the person on whose behalf the disposal was made;
(b) the asset disposed of; and
(c) the date on which he first be.g.an to hold that asset as nominee for that person.
(3) Where any assets acquireda. from any person by a company controlled by that person, by his wife or by him
jointly with his wife or a connected person; or
b. with the approval of the Director General under paragraph 17 of Schedule 2, by a
company from another company in the same group, are transferred by the acquiring
company to its stock in trade, the acquiring company shall within thirty days after
the transfer make a return giving particulars of the assets transferred.
(4) Where a person makes a return under this Act, the return shall be in the prescribed form:
48
Provided that, where the person making the return is a nominee, the return shall be made to
the income tax office nearest to the nominee's principal place of business or abode in Malaysia
or if he has no place of business or abode in Malaysia, to the office of the Director General in
Kuala Lumpur.
(5) Where a person is required to make a return for the purposes of the income tax law, he shall
make a declaration in that return whether or not he has made a disposal of chargeable assets in
the year immediately preceding the year of assessment for which that return is made.
Assessments
(1) Where a person makes a return under section 13 (1), the Director General may(a) accept the return and make an assessment accordingly;
(b) make an assessment after making such adjustments as he considers necessary; or
(c) reduce an assessment made for the year of assessment for which the return was made,
in giving effect to paragraph 7(4)(a).
(2) Where a person does not make a return under subsection 13 (1), the Director General, if he
is of the opinion that that person is chargeable with the tax, may make an assessment
accordingly: Provided that the making of an assessment in respect of a person under this
subsection shall not affect any liability otherwise incurred by that person by reason of his
failure to make the return.
(3) The Director General, where it appears to him desirable, either because a chargeable person
is about to leave Malaysia or for any other reason, that an assessment should be made
forthwith, may at any time make whatever assessment he considers appropriate; and any
assessment so made shall, when the year of assessment to which it relates and the time
allowed under subsection 13 (1) for making a return of disposals have expired, be adopted
with such revision (if any) as the Director General thinks necessary as the assessment for
that year.
(4) The death of a chargeable person shall not prevent the making of an assessment in respect
of disposals by him before his death, and where any such assessment is madea. the notice of assessment under section 17 may be served on the executor of the
deceased person; and
b. the assessment shall have the same effect as regards imposing a liability on the estate of
the deceased person as it would have had if it had been made during his life time:
Provided that no such assessment shall be made more than three years after the end of the
year of assessment in which the death took place.
Additional assessments
(1) The Director General, where in respect of any year of assessment it appears to him that no
or no sufficient assessment has been made on a person chargeable with the tax, may within
six years after the end of that year of assessment make on that person whatever
assessment or additional assessment he considers to be appropriate.
(2) The Director General, where it appears to him that a person chargeable with the tax has
been guilty of any form of fraud or willful default in connection with or in relation to the tax,
may at any time make an assessment in respect of that person for the purpose of making
good any loss of the tax attributable to the fraud or willful default.
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Cases where acquirer may be assessed
(1) Where in a case to which section 13 appliesa. the consideration on the disposal of a chargeable asset consists of another asset
(whether chargeable or not);
b. there is a failure by both the disposer and the acquirer to submit a return to the
Director General in the prescribed form as required under section 13; or
c. the consideration on the disposal of a chargeable asset is for the purposes of the Act
the market value of the asset, [Ins Act 476:s:23]
(1A) Where the Director General makes an assessment on the acquirer under paragraph (1)(b)
there shall be included in that assessment a sum equal to ten per cent of the tax payable
by the disposer, which shall be deemed to be an increase of the kind mentioned in
subsection 21 (4). (2) An assessment made under this section shall for all the purposes of
this Act have effect and be treated as though it were an assessment made on a person
disposing of a chargeable asset:
Provided thata. the acquirer assessed under this section shall not be entitled to any deduction from
the tax assessed for any tax relief for allowable losses suffered by the disposer; and
b. in relation to the notice of assessment, paragraph 17(b) shall have effect as if it did
not contain a reference to allowable losses.
(3) An acquirer of a chargeable asset who is assessed under this section shall be entitleda. to recover as a debt due to him from the disposer the amount of any payment made
in pursuance of the assessment; and
b. for that purpose to require the Director General to furnish a certificate specifying
the amount paid, and any certificate so furnished shall be conclusive evidence of the
facts stated therein.
Payment of the tax
1) Subject to this section, the tax payable under an assessment shall, on the service of the
notice of assessment on the person assessed, be due and payable at the place specified in
that notice whether or not that person appeals against the assessment.
2) Where the tax payable under an assessment is increased on appeal the additional tax
payable by virtue of the increased assessment shall, on the service of the notice of the
increased assessment on the person assessed, be due and payable at the place specified in
that notice.
3) Where any tax is payable in accordance with subsection (1) or (2) the Director General may
allow the tax to be paid by instalments in such amounts and on such dates as he may
determine.
4) Subject to subsection (3), where any tax due and payable on the service of a notice in
accordance with subsection (1) or (2) has not been paid within thirty days after the service
of that notice (or within such longer period as may be allowed by the Director General), so
much of the tax as is unpaid upon the expiration of those days or that period, as the case
may be, shall without any further notice being served on him be increased by a sum equal
to ten per cent of the tax so unpaid, and that sum shall be recoverable as if it were tax due
and payable under this Act:
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Provided thata. if the tax payable is reduced on appeal or otherwise the sum paid or payable by way
of increase shall be reduced proportionately; and
b. the Director General may in his discretion for any good cause shown remit the whole
or any part of any increase in the tax payable under this subsection.
Rate of RPGT
https://www.hasil.gov.my/en/rpgt/real-property-gains-tax-rpgt-rates/
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10.
Withholding tax
Learning Outcome:
After studying this topic you should be able to compute withholding tax.
Required Reading:
IRB’s website
Jeyapalan Kasipillai (2017), Chapter 15
Choong Kwai Fatt (2022), Chapter 22
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Introduction
Withholding tax is imposed on non-residents who has business dealings in Malaysia. Such a non-resident
does not have a business presence in Malaysia but merely renders services from his home country
(trading with Malaysia). In order to ensure an efficient tax collection, the Act has appointed the payer as
an agent responsible to collect income tax from such non-resident, to withhold a portion of the payment
and pay to the tax authorities. Such portion of payment is known as withholding tax.
Rates
Withholding tax is only restricted to the following types of payments made to non-resident:
tax rate in general
1) Special classes of income.
10%
2) Interest.
15%
3) Royalty.
10%
4) Contract payment. (S.107)
10%+3%
5) Public entertainer. (S.109A)
15%
6) Other income in S4(f)
10%
7) Payment to agent, dealers or distributors 2%
8) Real Estate Investment Trust (REIT):
1) Other than a resident company
10%
2) Non Resident company
25%
3) Foreign investment institution
10%
9) Family Fund/Takaful Family Fund/Dana Am:
1) Individual and other
8%
2) Non Resident Company
25%
Foreign Source Income (FSI)
All types of Foreign Sourced Income (FSI) received by a tax-resident individual in Malaysia
would be tax-exempted from 1 January, 2022 to 31 December, 2026. However, the FSI
shouldn’t be used for carrying out the operations of a partnership business.
For tax-resident Limited Liability Partnerships (LLP) and companies, the FSI is tax-exempted if
the income has been received in the shape of dividends. This type of tax exemption is available
from Jan. 1, 2022 to Dec. 31, 2026. However, any other type of FSI received by the above
entities would remain taxable at 3% prior to June 30, 2022 and at current income tax rate after
June 30,2022.
Non-compliance
With effect from 2 September 2006, where the taxpayer fails to pay the withholding tax to the
authority within 1 month after crediting or paying the payment on foreigners’ services to the
non-resident, a 10% penalty on the unpaid or outstanding withholding tax will be imposed on
the payer.
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11.
Indirect tax
Learning Outcome:
After studying this topic you should be able to discuss and compute the indirect tax.
Required Reading:
Royal Custom’s website
Choong Kwai Fatt (2022), Chapter 33
SST – As the SST was implemented on 1st September 2018. The details on the mechanisms is
available from the Royal Customs’ website.
http://www.customs.gov.my/en
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