2011 Jun F6 Tax (FA11)

EMPLOYMENT INCOME ACCA F6. T4.

Introduction

Taxes in Malaysia are divided into direct taxes and indirect taxes by reference to whether they are imposed directly on the taxpayer or indirectly via levies on certain goods and services. Direct taxes are usually paid directly to the tax authorities whereas the indirect taxes are collected by the vendors of the goods and services, who then pass on the tax to the relevant authorities.

Direct taxes include:Income Tax – applies to “persons” and is levied on chargeable income.Real Property Gains Tax – applies to “persons” and is levied chargeable gains made on the disposal of

real property in Malaysia.“SOCSO” – applies to “persons” and is levied on employment income to individuals.

Indirect taxes include:Sales Tax – levied on most goods consumed in Malaysia.Service Tax – levied on many services provided in Malaysia, e.g. food or drink provided in restaurants

or clubs, staying in a hotel, telecoms services, services at golf clubs, car repair centres and professional services such as legal, audit, tax advice, etc. in connection with goods or land in Malaysia.

Stamp Duty – levied on purchases and leases of land and buildings, and transfers of stocks and shares.Import/Excise Duties – levied on most goods imported into Malaysia.

We will consider Income Tax, Real Property Gains Tax, Sales Tax and Service Tax.

THE MAIN SOURCES OF TAX LAW ARE:

Income Tax Act 1967 (“ITA’67”).Real Property Gains Tax Act 1976 (“RPGTA’76”).Sales Tax Act 1972 (“STA’72”).Service Tax Act 1975 (“STA’75”).

The above Acts are amended by subsequent Finance Acts made following the annual Budget.

PERSONS SUBJECT TO TAX

Income of any person, other than a Resident Company Carrying on the business of banking, Insurance or sea and air transport derived from source outside Malaysia and received Malaysia is exempt.

For Resident company, the exempted foreign income will be credited to an exempt account from which exempt dividend can be paid. If the initial recipient of dividend is corporate entity, then it can also pay second tier dividend to its own shareholder. I.E A two tier tax exemption.

A “person” includes: an individual, a company, a body of persons, and (?) a corporation sole.

A body of persons is defined as an unincorporated body of persons, including a Hindu joint family but excluding a partnership. Examples include clubs, co-operative societies, trade associations and trusts.

ACCA F6. T4. EMPLOYMENT INCOME

Classes of chargeable income upon which income tax is due are provided for in s.4 ITA’67 as:

a) Gains or profits from a business, for whatever period of time carried on,b) Gains or profits from an employment,c) Dividends, interest or discounts,d) Rents, royalties or premiums,e) Pensions, annuities or other periodical payments not falling under the above,f) Gains or profits not falling under the above.

Each year of assessment runs from 1 January to 31 December.

S.5 ITA’67 provides more detail in the way income is subject to taxation by providing that income tax is payable on “chargeable income”, which is determined as follows:

1. Gross income from all sources is determined on a source by source basis.2. Adjusted income is gross income less all outgoings and expenses of a revenue nature wholly and

exclusively incurred in the production of gross income.3. Statutory income is adjusted income less capital allowances in respect of qualifying plant and

machinery expenditure, and qualifying buildings expenditure.4. Aggregate income is the sum of all business income less adjusted losses brought forward, plus all

non-business income, plus recoveries of aborted prospecting expenditure.5. Total income is aggregate income less adjusted losses for the basis period, certain miscellaneous

expenditures, donations and group losses.6. Chargeable income is total income less any personal reliefs available for individuals.

ADMINISTRATION OF TAX

Taxes on income and gains are administered and collected by the Director General of Inland Revenue (“DGIR”), or simply the Director General (“DG”), or the Inland Revenue (“IR”), under the authority of the Ministry of Finance. In practice, most of the work of the Director General is carried out by the Inland Revenue Board (“IRB”). Sales and service taxes, and import duties are administered by the Director General of Customs under the authority of the Royal Customs and Excise Department.

Apart from the indirect taxes, tax is calculated by instalments during the year according to rules applicable during a year of assessment and upon income assessed for that YA by reference to the basis year for that YA.

For individuals the basis year is the calendar year coinciding with the YA.

For a company, body of persons or a corporation sole, the basis year is the accounting period that ends within the YA.


RESIDENT OR NON-RESIDENT

Status Resident Non ResidentTax Rate 0% - 26% Flat rate at 26%

15% or 10%Personal Deduction Entitle Not EntitleRebate Entitle Not EntitleEmployment Income Taxable Para 21 Sch 6

RESIDENCE STATUS FOR INDIVIDUALS

S.7 ITA’67 provides that an individual is resident in Malaysia for a particular YA (“that YA”) if:

s.7(1)(a) he is in Malaysia for a period or periods within the basis year for that YA amounting to 182 days or more.

s.7(1)(b) he is in Malaysia for a period of less than 182 days in the basis year for that YA and the period is linked to another period of 182 or more consecutive days throughout which he is in Malaysia for the basis year for the YA immediately preceding or immediately following that YA.

N.B. Two periods are linked even if the individual is not present in Malaysia on 31 December or 1 January, subject to the period of absence being treated as a temporary absence, so long as the individual is in Malaysia immediately prior to and after that temporary absence.

The following “temporary absences” are to be taken to form part of either period:-

- Absences connected with his service in Malaysia and owing to service matters or attending conferences or seminars or study abroad.

- Absences owing to ill-health involving himself or a member of his immediate family (agreed as spouse, children and parents), and

- Absences in respect of social visits not exceeding 14 days in aggregate.

s.7(1)(c) he is in Malaysia for a period or periods within the basis year for that YA amounting to 90 days or more and … in any 3 of the basis years for the 4 YAs immediately preceding that YA he is:

either: resident in Malaysia,or: in Malaysia for a period or periods amounting to 90 days or more.

s.7(1)(d) he is resident in Malaysia (within the meaning of the above sections) in the basis year for the YA following that YA, having been so resident for the each of the basis years for the 3YAs immediately preceding that YA.

- This paragraph means that someone who is not resident for one year but is resident the year after, and who was resident for the three years previously, is nevertheless deemed to be resident during that one year.

Notes: Any amount of time spent on Malaysian soil on any day makes that day count as a day’s presence in Malaysia.Citizenship or permanent residence status of an individual is not relevant in determining residence status for tax purposes.


Trading/Self-employed or Employed ?

Employment income Bussiness incomeLoss relief X relief ReliefCapex X Relief Capital AllowanceNR deriving Emp Y Para 21 Sch 6 X exempted

Guidelines to determine wether the contract is Employment income or Bussiness income.

a) Master and servant relationshipb) Extent of control by the employer as to how the work is to be performed and the manner is to

be done.c) Define work hourd) Provision of own tools and equipment in the performance of wore) Restriction to contract with other parties

EMPLOYMENT INCOME

Employment is defined in s.2 ITA’67 to mean:

a) employment in which the relationship of master and servant subsists, andb) any appointment or office, whether public or not and whether or not that relationship subsists, for

which remuneration is payable.

- The servant or holder of the appointment or office is defined as the employee.- The master or person responsible for paying the holder of the appointment or office is defined as the

employer.


Determination of Employment Income

Under s.3 ITA’67 chargeable income is only subject to tax if it accrues in or derives from Malaysia, or is received in Malaysia from outside Malaysia. S.13 ITA’67 provides specifically for employment income, widening the scope of income subject to tax by providing for income deemed derived from Malaysia.

S.13(2) ITA’67 provides that employment income is deemed derived from Malaysia in the following circumstances:

a) for any period during which the employment is exercised in Malaysia,b) for any period of leave attributable to the exercise of the employment in Malaysia,c) for any period during which the employee performs outside Malaysia duties incidental to the

exercise of the employment in Malaysia,d) for any period during which a person is a director of a company and that company is resident in

Malaysia for the basis year for a YA and within that basis year that period or part of that period falls,

e) for any period during which the employment is exercised aboard a ship or aircraft used in a business operated by a person who is resident in Malaysia for the basis year for a YA and within that basis year that period or part that period falls*.

* But employment income earned on ships registered under the Marine Shipping Ordinance 1952 and owned by a Malaysian tax resident is exempt from income tax.

S.13(3) ITA’67 further extends the scope of employment income deemed derived in Malaysia for Malaysian citizens who are public servants, to include employment income:

a) for any period during which the employment is exercised outside Malaysia, orb) for any period of leave attributable to the exercise of the employment outside Malaysia.

N.B. para.21 Sch.6. provides that the employment income of a non-resident* is exempt from income tax if that person exercised his employment for a period or periods amounting to not more than 60 days.


When is employment income taxable ?

S.25 ITA’67 contains provisions that deal with which particular YA employment income falls to be taxed.

S.25(1) ITA’67 provides for employment income that is not attributable to any particular period, which is taxable when it becomes receivable.

S.25(2) ITA’67 provides for employment income that is attributable to a particular period, which is taxable when it is received, as income relating to that particular period. However, for bonuses and directors fees received after the end of the YA to which they relate, the bonus and/or fees will be taxable as income in the YA of receipt.

S.25(3) ITA’67 serves to counter tax avoidance by treating employment income that is discovered more than five years after the end of the period to which it relates as income in the YA five years before the YA of its discovery.

S.25(4) provides for the apportionment of employment income that overlaps two or more periods on a day by day basis. However, in the case of a lump sum receivable upon cessation of employment, that is not pension or compensation income, the lump sum is apportioned evenly over the period of employment subject to a maximum period of the current and five previous YAs.For income that is discovered late:-

- if the overlapping period extends more than five years before the discovery of the income then the income is apportioned over that part of the overlapping period that does not extend more than five years ago.

- if the overlapping period ended more than five years before discovery of the income then the whole amount is treated as income in the YA five years before the YA of its discovery.

S.25(5) provides for employment income that is attributable to future periods, which is taxable on a receipts basis.

S.25(6) provides for employees leaving Malaysia:-if: an employee has left or will leave Malaysia in one YA, and

will not be resident …… nor will receive any pension in the following YA, and

his gross income will cease to be derived from Malaysia after a period of leave following departure,

- then income receivable in the following YA will be treated as income in the current YA unless the employee requests otherwise in writing.

In all cases, s.29(1) ITA’67 provides that income shall be deemed to have been received in a basis period if a person:-

i) is entitled to income accruing in or derived from Malaysia, andi) is able to obtain the receipt thereof on demand.


What constitutes employment income is provided in s.13(1) ITA’67, which states that it includes:

a) any wages, salary, remuneration, leave pay, fee, commission, bonus, gratuity, perquisite or allowance (whether in money or otherwise) in respect of having or exercising the employment,

b) an amount equal to the value of the use or enjoyment by the employee of any benefit or amenity (not being a benefit or amenity convertible into money) provided for the employee by or on behalf of his employer, excluding-i) a benefit consisting of medical or dental treatment or a benefit for child care,ii) a benefit consisting of:

A) leave passages including meals and accommodation for travel within Malaysia not exceeding three times in any calendar year, or

B) one leave passage for travel between Malaysia and any place outside Malaysia in any calendar year, limited to a maximum of RM3,000,

provided that the benefit is confined only to the employee and members of his immediate family (spouse and children),

iii) a benefit or amenity used by the employee solely in connection with the performance of his duties, and

iv) a benefit or amenity falling under para. c).

c) an amount in respect of the use or enjoyment by the employee of living accommodation in Malaysia (including living accommodation in premises occupied by his employer) provided for the employee by or on behalf of the employer rent free or otherwise.

d) so much of any amount (other than a pension, annuity or periodical payment falling under s.4(e) ) received by the employee, whether before or after his employment ceases, from a pension or provident fund, scheme or society not approved for the purpose of this Act as would not have been so received if his employer had not made contributions in respect of the employee to the fund, scheme or society or its trustees.

e) any amount received by the employee, whether before or after his employment ceases, by way of compensation for loss of the employment, including any amount in respect of:i) a covenant entered into by the employee restricting his right after leaving the employment to

engage in employment of a similar kind, orii) any agreement or arrangement having the like effect.

The reason that employment income is subdivided as above is that the calculation of any accommodation benefit is made by reference to s.13(1)(a) income only.


S.13(1)(a) ITA’67 covers employment income that is, or is convertible into, money.

A bonus need not be contractual.

Gratuity or gift ? – Gratuities do not include gifts. A gift is given for the personal qualities of a person in his private capacity, whereas a gratuity is given to a person for services rendered. A gift is not assessable as income.A gratuity is exempt from income tax if it is received upon retirement:- Due to the ill-health, or- On or after the age of 55 or the normal retirement age*, after ten years service with the same

employer or with different employers under the same effective control.- On or after the age of 50 (but before 55) on reaching the compulsory age of retirement pursuant to a

contract of employment or collective agreement (with unions) after ten years service with the same employer or with different employers under the same effective control

* Normal retirement age (“NRA”) is as defined by statute for the profession concerned.

For YA 2008 to YA 2010 the following items given to employees are treated as gifts, not gratuities:- One new personal computer.- Broadband subscription fees registered in the name of the employer.

A perquisite, or perk, is an incidental benefit over and above regular pay that is often customary in a particular field of work.

Para. 25C Sch.6 ITA’67 provides for an exemption from tax for a perquisite up to RM2,000 in cash or kind in respect of innovation or productivity awards, past achievement, service excellence or long service of more than ten years.

For YA 2008 to YA 2010 the following perquisites are exempt from tax:- Employer’s own goods provided free or at a discount, so long as the discount does not exceed

RM1,000.- Employer’s own services provided free or at a discount, so long as the benefits are not transferable.

But the above exemptions do not apply to directors of controlled companies, sole proprietors and partnerships.

Allowances (for entertainment or other expenses) are assessed in full even if the employee does not claim/receive the full amount of the allowance. The entertainment or other expenses incurred by the employee would be given a deduction as allowable expenses, but entertainment expenses cannot exceed the amount of the allowance given.

For YA 2008 to YA 2010 the following allowances are exempt from tax:- Petrol card or petrol or travel allowance between home and work, up to RM2,400.- Petrol card or petrol or travel allowance and toll card for official duties, up to RM6,000.- Parking fees or allowance.- Meal allowance.- Allowances or subsidies for child care, up to RM2,400.

But the above exemptions do not apply to directors of controlled companies, sole proprietors and partnerships.

Allowance vs. Reimbursement

An allowance is usually given in advance of the expenses to be incurred, whereas a reimbursement is given after the employee has spent the money. Reimbursements of expenses paid by the employee on behalf of the firm need not be declared as income, nor should the expenses be claimed as a deduction.


Share options and share incentive schemes – the value that is assessed as income is the excess of the market price upon issue of the options or upon exercise, whichever is lower, less the exercise/allotment price, less any amount paid by the employee for the option. (For non-listed companies, the market price is deemed to be the net asset value per share.)

Interest benefit on loans to employees:-- Loans made out of internal funds do not carry an assessable interest benefit.- Loans made possible by external borrowing carry an assessable interest benefit at an amount equal to

the interest paid by the company less any amount paid by the employee.- Subsidised loans carry an assessable interest benefit at the amount of the subsidy.- Loans waived by the employer are assessable in full.

For YA 2008 to YA 2010, subsidised loans up to RM300,000 for housing, passenger motor vehicles and education are exempt. But this exemption does not apply to directors of controlled companies, sole proprietors and partnerships.

Course fees for the purpose of enhancing the education and skills of the employee in relation to the performance of duties are not assessable.

Insurance premiums on personal accident policies taken out by the employer for the benefit of employees are not assessable. Life policies provided by the employer on the life of the employee are assessable only if the employee and/or members of the employee’s family, or their appointed representatives, are beneficiaries.

The payment by the employer of subscription fees to a professional body is not assessable so long as the membership is directly related to the business of the employer.

Credit cards provided by employers – if the card is part used for private purposes then the annual membership fees are assessable as income (as is the amount of any private purchases not reimbursed by the employee).

Scholarships provided by the employer are not assessable.


S.13(1)(b) ITA’67 covers employment income that is not convertible into money or does not have an exact monetary value, except living accommodation. Employment income falling under this paragraph is known as benefits-in-kind (“BIK”).

Certain BIKs are not assessable; these include:- Those provided for in s.13.(1)(b) – medical or dental treatment for the employee, or child care benefit,

up to three leave passages for the employee and members of his immediate family (spouse and children) and one overseas leave passage limited to RM3,000.

- Free transportation to and from work by bus/coach provided by the employer.- Food and drink provided free of charge or subsidised by the employer.

For YA 2008 to YA 2010 the provision of a telephone, mobile phone, pager, PDA and internet subscription, as well as the payment of telephone bills, are exempt. But this exemption does not apply to directors of controlled companies, sole proprietors and partnerships.

The value of any benefit-in-kind is the amount paid by, or the cost to, the employer. A common example is where fuel (only) is provided for an employee’s private use of his own car – the fuel benefit is assessed at the actual cost of the fuel provided for private use.

Any contribution by the employee towards the cost of a benefit assessed at actual cost is deducted from the value of the benefit assessable to tax.

Certain BIKs are assessed at prescribed values, and where prescribed values are used, any contribution by the employee towards the cost of the benefit is not allowable. The benefits assessed at prescribed values are as follows:

Corporate club membership – only the subscription fees are assessed as income. Where more than one corporate club membership is provided, only the lower(est) subscription fee is assessed.

Gardener – RM3,600 p.a. (or RM300 p.c.m.).

Domestic servant – RM4,800 p.a. (or RM400 p.c.m.).

Driver – RM7,200 p.a. (or RM600 p.c.m.). Drivers provided from a pool used by other employers solely for business purposes are not assessable.


Certain BIKs are assessed under a formula method, with a concession allowing assessment on a prescribed value basis. These include:

Motor Cars plus any fuel

The prescribed value is calculated by reference to the cost of the car when new (including accessories), as follows:

Cost of car(RM)

Prescribed annual value of private usage of car (RM)

Prescribed annual value of fuel (RM)

Up to 50,000 1,200 60050,001 – 75,000 2,400 900

75,001 – 100,000 3,600 1,200100,001 – 150,000 5,000 1,500150,001 – 200,000 7,000 1,800200,001 – 250,000 9,000 2,100250,001 – 350,000 15,000 2,400350,001 – 500,000 21,250 2,700500,000 and above 25,000 3,000

↑

This amount is halved if the car is over 5 years old as at 1 January in the YA.

Note: The BIK is scaled if the benefit is provided for part of a year.The BIK is not reduced by amounts contributed by the employee.

The formula method is to calculate the value of the BIK as follows:

Motor Car:-

Fuel:- Annual value of the fuel is the actual cost of the fuel provided for private use.

Notes: Cost is the actual cost incurred or the market value.A motor car is given a prescribed average lifespan of 8 years.The BIK is assessed according to the proportion of the total use that is private use.The BIK is scaled if the benefit is provided for part of a year.The BIK is reduced by any amount contributed by the employee.

Household furniture and appliances

The prescribed values are as follows:

Semi-furnished with furniture in the lounge, dining room or bedrooms

RM70 p.c.m.

Semi-furnished as above plus one or more of: air-conditioner, curtains and carpets

RM140 p.c.m.

Fully furnished RM280 p.c.m.

- Fans and water heaters are treated as forming part of the premises.


The formula method is to calculate the value of the BIK as follows:

The prescribed average lifespan of assets is provided as follows:-

Asset Prescribed Average Lifespan (yrs)

Furniture & fittingsCurtains, carpets 5Furniture, sewing machine 15Air-conditioner 8Refrigerator 10

Kitchen equipment 6

Entertainment & recreationPiano 20Organ 10TV, Video, CD/DVD player, stereo set 7

Swimming pool (detachable), sauna 15

Miscellaneous 5

Notes: The BIK is scaled if the benefit is provided for part of a year.The BIK is reduced by any amount contributed by the employee.


S.13(1)(c) ITA’67 covers employment income that is living accommodation

S.32(2) ITA’67 provides that the value of the BIK in respect of living accommodation is assessed as the lower* of:

The defined value of the living accommodation, and 30% of the employee’s s.13(1)(a) gross income.

* The comparison is done based on the period of employment, notwithstanding that the accommodation might not have been provided for a full year.

- The defined value of a property is the economic rent that would be collected in an arm’s length transaction, if the property was unfurnished. However, in the case of properties subject to controlled rents, the defined value is the rateable value of the property.

Notes: If the accommodation is provided for part of a year, the value of the BIK is pro-rated accordingly.

If the accommodation is shared then the defined value is pro-rated accordingly before comparison with the 30% gross income.

If the employee is required by the employer to live in the accommodation then the defined value is apportioned so as to arrive at a fair amount in the circumstances, before comparison with the 30% of gross income.

If the employee is required by the employer to use part of the accommodation for entertaining clients and for that reason the accommodation is larger than would otherwise be needed then the defined value is apportioned so as to arrive at a fair amount in the circumstances, before comparison with the 30% of gross income.

If the property is a hotel or hostel, or any premises on a plantation or in a forest, or any premises in a rateable area but not subject to rates, then the value of the BIK is 3% of the employee’s s.13(1)(a) gross income.

S.33(2) ITA’67 provides that accommodation provided to directors, not being service directors, of a controlled company shall be assessed to a BIK at the defined value of the living accommodation.

- A controlled company is one not having more than fifty members and controlled by not more than five persons.

- A service director is a director who is employed in a managerial or technical capacity and is not the beneficial owner of more than five per cent. of the ordinary share capital of the company.

- A director is defined to include a manager who is the beneficial owner of twenty per cent or more of the ordinary share capital of the company.

Notes: If the accommodation is provided for part of a year, the value of the BIK is pro-rated accordingly.

If the property is a hotel or hostel, or any premises on a plantation or in a forest, or any premises in a rateable area but not subject to rates, then the value of the BIK is the full defined value.

S.13(1)(d) ITA’67 covers employment income that consists of receipts from an unapproved pension fund that accrue to contributions made by the employer.

Notes: Receipts received by the employee as a result of his own contributions and interest earned thereupon are not taxable.

Receipts are taxable in the year the money is received.The status of the fund at the time the employer’s contributions were made is not relevant; it is

the status of the fund at the time of the receipts that counts.


S.13(1)(e) ITA’67 covers employment income that consists of compensation for loss of employment, including payments in connection with arrangements restricting the right of the employee to engage in employment with anyone else.

Notes: The compensation payment need not be contractual.A payment made as compensation for loss of employment is entirely different to a payment

made in respect of employment or in respect of having or exercising employment; the circumstances are mutually exclusive. The former is treated under s.13(1)(e) whereas the latter is treated under s.13(1)(a). The distinguishing test is whether or not the person has been deprived of something to which he was entitled, for which deprivation the payment represents compensation. In cases of employees hired under several fixed period contracts, one after the other, case law has provided that in determining whether or not the person was entitled to employment, the test is whether or not the employment was likely to continue.

An exemption* is available for payments made as compensation for loss of employment if the loss of employment is due to ill-health, i.e. the ill-health renders the employee unfit for work.

A partial exemption* is available for payments made as compensation for loss of employment, up to RM10,000 for each complete year of service with the same employer or with different employers under the same effective control.

* These exemptions are not available for payments made by a controlled company to its directors, not being service directors.

DEDUCTIBLE EXPENSES ACCA F6. T5.

ADJUSTED INCOME

Adjusted income is defined in s.33(1) ITA’67 as gross income less all outgoings and expenses wholly and exclusively incurred in the production of gross income.

The word wholly means simply the whole amount of the money involved.

The word exclusively refers to the motive or purpose behind incurring the expense, which must be of direct benefit for the business. An expense serving a dual purpose can be deducted in full if the private/domestic purpose is incidental to the business/employment purpose, otherwise only an apportionment would be deductible.

The word incurred refers to the point in time at which a legal liability to pay has arisen, i.e. the date of invoices received, or when an outgoing or expense is definitely committed.

The phrase in the production of gross income is interpreted to allow the deduction of outgoings and expenses incurred for the purpose of earning income but which may not yet have caused any income to be earned. However, it does not allow pre-commencement expenditure because these are outgoings and expenses incurred in order to earn income. However, the following exceptions to this rule are provided for:

- Incorporation expenses are deductible for companies with authorised share capital not more than RM2.5m.

- Pre-commencement staff recruitment costs are deductible.Similarly, retrenchment fees paid upon liquidation are not incurred in the production of gross income and are not deductible.

Sections 33 and 34 ITA’67 seek to provide guidance on what is deductible by providing that:- Interest payable on money borrowed and used in the production of income is deductible. Any

interest paid on non-business loans is disallowed (on a pro-rata basis to the amounts of the loans). Rental expense on land and buildings is deductible. Repairs to or replacements of subsidiary parts of items of capital expenditure are deductible, but

improvements to items of capital expenditure are disallowed. Specific provisions are deductible. Employer’s contributions to approved pension schemes are deductible up to a limit of 19% of each

employee’s remuneration (with remuneration being defined to include wages, allowances, commissions and bonus only).

S.34(6) provides for various special deductions, which are exceptions to the rule that deductible expenses be revenue in nature and wholly and exclusively incurred in the production of income, as follows:-

payroll tax for employees, turnover tax paid, mining expenditure, replanting expenditure, expenditure incurred on the provision of equipment, or on the alteration/renovation of premises for

the benefit of disabled employees, translation into or publication in Bahasa Melayu of books approved by the Dewan Bahasa dan

Pustaka, contributions to public libraries or libraries of schools, colleges or universities – restricted to

RM100,000, contributions to approved charities or community projects pertaining to education, health, housing,

infrastructure, information and communication technology approved by the Ministry, expenditure for the provision or maintenance of child care centres, expenditure for establishing and managing musical or cultural groups, sponsoring local or foreign arts, cultural or heritage activities approved by the Ministry of Culture,

Arts and Heritage – restricted to RM500,000, but only RM200,000 for sponsorship of foreign affairs,

ACCA F6. T5. DEDUCTIBLE EXPENSES

scholarships provided by companies for full-time students taking any diploma, degree or equivalent at a registered educational institution, so long as the student has no means of his own and the total monthly salary of his parents does not exceed RM5,000.

expenses incurred by companies in obtaining accreditation for a laboratory or as a certification body, as certified by the Department of Standards, Malaysia,

practical training expenses for resident non-employees, expenses incurred by companies in participating in international standardisation activities approved

by the Department of Standards, Malaysia. The cost of a personal computer given to employees. The cost of a broadband subscription provided to employees, registered in the name of the

employer. The cost of a gift to staff upon marriage.

Certain revenue expenses are eligible for double deduction, such as the following:- promotion of export, approved training for the purposes of upgrading and developing the technical skills of employees, research and development, cash contributions to approved research institutes, advertising expenses on Malaysian brand names, freight charges incurred by manufacturers to ship goods from Sabah and Sarawak via ports in

Peninsular Malaysia, insurance premiums paid for import/export of cargo insured with local insurance companies, employment of handicapped staff, expenses incurred by companies in obtaining certification for recognised quality schemes and

standards, and halal certification.

Certain expenses are given a special deduction, such as the following: The cost of developing a website that is electronic commerce enabled is deductible by way of a

20% deduction in the year incurred and in the following four years. The cost of acquiring patents, industrial designs and trademarks for use in a manufacturing process

is deductible for a manufacturing company that is at least 70% Malaysian owned, by way of a 20% deduction in the year incurred and in the following four years.

The replacement cost of short-life assets is given a 100% deduction.

s.39(1) ITA’67 provides further clarification on what kind of outgoings and expenses are deductible by providing that certain expenses are disallowed, as follows:-

domestic or private expenses, disbursement of expenses that are of dual purpose, capital withdrawn or any sum employed or intended to be employed as capital, contributions to unapproved pension schemes, contributions to approved pension schemes exceeding 19% of employee’s remuneration, qualifying mining, agriculture, forest, prospecting, and farm expenditure, interest and royalty expenses where applicable withholding tax has not been deducted and paid, payment for the use of licences or permits to extract timber from a forest in Malaysia other than to

Government or statutory bodies, contract payments to non-residents where applicable withholding tax has not been deducted and

paid, technical/consultancy and installation fees paid to non-residents where withholding tax has not

been deducted and paid, lease rental for motor vehicles in excess of RM100,000 per vehicle (limited to RM50,000 per

vehicle where the car costs more than RM150,000), computed on an aggregate basis, i.e. total rental to date,

a sum equal to 50% of any entertainment expenses – but staff entertainment is allowable, as is entertainment related wholly to sales, but note that entertainment allowances paid to staff are only 50% deductible.

leave passage for employees within and outside Malaysia, except leave passage to facilitate a yearly event within Malaysia which involves the employer, the employee and the employee’s immediate family.

DEDUCTIBLE EXPENSES ACCA F6. T5.

Incidental expenses – the treatment of any incidental expenses follows that of the underlying item.

Expenses allowed by concession include statutory audit fees (but not fees incurred in submitting a tax return or any returns required under company law).

If the adjusted income is negative, i.e. there is an adjusted loss, then adjusted income is deemed to be zero. Adjusted losses from business sources can be set off elsewhere and/or carried forward for future set-off. Adjusted losses from non-business sources are permanently lost.

ACCA F6. T5. DEDUCTIBLE EXPENSES

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CAPITAL ALLOWANCES ACCA F6. T6.

STATUTORY INCOME

Statutory income is adjusted income less capital allowances in respect of qualifying plant and machinery expenditure, qualifying buildings expenditure, qualifying agricultural expenditure and qualifying foreest expenditure.

Unabsorbed capital allowances may be carried forward for set-off against adjusted income from the same business.

CAPITAL ALLOWANCES

In determining chargeable income, expenditure on items of a capital nature – capital expenditure – is disallowed. Likewise, the allocation of the cost of capital items – depreciation – is disallowed as a deductible expense. Instead, the ITA’67 provides that capital allowances may be deducted against adjusted income in determining statutory income.

Deductions in connection with capital expenditure are known generally as capital allowances, and are effectively the tax man’s version of depreciation that is given a deduction in calculating chargeable income. In order for capital allowances to be claimed, Sch.3 provides that the conditions to be met are that:

- the person was carrying on a business during the basis period,- the person incurred qualifying expenditure, and- the person used the assets in the business.

Capital allowances are given only for certain types of capital expenditure, specifically plant and machinery, industrial buildings, agricultural expenditure and forest expenditure.

Capital allowances for Qualifying Plant Expenditure

Definitions

Qualifying plant expenditure (“QPE”) is defined in Sch.3 as “capital expenditure incurred on the provision of machinery or plant used for the purposes of a business, including:(a) Expenditure incurred on building alterations necessary for the installation of plant and

machinery, and any other incidental installation expenses.(b) Expenditure incurred on preparing, cutting, tunnelling or levelling land in order to prepare a

site for the installation of plant and machinery Note 1.(c) Expenditure incurred on fish ponds, animal pens, chicken houses, cages, buildings Note 2 and

other structural improvements on land used for the purposes of poultry farms, animal farms, inland fishing or other agricultural or pastoral pursuits.

Note 1. If the expenditure on the site preparation costs exceeds 10% of the total expenditure on the asset and the site preparation costs, then the site preparation costs are disallowed. However, if the expenditure on the site preparation costs exceeds 75% of the total expenditure on the asset and the site preparation costs, then the total expenditure falls to be treated as qualifying building expenditure (see later).

Note 2. Expenditure on buildings used for accommodation purposes is disallowed unless the building is used solely for the accommodation that is provided as a necessary part of the duties of staff.

Qualifying plant expenditure includes expenditure on machinery or plant used for approved research purposes.

ACCA F6. T6. CAPITAL ALLOWANCES

Sch.3 does not provide further guidance on the definition of plant and machinery but the usual test is whether the asset performs an active or passive function in the carrying on of business, i.e. is the asset a piece of apparatus with which the business is carried on or rather a setting in which the business is carried on. The former is plant and machinery and the latter is buildings. Case law has determined that ordinary fittings to a building, e.g. ceiling lights and wall panelling, form part of the building and are disallowed. Only fittings that serve a specific purpose in the business are allowed.

Capital Allowance

Capital allowances for “QPE” are given as two distinct types and at the following rates:-

Initial allowance – given in the year of acquisition so long as the person owns† the asset at the end of the basis period for a YA*, at a rate of 20%‡.

* assets bought and sold within a year are still given the initial allowance.

Annual allowance – given in the year of acquisition and subsequent years so long as the person owns†

the asset at the end of the basis period for a YA, at the following rates:

Office equipment, furniture and fittings 10% p.a.Plant and machinery 14% p.a.Heavy machinery and motor vehicles 20% p.a. ‡

† Beneficial ownership will suffice, legal ownership is not necessary.‡ But imported heavy machinery for use in the building and construction, plantation,

mining and timber industries is given allowances (both initial and annual) at the rate of 10%.

Accelerated allowances are available for certain specified QPE, e.g. information and communication technology equipment, including software – 80% annual allowance, and all plant and machinery purchased by companies with paid-up capital not more than RM2.5m – 80% annual allowance. Knowledge of other accelerated allowances is beyond the scope of the syllabus.

Additional points

The initial allowance and first year’s annual allowance are given in full regardless of the point during the year at which the expenditure was incurred.

Expenditure incurred prior to the commencement of business is eligible for allowances from the first year of use in the business.

Total capital allowances claimed cannot exceed the original QPE. Assets in temporary disuse, even for a whole year, are deemed to be in use so long as the asset

stands ready to be brought back into use, and the period of disuse is temporary. If a person does not wish to claim capital allowances (for some tax planning purpose) then the

IR will apply a notional allowance (which serves to reduce the residual expenditure and to restrict the total allowances claimed).

Certain second-hand assets do not qualify for an initial allowance, only the annual allowance. These are:-

- Plant and machinery brought into business use after use for a non-business purpose, where the amount of the QPE is the market value upon transfer into business use.

- Plant and machinery brought into business use after use for a business purpose outside Malaysia, where the amount of the QPE is the lower of the market value or net book value upon transfer into business use in Malaysia.


Short-life assets

Expenditure on items of plant that have a normal working life of less than two years is disallowed for capital allowance purposes. Subsequent expenditure on the replacement of short-life plant is allowed as a deductible expense in the year the items are replaced.

Motor Vehicles

Qualifying plant expenditure on commercial motor vehicles, such as a taxi, bus, lorry or van, carries no restrictions on the amount of the expenditure. QPE on other motor vehicles is subject to a limit by reference to the total cost of the car, as follows:

- New cars costing not more than RM150,000 – the lower of the cost and RM100,000.- New cars costing more than RM150,000 – RM50,000.- Second-hand cars are subject to a RM50,000 limit on QPE.

Assets acquired on Hire Purchase

Only the capital element of the instalments payable under a hire purchase agreement is eligible for allowances, as usual for the asset concerned.

Assets sold within two years

If an asset is sold within two years of purchase then the IR will claw back all allowances taken to date unless the asset was disposed of for commercial reasons or by way of fire or theft.

Small value items

Small value items are given a 100% capital allowance in the year of acquisition so long as the cost of each item is not more that RM1,000, subject to an overall limit on the allowance for small value items of RM10,000 p.a.*

* But this limit does not apply to companies with paid-up capital of not more than RM2.5m.

Treatment on Disposal

No annual allowance is given in the year of disposal and instead a balancing allowance or charge is applied by reference to the disposal proceeds and the tax-written-down value of the asset, the latter being known as the “residual expenditure”:-

- if the disposal proceeds exceed the residual expenditure, the excess is a balancing charge,- if the disposal proceeds are less than the residual expenditure, the shortfall is a balancing allowance.

i.e. Balancing allowance / (charge) = Residual expenditure – Disposal proceeds

Additional points

Any balancing charge cannot exceed the actual allowances claimed to date. (Notional allowances are ignored.)

For motor cars subject to a restriction on QPE, the sale proceeds are pro-rated in the same fraction as the restriction bears to the initial cost of the car.


In cases of insurance recoveries, the disposal proceeds are the amount recovered, subject to the above restriction.

If, pursuant to some law or agreement, an item of QPE is required to be dismantled and removed after some period and the site on which the asset stood is required to be restored then the expenditure incurred can be added to the residual expenditure, before comparison with the disposal proceeds.

Disposals subject to Control

A disposal of an item of qualifying expenditure establishes a new level of expenditure for the buyer and if this is higher than the residual expenditure for the seller, the seller is subject to a balancing charge. The increased capital allowances given to the buyer are clawed back via the balancing charge on the seller. However, if the item is sold at a price that is higher than its original cost to the seller, the balancing charge on the seller is restricted to the allowances already given. Whilst this scenario is unlikely in arm’s length transactions, disposals between connected parties at non-market prices could result in excessive allowances being claimed.

The controlled transfer provisions provide that disposals subject to the provisions are transparent for capital allowance purposes:-

The disposal proceeds are deemed to be the residual expenditure of the disposer and there is no balancing charge or allowance.

No initial allowanceNote 1. is clamed by the acquirer, only annual allowances by reference to the qualifying expenditure of the disposer.

The total allowances claimed by the acquirer cannot exceed the residual expenditure inherited from the disposer.

All allowances claimed by the disposer are deemed to have been claimed by the acquirer.

The conditions that trigger the controlled transfer provisions are that: A person disposes of an asset that is eligible for allowances under Sch.3. At the time of disposal, one of the following conditions is met:-

- the disposer or the acquirer controls the other,- both the disposer and the acquirer are under common control,- the disposal is as a result of a scheme of reconstruction or amalgamation of companies,- the disposal is by way of a settlement or gift or by inheritance.

Control means the power to secure that the affairs of the controlled party are conducted in accordance with the wishes of the controlling party. For a partnership, a right to a share of more than one half of the assets or divisible profits constitutes control.

The date on which the disposal is deemed to have taken place is the first day in the disposer’s basis period for the YA that co-incides with the YA in which the acquirer can first claim allowances. [This serves to prevent the double-taking of allowances in the disposal year.]

If the actual disposal date is earlier than the deemed disposal date, i.e. in the period before the disposer’s final period, then the disposer is deemed still to own the asset at the end of that preceding year, so he can claim the allowance for that year.

Note 1. But any expenditure incurred by the disposer on or after the first day of the disposer’s final period is deemed incurred by the acquirer and the latter can claim an initial allowance.


Capital allowances for Qualifying Building Expenditure

Definitions

Qualifying building expenditure (“QBE”) is defined in Sch.3 as “capital expenditure incurred on the construction or purchase of a building which is used at any time after its construction or purchase as an industrial building.

An industrial building is defined to include:- a factory, a dock, wharf, jetty or other similar building, a warehouse for the hire of storage space to the public, buildings used in the utilities or telecommunications industries, buildings used in the working of a farm or mine, and

A factory is defined to include:- a mill, workshop* or other building for the housing of plant or machinery for the manufacture of

any product or the subjection of goods or materials to any process or the generating of power for the manufacturing process.

A building used for the storage of any raw material, fuel or stores necessary for the manufacturing process or for the storage of work-in-progress or finished goods, so long as the building is within the same curtilage [meaning: on the same site] as the building used for manufacture.

* This does not include a workshop used for the repair or servicing of goods, if the repair or servicing is carried out in conjunction with or incidentally to the business of selling those goods, e.g. a car repair shop.

Incidental costs treated as qualifying building expenditure include:- architect’s fees, the cost of preparing plans and planning applications, the cost of clearing the site the cost of construction, including labour, materials, haulage, management supervision and other

overheads, incidental site expenditure necessary to the building, the cost of installing fittings, and legal charges, stamp duty etc. relating to the building.

Any costs associated with the land do not qualify as QBE.

For purchased buildings the QBE is the purchase price plus any expenditure required to bring the building into industrial use, e.g. renovation costs.

Qualifying renovation or refurbishment expenditure – such expenditure is capital in nature and is not a deductible expense. However, such expenditure on buildings that are industrial buildings does qualify for capital allowances. Furthermore, renovation or refurbishment expenditure incurred from 10 March 2009 until 31 December 2010 on buildings that are not industrial buildings does qualify for capital allowances of 50% p.a., subject to an overall limit of RM100,000.

Other buildings are treated as industrial buildings, including:-

Licensed private hospitals, maternity homes and nursing homes. Buildings used for approved research or training. Warehouses used for the storage of goods for export or for the storage of imported goods which

are to be processed attract a 10% annual allowance, but no initial allowance. Hotels registered with the Ministry of Culture, Arts and Tourism. Airports Approved motor racing circuits.


Additional buildings constructed and used for the accommodation of workers attract a 40% initial allowance.

Buildings used for the accommodation of workers in the manufacturing, hotel or tourism business attract a 10% annual allowance, but no initial allowance.

Buildings for child-care facilities attract a 10% annual allowance, but no initial allowance. Approved schools or educational institutions attract a 10% annual allowance, but no initial

allowance. Additional buildings used for a staff canteen and other staff welfare. Public toll roads and ancillary structures. Plant or machinery, where the cost incurred in preparing, cutting, tunnelling of levelling land in

order to prepare a site for the installation of the plant or machinery exceeds 75% of the total expenditure on the asset and the site preparation costs.

Buildings that do not qualify as industrial buildings are those that serve no manufacturing purpose, e.g. retail premises, showrooms, hotels and offices.

Capital Allowances

Capital allowances for QBE are given as two distinct types and at the following rates:-

Initial allowance – given in the year of acquisition so long as the building was in use or about to be used as an industrial building and the person owns† the asset at the end of the basis period for a YA*, at a rate of 10%.

* assets bought and sold within a year are still given the initial allowance.

Annual allowance – given in the year of acquisition and subsequent years so long as the person owns†

the asset at the end of the basis period for a YA, at a rate of 3% p.a.:

† Beneficial ownership will suffice, legal ownership is not necessary.

Additional points

The initial allowance and first year’s annual allowance are given in full regardless of the point during the year at which the expenditure was incurred.

Total capital allowances claimed cannot exceed the original QBE. A building that is partially used as an industrial building will qualify in full so long as the non-

industrial use is less than 10% of the whole building. Once the non-industrial use is 10% or more, the QBE is that portion of the total expenditure relating to industrial use.

Assets in temporary disuse, even for a whole year, are deemed to be in use so long as the asset stands ready to be brought back into use, and the period of disuse is temporary.

If a person does not wish to claim capital allowances (for some tax planning purpose) then the IR will apply a notional allowance (which serves to reduce the residual expenditure and to restrict the total allowances claimed).

Disposals – the usual disposal rules apply.


Capital allowances for Qualifying Agriculture Expenditure

Certain capital expenditure incurred for agricultural purposes qualifies for capital allowances.

Definitions

Qualifying agricultural expenditure (“QAE”) is defined in Sch.3 as “capital expenditure incurred by a person on:(a) the clearing and preparation of land for the purposes of agriculture;(b) the planting (but not replanting*) of crops on land cleared for planting;(c) the construction on a farm of a road or bridge;(d) the construction on a farm of a building used for the purposes of a business of that person

which consists wholly or partly of the working of the farm, or the construction on that farm of a building which is provided by that person for the welfare of persons, or as living accommodation for a person employed or in connection with the working of that farm and which, if the farm creases to be worked, is likely to be of little or no value to any person except in connection with the working of another farm”.

* Replanting expenditure is deductible against gross income under S.34(6)(d).

Agriculture is defined in s.18 ITA’67 as “any form of cultivation of crops, animal farming, aquaculture, inland fishing and any other agricultural or pastoral pursuit”, and for capital allowances, Sch.3 adds that “agriculture includes the reafforestation of timber”.

Agricultural allowance

Agricultural allowances for QAE are given as annual allowances only (there is no initial allowance) so long as the person owns the asset at the end* of the basis period and the asset is in use for the purpose of the business.

* An asset that is disposed of in any year is still given a pro-rated allowance (by days) so long as the asset was in use for the purpose of the business within the month before the disposal date.

The rates of annual allowance are as follows:

Land clearing and preparation 50%Planting 50%Road and bridge construction 50%Buildings for the welfare or accommodation of workers 20%Farm building 10%

Additional points

The first year’s annual allowance is given in full regardless of the point during the year at which the expenditure was incurred.

Total capital allowances claimed cannot exceed the original QAE. Buildings used for accommodation of workers can be the subject of an election to be treated as

an industrial building, eligible for the 40% initial allowance and 3% annual allowance.

Disposals


Where an item of QAE is disposed, the buyer assumes the tax written down values of the asset; the purchase consideration is ignored.

Where an item of QAE is disposed of less than six years from the date the expenditure was incurred, all previous agricultural allowances are reversed as an “agricultural charge”*, assessed in the year of disposal. An election can be made within three months of the beginning of the relevant YA † to spread back the charge to the years in which the allowances were originally given, spread evenly.

* A similar charge is made to reverse all previous allowances if a grant in respect of the QAE is subsequently awarded by the Government, State Government or statutory authority.

† A disposal after the cessation of business is deemed to have taken place in the final basis period and the time limit for any election is extended to the next YA, following that in which the business ceased.

Capital allowances for Qualifying Forest Expenditure

This is excluded from the ACCA F6 syllabus.

COMPUTATION OF AGGREGATE, TOTAL & CHARGEABLE INCOME ACCA F6. T7.

AGGREGATE INCOME

Aggregate income is the sum of all business income less adjusted losses brought forward, plus all non-business income, plus recoveries of aborted prospecting expenditure.

TOTAL INCOME

Total income is aggregate income less: - adjusted losses for the basis period (- “current year losses”),- prospecting expenditure for sites declared aborted,- qualifying* pre-operational business expenditure,- approved donations†,- group loss relief‡.

* these are feasibility studies and market research (plus incidental expenses) in certain overseas countries.

† Approved donations are provided for in s.44(6) ITA’67 and are those in cash only (unless otherwise specified) and include:

- Donations to governmental bodies, approved institutions or approved organisations – donations to approved institutions/organisations are limited to 10%* of aggregate income.

- Donations of artefacts, manuscripts or paintings to the Government.- Donations to public libraries and libraries of schools and institutions of higher education –

limited to RM20,000 [this deduction does not apply in addition to that allowed under s.34(6)].- Donations in cash or in kind by individuals for public facilities for disabled persons.- Donations in cash or in kind by individuals for approved healthcare facilities, limited to

RM20,000.- Donations of paintings to the National Art Gallery or the State Art Gallery.- Zakat perniagaan paid by non-individuals – limited to 2.5% of aggregate income.- Donations in cash or in kind to approved sports activities, limited to 10%* of aggregate income.- Donations in cash or in kind to projects of national interest approved by the Minister, limited to

10%* of aggregate income.

* - 10% is the limit that applies to companies. A limit of 7% applies to all other persons.

‡ Related companies may surrender up to 70% of their adjusted losses so long as:- the companies are tax resident and incorporated in Malaysia,- the companies have paid up share capital of more that RM2.5m at the beginning of the YA,- the companies are related (70% ownership) throughout the YA and the twelve months prior to

that YA,- the companies have a common twelve month accounting period,- the companies are subject to income tax at the usual rate,- the claimant company has defined aggregate income for the that YA,- the companies make an irrevocable election to surrender/claim losses on tax return Form C.

ACCA F6. T7. COMPUTATION OF AGGREGATE, TOTAL & CHARGEABLE INCOME

CHARGEABLE INCOME

Chargeable income is total income less any personal reliefs available for individuals. For companies, chargeable income is the same as total income. The reliefs available are deductible up to the amount of total income (chargeable income cannot be less than zero). Reliefs not utilised cannot be carried forward.

The reliefs available to individuals are provided for in s.46(1) ITA’67. The main reliefs are as follows:-

RM

Self or Hindu joint family 8,000Disabled self – additional 6,000Medical expenses for own parents up to 5,000Medical expenses for self, spouse, or child with serious disease, including up to RM500 for medical examination up to 5,000Basic supporting equipment for disabled self, spouse, child or both sets of parents up to 5,000Fees for skills or qualifications for oneself provided by Malaysian institutions up to 5,000Expenses on books for own use, spouse or child, in order to enhance knowledge up to 1,000Spouse relief (joint assessment), so long husband and wife are living together* 3,000Disabled spouse – additional 3,500Child (unmarried and under 18 years of age)†‡ 1,000 eachDisabled child (– no age limit) †‡ 5,000 eachChild’s higher education (incl. service under articles or indentures) ‡ 4,000 eachLife insurance premiums for self and spouse, and contributions to approved provident funds, e.g. EPF up to 6,000Medical or education insurance premiums for self, spouse or child up to 3,000SSPN account (National Education Savings Scheme) up to 3,000Purchase of a personal computer (once in every three years) up to 3,000Sports equipment up to 300Broadband subscription fees up to 500

Rebates given against tax due.

Tax rebate for chargeable income not exceeding RM35,000 400Zakat, fitrah or any other Islamic religious dues

* Alimony payments are allowed relief, but the total deduction for spouse relief and alimony payments must not exceed RM3,000.

† In the case of divorced parents both maintaining a child, the child relief is split equally between them.

‡ But the relief is lost if the child’s income exceeds the amount of the relief.

COMPUTATION OF AGGREGATE, TOTAL & CHARGEABLE INCOME ACCA F6. T7.

Joint Assessment

The income of a husband and wife can be jointly assessed to tax as the income of only one spouse, but only at the total income level. The personal reliefs of one spouse are lost and instead the spouse relief of RM3,000 is available against the joint income. In addition, if joint chargeable income is less than RM35,000, then two rebates of RM400 are available.

In order for husband and wife to have their income jointly assessed, either spouse must elect for joint assessment for any particular YA. The conditions for joint assessment are that:

- the husband and wife must be living together throughout the year,- the person electing is resident or is a citizen, and- the election is made in writing before 1st April following the YA.

RATES OF INCOME TAX PAYABLE

For resident individuals, trade associations and clubs, the rate of income tax is on a sliding scale, progressively increasing as income increases. The income bands and tax rates are as follows:

Chargeable income Tax rate Tax payable Cum. Tax payable

≤ 2,500 0 0 0> 2,500 ≤ 5,000 1 25 25> 5,000 ≤ 20,000 3 450 475

> 20,000 ≤ 35,000 7 1,050 1,525> 35,000 ≤ 50,000 12 1,800 3,325> 50,000 ≤ 70,000 19 3,800 7,125> 70,000 ≤ 100,000 24 7,200 14,325

> 100,000 26

For non-resident individuals the rate of tax is a flat 26% regardless of the level of chargeable income. Non-resident individuals are subject to the withholding tax rates on sources of interest income (15%), rental income (10%), royalty income (10%) and technical/management fees (10%).

Companies with paid up capital less than RM2.5m at the beginning of the YA are subject to income tax at 20% on chargeable income not exceeding RM500,000, and 26% on all chargeable income in excess of RM500,000.

Companies with paid up capital of RM2.5m or more are subject to income tax at a flat rate of 26% on all chargeable income.

ACCA F6. T7. COMPUTATION OF AGGREGATE, TOTAL & CHARGEABLE INCOME

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DIVIDEND, INTEREST, RENTAL, ROYALTY & OTHER INCOME ACCA F6. T8.

DIVIDEND INCOME

The word “dividend” is not defined in the Act but company law has determined that a dividend is any distribution of profit, whether in money or in specie [meaning: in kind]. Notwithstanding that a bonus issue represents an allocation of profits towards share capital, a bonus issue does not constitute income in the hands of shareholders. This is because what would otherwise have bee income went to increase the capital employed by the company.

Determination of Dividend Income

S.14 ITA’67 deals with the derivation of dividend income. S.14(1) provides that dividends paid, credited or distributed by a resident company constitute dividend income deemed derived from Malaysia.

Sections 14(2) and 14(3) provide for situations where a company’s management and control begin or cease to be exercised in Malaysia:-

- where a company’s management and control is first exercised in Malaysia during a YA, only dividends paid, credited or distributed from that date are deemed derived from Malaysia.

- where a company’s management and control ceases to be exercised in Malaysia during a YA, dividends paid, credited or distributed after that date are not deemed derived from Malaysia so long as the company does not become resident again in the next YA.

S.26(1) provides that dividend income is assessed to tax on the earlier of the dividend being paid, or distributed in the case of dividends in specie, and being provided for in the company’s books of account. The date of payment/distribution is the date on which the dividend is posted/delivered by the company.

Deduction of tax

S.108(1) provides that companies must deduct tax from dividends deemed derived from Malaysia, at the corporate tax rate applicable to the company for that YA. The amount received by the shareholder is the net dividend, but the dividend income of the shareholder is the gross dividend.

S.110(1) provides that the tax deducted by the company is available for set off against the tax charged on the shareholder’s chargeable income. This system of crediting the shareholder with the tax paid by the company is called the imputation system, and serves to avoid the double taxation of dividend income. S.110 further provides that the tax deducted by the company on dividends paid is available for offset against the income tax payable by the company on its chargeable income (see later).

S.108(2) provides that if the company for some reason does not deduct tax from dividends then the amount received by the shareholder is still a net dividend. The gross dividend income of the shareholder is the amount received as grossed up for the tax that would have been deducted, and as far as the shareholder is concerned, the tax that would have been deducted is deemed to have been deducted.

Single-tier dividends

From 2008 companies may elect to pay dividends under a “single-tier” system, which treats the tax paid by companies as a final tax and the dividend income for shareholders is therefore exempt from tax. The company is not required to deduct any tax from the payment of dividends. The single-tier system will become mandatory for all companies from 2014.

Deductible expenses

Any expenses incurred in the production of dividend income are allowable, e.g. the interest expense on a loan taken out to finance the acquisition of the shares producing the income.

ACCA F6. T8. DIVIDEND, INTEREST, RENTAL, ROYALTY & OTHER INCOME

Exempt Dividend Income

Certain sources of dividend income are exempt from tax, these include:-- dividends paid, credited or distributed to a member of a co-operative society,- dividends paid out of the exempt income of unit trusts, property trusts and venture capital companies,- dividends paid out of an exempt income account arising from tax incentives for resident companies

under various statutes.- dividends paid of a tax exempt account arising from foreign income received in Malaysia by a resident

company or unit trust.

The tax imputation system – the s.108 account

The income tax paid by a company is credited to a “s.108” account, which is merely a memorandum account, and is available for offset against the tax payable on dividends to shareholders. The tax credit on any dividends received by the company is also credited to the s.108 account, up to the amount of tax payable by the company.

Any exempt dividend income received by a company does not carry a tax credit and companies may pay tax exempt dividends to shareholders from this tax exempt account (that also do not carry a tax credit). Companies can therefore pay dividends at two levels, or tiers, one that is tax exempt and one that is taxable, but carrying a tax credit.

In the event that the balance on the s.108 account is not enough to cover the tax payable on dividends to shareholders, the IRB will raise a s.108(6) charge on the company for the difference.

With the introduction of the self assessment system for companies from YA01, the existing s.108 account was frozen [no more tax credited] with effect from 31/12/00 (subject to one last payment for YA00 for companies with a calendar year-end, in January 2001). From YA01 a “new” s.108 account was maintained in conjunction with the “old” account.

With the introduction of the single tier dividend system from YA08, the existing “new” s.108 account was frozen [no more tax credited] with effect from 31/12/07 (subject to one last payment for YA07 for companies with a calendar year-end, in January 2001). Any credit on the s.108 accounts is now left to be run down by using it to provide tax credits for dividends, but only until the credit runs out or 31/12/13, whichever is the earlier. From that date, all companies will pay dividends under the single tier dividend system. Companies may elect (irrevocably), beforehand, to move on the single tier dividend system.

The single tier dividend system is therefore a system that de-couples the tax paid by the company and the tax credit imputed to shareholders. Dividends paid under the single tier system are tax-exempt income in the hands of shareholders and the tax paid by the company is a final tax. Thus, the need to keep a s.108 account and an exempt dividend account will no longer arise.


INTEREST INCOME

The word “interest” is not defined in ITA’67 but case law has determined that it is any sum calculated by reference to time for the use of money.

In the case of a loan repayable at a premium to face value, the treatment of the premium as interest income or capital in nature would largely be determined by whether or not a commercial rate of interest had been charged on the loan. In the case of loans issued at a discount to face value, the treatment of the discount is along similar lines. A less than commercial rate of interest would render the premium or discount to be treated as interest income.

Interest income is treated as investment interest income under s.4(c) ITA’67, except for the following sources which are treated as business interest income:

interest received from trading debts, interest received in the ordinary course of business, and interest earned by certain businesses, e.g. banks, insurers, etc.

Determination of Interest Income

Interest income is only subject to tax under ITA’67 if it derives from or is deemed to derive from Malaysia. S.15 ITA’67 provides that interest income shall be deemed to be derived from Malaysia if:-

a) responsibility for payment of the interest lies with the Government or a State Government, orb) responsibility for payment of the interest lies with a resident person and the money borrowed is:

- employed in, or laid out on assets used in or held for, the production of gross income derived from Malaysia, or

- secured on any property situated in Malaysia, orc) the interest is charged as an expense against any income accruing in or derived from Malaysia.

S.27(2) ITA’67 provides that interest income is assessed to tax at the earlier of the income becoming receivable (- meaning: receipt can be obtained on demand) and the receipt of the income.

S.27(2) ITA’67 provides that interest relating to two or more YAs, but not future YAs, shall be apportioned according to the interest rate(s) at the time.

S.27(2) ITA’67 provides that interest received in respect of a period that extends more than five years before the discovery of the income shall be apportioned over that part of the period that does not extend more than five years ago.

S.27(2) ITA’67 provides that interest received in respect of a period that ended more than five years before discovery of the income shall be treated wholly as income in the YA five years before the YA of its discovery.

Exempt Interest Income

Certain sources of interest income are exempt from tax; these are:-

Interest paid in respect of any savings certificates issued by the Government.

Interest paid on bonds and securities issued by Pengurusan Danaharta Nasional Bhd.

Interest paid to individuals on Merdeka Bonds issued by Bank Negara Malaysia.

Interest paid to individuals, unit trusts and listed closed-end funds in respect of:- Securities or bonds issued or guaranteed by the Government,- Non-convertible debentures approved by the Securities Commission or listed on MESDAQ, and- Bon Simpanan Malaysia issued by Bank Negara Malaysia.


Interest accruing to resident individuals on balances with:- Banks or finance companies licensed or deemed licensed under the Banking and Financial

Institutions Act 1989- Banks licensed under the Islamic Banking Act 1983- Development financial institutions prescribed under the Development Financial Institutions Act

2002.- The Lembaga dan Tabung Haji established unde the Tabung Haji Act 1995.- The Malaysia Building Society Bhd incorporated under the Companies Act 1965.- The Borneo Housing Finance Bhd incorporated under the Companies Act 1965.

Interest income credited to non-residents by banks, finance or other institutions approved by the Minister, provided that person does not have a place of business in Malaysia.

Interest income paid/credited to non-resident companies on Government securities or non-convertible Islamic securities approved by the Securities Commission.


RENTAL INCOME

Rental income is defined in s.2 ITA’67 to include “any sum paid for the use or occupation of any premises or part thereof or for the hiring of any thing”.

Rental income can fall to be treated as business income under s.4(1) ITA’67 or investment income under s.4(d). The main differences between the treatment of rental income as business income and investment income are that:-

i. capital allowances are only available to persons carrying on a business*, andii. only rental losses from a business can be set off against profits from other business sources.

* However, industrial buildings allowance can be claimed against investment rental income derived from industrial buildings.

The IRB has issued a Public Ruling – PR1/2004 – that provides guidance regarding the treatment of rental income.

For companies, rental income is business income if the company owns a minimum number of properties, as follows:

PropertyMin. no. to be treated as business income

Factory 1Warehouse 1Office or shopping complex 1Standard lot in a complex 4Shophouse 4 floorsResidential 4Any mix of lots, shophouses & residential 4

For persons (including companies), rental income is business income if the person actively engages in the provision of ancillary or support services/facilities for the properties, such as:-

- Security guards.- Air-conditioning systems.- Hot water, lifts, or escalators.- Recreational facilities.- Cleaning or house-keeping.- Maintenance of common areas.

Notwithstanding the separate categories of property mentioned in PR1/2004, all business rental income and all investment rental income are both treated as single sources. [PR1/2004 guidance does actually state that investment rental income should be assessed as three separate sources – residential, commercial and vacant land – but case law has determined that the ITA’67 does not provide for this.]

Determination of Rental Income

In general, rent from any property located in Malaysia is income derived from Malaysia. For moveable property, if the owner carries on a business in Malaysia then the rental income, wherever receivable, is deemed derived from Malaysia; otherwise rental income is only derived from Malaysia if the property is used in Malaysia.

Investment rental income is assessed to tax at the earlier of the income becoming receivable (- meaning: receipt can be obtained on demand) and the receipt of the income. Business rental income is assessed on the usual accruals basis.


Generally, the determination of gross rental income and the allowable deductions follows the usual rules regarding income being of a revenue nature and deductible expenses being of a revenue nature incurred wholly and exclusively in the production of the income.

Notes: Costs involved in obtaining the first tenant are not deductible since they are incurred in order to produce income, not in the production of income.

Income and expenses are first assessed when the property is made available for occupation by tenants.

Temporary void periods (of non-occupation) do not prevent the deduction of expenses incurred during those periods.

Expenses relating to periods where rent was collected in advance must be related to the YA in which the advance rental was assessed. (This may cause a prior YA to be reassessed.)


ROYALTY INCOME

A royalty can be summarised as any sum of money payable for the use of, or the right to use, any intellectual property. A royalty is defined in S.2.ITA’67 to include “any sum payable as consideration for the use of, or the right to use:-

i) copyrights, artistic or scientific works, patents, designs or models, plans, secret processes or formulae, trademarks, or tapes, films or video tapes where such tapes or films have been or are to be used or reproduced in Malaysia, or other like property or rights;

ii) know-how or information concerning technical, industrial, commercial or scientific knowledge, experience or skill”.

Determination of Royalty Income

Royalty income is only subject to tax under ITA’67 if it derives from or is deemed to derive from Malaysia. S.15 ITA’67 provides that royalty income shall be deemed to be derived from Malaysia if:-

a) responsibility for payment of the royalty lies with the Government or a State Government, orb) responsibility for payment of the royalty lies with a resident person, orc) the royalty is charged as an expense against any income accruing in or derived from Malaysia.

Exempt Royalty Income

Certain sources of royalty income are exempt from tax; these are:-

Up to RM10,000 for a resident individual in respect of:- the publication of, use of, or the right to use any artistic work, other than an original painting,- recording discs or tapes.

Up to RM12,000 for a resident individual in respect of the translation of books or literary work at the specific request of any agency of the Ministry of Education or the Attorney General’s Chambers.

Up to RM20,000 for a resident individual in respect of:- the publication of, use of, or right to use any literary work or any original paining,- any musical composition.


OTHER PERIODICAL PAYMENTS

Pension Income

A pension is deferred compensation in respect of employment.

Pension payments are exempted from tax if:- the pensions is derived from Malaysia,- the recipient has reached the age of 55 or the normal retirement age, or has retired due to ill-health,- the pension is paid by an approved fund, and- the pension is payable in respect of employment services rendered in Malaysia.

Annuity Income

An annuity is a definite sum of money payable on a regular basis. However, for the annuity to be taxed as annuity income it must be money that is payable as a result of the surrender of capital and not merely the return of capital.

Annuity income is exempt from tax if it is paid under an annuity contract issued by a Malaysian life insurer.

Alimony Income

Payments made to former spouses under a separation agreement are known as alimony payments and are taxable in the hands of the recipient.

OTHER GAINS OR PROFITS

S.4(f) ITA’67 is a “sweep-up” provision designed to catch casual income received.

INCOME FROM PARTNERSHIPS ACCA F6. T9.

PARTNERSHIPS

A partnership is defined in s.2 ITA’67 as “an association of any kind between parties who have agreed to combine any of their rights, powers, property, labour or skill, for the purpose of carrying on a business and sharing the profits therefrom …”.

The basis period for any YA for a partnership must be a calendar year.

The partnership itself is not a separate entity and tax is levied on the separate partners, as business income. However, in order for income to be treated as business partnership income there has to be an element of risk and reward for each partner and the absence of any master-servant relationship, which would otherwise render that person’s income to be treated as employment partnership income.

A partnership is treated as a sole proprietorship for income tax purposes and the partnership’s income and expenses are determined according to the usual rules. This means that any partnership expenses that are paid to the partners are private expenses and are not allowable as deductions. The partnership’s income net of allowable expenses is called “provisional adjusted income”.

The separate partners will have partnership income according to the stated profit-sharing ratio *, based on divisible income, which is the partnership’s provisional adjusted income less the partnership’s private expenses.

* Any change in the ratio is dealt with by a simple time apportionment of the divisible income.

The adjusted income of each partner is the partner’s share of divisible income plus that partner’s private expenses paid by the partnership. (Divisible income was determined after deducting the partners’ private expenses, and so the expenses are now added back in.)

The statutory business partnership income of each partner is determined by deducting capital allowances in the usual way.

Capital allowances on QPE and QBE by the partnership are available to the separate partners in proportion to their profit sharing ratios.

N.B. CAs are claimed at the end of each year, according to profit shares at that time, and so partners leaving a partnership do not get a CA for that year and while a new partner gets a full year allowance.

The capital allowance on any QPE and QBE incurred by a partner on assets used solely by that partner is available in full to that partner.

Summary – the determination of each partners’ statutory income is therefore as follows:-

Start with accounting profits before taxReverse any non-business entriesReverse any disallowed expenses“Provisional adjusted income”Deduct all items for the partners

“Divisible income”Allocate the income to the partners

Add in all items for each partner“Adjusted income” for each partner

Deduct each partner’s capital allowances“Statutory income” for each partner

e.g. entries of a capital nature, dividends, interest, etc.

- inlcuding all items for the partners

ACCA F6. T9. INCOME FROM PARTNERSHIPS

Changes in the Partnership

From a legal perspective, any change in the partnership constitutes a cessation of the partnership and a commencement of a new partnership. From a taxation perspective, so long as one of the partners in the old partnership is a partner in the new partnership and there is no change of accounting date, then the business of the partnership is treated as unbroken.

WITHHOLDING TAX ACCA F6. T10.

Introduction

Withholding tax is due on certain types of income derived from Malaysia and accruing to non-residents not* having a business presence in Malaysia. The withholding tax is deducted by the person making the payments, on behalf of the IR, so that the IR is ensured of receiving some tax from non-residents before they leave the country.

* But income accruing to non-resident contractors carrying on business in Malaysia is subject to withholding tax.

Sources of Income subject to Withholding Tax

The types of income and the rates of withholding tax are as follows:-

Income Tax rate

S.107A Contract payments (service portion only) to contactor with a business presence in Malaysia

10% + 3%

S.109 Interest 15%‡

S.109 Royalty 10%S.109A Public entertainers 15%S.109B Special classes of income (installation or operational

advice†, technical management/administration advice† or the rental of moveable property)

10%

† The service must be performed in Malaysia.

‡ Double taxation agreements with many countries reduce this rate to nil or 10%.

Notes: In the case of special classes of income, the gross amount of the income becomes a deductible expense for the payer only if the withholding tax and any fine has been paid.

For contractors, the contractor will submit it own tax return and will claim credit for the 10% withholding tax paid. The 3% tax is refunded when the contractor can show that all employees’ are under the schedular tax deduction scheme.

Special classes of income

S.4A ITA’67 provides that non-residents are chargeable to tax on income derived from Malaysia in respect of :(i) amounts paid in consideration of services rendered by the person or his employee in

connection with the use property or rights belonging to, or the installation or operation of any plant, machinery or other apparatus purchased from, such person;

(ii) amounts paid in consideration of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; or

(iii) rent or other payments, not being payments of film rentals, made under any agreement or arrangement for the use of any moveable property.

- but in the case of sub-paras (i) and (ii), the services must be rendered in Malaysia.

S15.A ITA’67 provides that s.4A income is deemed to be derived from Malaysia if:(i) responsibility for payment lies with the Government or a State Government,(ii) responsibility for payment lies with a resident person, or(iii) the payment is charged as an expense in the accounts of a business carried on in Malaysia.

The person paying the income must deduct withholding tax and pay the amount to the Director General of Inland Revenue within one month of paying or crediting the income to the non-resident.

ACCA F6. T10. WITHHOLDING TAX

The word crediting has been held to mean: making available to.

Failure to pay the withholding tax with the one-month period leads to a fine of 10% of the amount outstanding.

If withholding tax has not in fact been deducted then the payment to the non-resident is deemed to have been net of withholding tax, and so the amount of the payment for withholding tax purposes has to be grossed up. Nevertheless, the amount that is deductible in the accounts of the payer is the amount that was paid to the non-resident.

Exemptions

Interest

Interest on loans approved by the Ministry of Finance (loans to the Government, State Government, local authority or statutory body)

Interest paid to non-residents by banks or finance companies licensed under the Banking & Financial Institutions Act 1989 or the Islamic Banking Act 1983.

Interest on securities and bonds paid/credited to individuals, unit trusts, listed closed-end funds in respect of:

- Securities or bonds issued or guaranteed by the Government- Non-covertible debentures approved by the Securities Commission- Bon Simpanan Malaysia issued by Bank Negara.

Interest paid to a non-resident company in respect of:- Securities issued by the Government- Non-convertible Islamic securities or debentures denominated in Ringgit Malaysia and

approved by the Securities Commission, Interest income in respect of non-convertible Islamic securities issued in non-Ringgit currency and

approved by the Securities Commission.

Interest income in respect of bonds and securities issued by Pengurusan Danaharta Nasional Bhd.

Royalties

Those approved by the Minister of Finance. Those that are Approved Industrial Royalties under various double taxation treaties.

SALES & SERVICE TAX ACCA F6. T7.

SALES TAX & SERVICE TAX

Introduction

Sales Tax and Service Tax are levied on taxable goods consumed in and taxable services provided in Malaysia. The tax is collected at the point of sale and is an indirect tax in the sense that the provider of the goods and services is responsible for its collection and payment to the Royal Malaysian Customs & Excise Department. The taxes are known as “ad valorem” taxes because they are levied as a percentage of the sales value. The relevant acts are the Sales Tax Act 1972 (“STA’72”) and the Service Tax Act 1975 (“STA’75”) and these are administered by the Director General of Customs & Excise. Important regulations are the Sales Tax Regulations 1972 (“STRegs’72”) and the Service Tax Regulations 1975 (“STRegs’75”).

The general rates of tax are 10% for sales tax and 6% for service tax, but special sales tax rates apply in the following circumstances:-

Food, fruit & building materials 5%Petroleum products fixed rates per litre

e.g. 58.62 sen per litre of car petrol

The idea behind the two types of tax is that they are consumption taxes levied on the final consumer of the goods or services, and so the tax is levied only once. For goods, this means that persons who are intermediaries in the chain of supply are either exempted from the tax or are able to claim back any sales tax paid on inputs. For services rendered to intermediaries in the supply chain, the costs of these services (including the service tax) are separately identified and simply passed on to the final consumer.

Administrative Arrangements

Many of the provisions of the two Acts are similar and these are dealt with below.

Licensing

S.13 STA’72 provides that every manufacturer of taxable goods shall apply for a sales tax licence and that no person shall manufacture taxable goods unless they have a sales tax licence, which must also specify the place(s) where such business is undertaken. There is no fee payable upon application for a licence. Reg.6 STRegs’72 provides that the licence must be displayed in a safe and conspicuous place at the licensed place of business.

S.8 STA’75 provides that every taxable person providing a taxable service shall apply for a service tax licence and that no taxable person shall carry on such business unless they have a service tax licence, which must also specify the place(s) where such business is undertaken. Para. 6 STRegs’75provides that the licence must be displayed in a safe and conspicuous place at the licensed place of business.

S.8A. STA’75 also provides that voluntary licensing is possible for those persons providing taxable services whose annual turnover falls below the thresh-hold for compulsory licensing.

The application form for the licence is JKED1 and no fee is payable. The licence is form CJ2 and is valid until it is revoked. S.13A STA’72 and S.9 STA’75 provide that the DG may revoke a licence in the event that the taxable person ceases to carry on business, dies or is dissolved, or the taxable person fails to abide by the requirements regarding invoices, records and returns.

Exemptions from licensing are available in certain circumstances and these are dealt with in the separate sections on Sales Tax and on Service Tax that follow.

ACCA F6. T7. SALES & SERVICE TAX

S.13A STA’72 and s.9 STA’75 also provide that the licence must be surrendered if the taxable person ceases to carry on business. Reg.7 STRegs’72 & ’75 provide that the licence must be surrendered in the following circumstances:

- any change of company/business name- any change in the address of the business- any change in the goods or services offered

Reg.7 STRegs’75 provides for further circumstances in which surrender of a service tax licence is required:-

- any change involving a partnership- business takeover by another person

Invoices and Records

S.17 STA’72 & S.10 STA’75 provide that all taxable persons must issue invoices that separately specify the charges for the taxable product/service and the sales/service tax levied thereupon.

S.18 STA’72 & S11 STA’75 provide that books of account containing full and true records of all transactions affecting one’s liability to sales and service tax must be maintained, for at least six year from the date of the last transaction.

Returns, Collection & Payment of Sales Tax and Service Tax

S.19 STA’72 and S.12 STA’75 provide that a return summarising taxable sales/services (on form CJP1) must be sent by the provider of the goods/services to the Royal Customs & Excise Department within 28 days of the end of the taxable period in which the sales/service tax is due. S.2 of each Act provides that a taxable period is a period of two calendar months. The two-month periods run from the beginning of January to the end of February and so on.

S.22 STA’72 and S.14 STA’75 provide for the due dates and payment dates as follows:-- S.22 STA’72 provides that sales tax is due when the goods are sold or otherwise disposed of –

generally the invoice date- S.14 STA’75 provides that service tax is due when payment for the service has been made, subject to

a maximum of twelve months from the invoice date.

S.22 STA’72 & S.14 STA’75 then go on to provide that sales/service tax is payable within 28 days of the end of the taxable period* in which it became due.

* An exception is for sales tax on petroleum products, which is payable within 10 days of the calendar month in which the sales tax is due.

S.24 STA’72 and S.16 STA’75 provide that failure to remit sales tax and service tax within the twenty-eight day period attracts a penalty of 10% of the amount unpaid for each 30 day period, or part thereof, that the amount remains unpaid, up to a maximum penalty of 50% of the tax unpaid.

S.26 STA’72 & s.17 STA’75 provide that where a company, firm, society or association is liable to pay any tax, penalty or surcharge, then the current and past directors, partners or members are jointly and severally liable to pay.

Doubtful & Bad debts

S.31C STA’72 & S.21B STA’75 provide that refunds of sales tax and service tax are possible in respect of doubtful and bad debts, upon application to the Director General of Customs & Excise, so long as all


reasonable efforts have been made to recover the debt and the claim is made within six years of the sales tax having been paid by the retailer.

Reg.19D STRegs’72 & Reg.16A STRegs’75 provide that the earliest such a claim can be made is six months after the tax has been paid, or upon the filing of a claim for payment with a court, the petitioning for bankruptcy, the placing into receivership, or the declaration of bankruptcy in respect of the debtor.

Refunds of tax overpaid or erroneously paid

S.32 STA’72 & s.21 STA’75 provide that tax overpaid or erroneously paid can be refunded so long as a claim is made within one year of the payment concerned.

Power of inspection, search, seizure & arrest

S.34 STA’72 & S.23 STA’75 provide that persons having relevant information or documents are bound to produce such information or documents when requested to do so.

S.36 STA’72 & S.24 STA’75 provide that a customs officer may at any time have access to all places where the taxable person carries on business and to all books and documents relating to the business.

S.37 STA’72 & S.25 STA’75 provide that a magistrate may issue a search warrant upon written information upon oath concerning books, documents and goods, which may afford evidence of an offence under the Acts.

S.38 STA’72 & S.25 STA’75 provide that a customs officer may search without a warrant if he believes that any delay may result in any books, documents or goods affording evidence being removed.

S.40 STA’72 & S.27 STA’75 provide that if a customs officer believes an offence has been committed, he may seize any books, documents or goods (including any vehicle, vessel or aircraft used to transport them) that would have a bearing in the case.

S.42 STA’72 & S.28 STA’75 provide that a customs officer may arrest without warrant, any person committing or attempting to commit an offence (including aiding and abetting), and any person whom he reasonably suspects to have committed an offence.

Offences

S.43 STA’72 & S.29 STA’75 provide that any person who:fails or refuses to: - raise and/or pay tax on time

- apply for a licence- issue proper invoices or issues improper invoices- keep proper records- furnish returns

carries on business at any place not specified in the licencefails or refuses to produce any book or document requestedfails or refuses to give correct information or any informationunderpays tax required to be paidacts on behalf of a taxable person without producing a letter of authorisationobstructs any proper office in the discharge of his functionsissues an invoice showing an amount which purports to be sales/service tax

is guilty of an offence and is liable to imprisonment for not longer than 12 months (sales tax) or 2 years (service tax) and/or a fine not exceeding RM5,000.


S.43A STA’72 & S.32 STA’75 provide that any person who wilfully with intent to evade or to assist any other person to evade sales/service tax:-

omits information on a return affecting the chargeability to taxmakes any false statement or entry in any return, claim or applicationgives any false answer to any question or request for informationprepares, maintains or authorises the preparation or maintenance of any false books, invoices or

records, or falsifies or authorises the falsification of any books, invoices or recordsmakes use or authorises the use of any fraud, art or contrivance

is guilty of an offence and is liable to imprisonment for not longer than 3 years and/or a fine not exceeding RM50,000.

S.45 STA’72 & S.35 STA’75 provide that where an offence has been committed by a company or any other body of persons, any person who was a director, manager, secretary, partner or other similar officer at the time of the offence is deemed guilty of the offence unless he can prove that the offence was committed without his consent or connivance and that he exercised all such diligence to prevent the offence as he ought to have done.

Agents

S.63A STA’72 & S.47A STA’75 provide that no person shall transact business in relation to the Act on behalf of any taxable person except on matters with regard to:

a refund of taxa remission of taxan exemption

and only then if the person produces a letter of authorisation from the taxable person.

S.63 STA’72 & S.47 STA’75 provide that any clerks or servants of a taxable person may act on behalf of that person.

Customs Rulings

S.11A STA’72 & S.6A STA’75 provide that a customs ruling can be applied for*, upon payment of a fee, in respect of:

the classification of goods or the determination of a taxable servicethe determination of a taxable personthe principles used for determining the value of goods and servicesany other matters prescribed by the DG

* The application should be made before the goods are manufactured or imported, or the service provided, or later upon the discretion of the DG.

The DG may decline to make a ruling if:insufficient information is provided,the application concerns a hypothetical situation,an appeal under the Act concerning the subject matter is currently pending.

Any ruling made is binding upon the applicant.

Cessation of business

S.13A STA’72 & S.9 STA’75 provide that when a trader ceases to carry on the manufacture of taxable goods or the provision of taxable services then the taxable person shall surrender his licence.

S.22 STA’72 further provides that if a manufacturer possesses any taxable goods upon cessation of business then these are deemed disposed of and sales tax is due.


SALES TAX

Sales tax is governed by the Sales Tax Act 1972 (STA’72) and the Sales Tax Regulations 1972 (“STRegs’72”). S.6 STA’72 provides that sales tax shall be charged and levied on all taxable goods:-

a) manufactured in Malaysia by a taxable person and sold, used or disposed by him, otherwise than by sale or disposal to a licensed manufacturer;

b) imported into Malaysia by any person for home consumption.

S.2 STA’72 provides that taxable goods means all goods not exempted under various Orders.

Transactions that are deemed to be sales or disposals include: GiftsDestructionExchange or barterUse by a manufacturer otherwise

than in the manufacturing process

Goods disposed with a right to re-purchase

Goods sold under hire purchase

Sales tax only applies to goods consumed in Malaysia and so it does not apply to goods exported or sales made in:

The Joint Development Area (s.1 STA’72)A Free Trade Zone (s.2A STA’72)Labuan, Langkawi and Tioman (except for petroleum products) (s.73, s.84 & s.90B

STA’72, respec.)

Drawback – S.29 STA’72 & Reg.18 STRegs’72 provide that sales tax paid on goods purchased by a person who subsequently exports them can be claimed back so long as the goods are exported within 12 months of the date the sales tax was paid and the claim is made within 3 months of the date of export.

S.2B STA’72 provides that a licensed warehouse shall be deemed to be a place outside Malaysia and so goods imported and stored in a licensed warehouse are only charged to sales tax at the time of clearance from the warehouse.

S.7 STA’72 provides that the value of the goods is the arm’s length market value or the value for customs duty purposes, plus any customs duty and any excise duty payable. (The transaction price would be the starting point in most cases.)

Exemptions from licensing are available under the Sales Tax (Exemption) Order 1997 for manufacturers and contractors whose annual turnover did not exceed RM100,000 and RM20,000, respectively in the last twelve months and is not expected to do so in the next twelve months.

Exemptions from licensing are also available for manufacturers in a number of sectors, including:

- Developing and printing of photographs- Incorporation of goods into buildings- Preparation of meals- Photocopying- Repair of second-hand goods- Eyesight testing and prescription of lenses- Personal tailoring- Printing on ready-made T-shirts- Traditional manufacture of batik fabrics- Jewellery


- Extracting, recovering and refining of gold

Sales Tax is a Consumer Tax

As already mentioned, the idea behind sales tax is that it is a tax on the final consumer of the goods and so the STA’72 contains several provisions enabling different manufacturers in a supply chain to claim back any input tax paid along the way. These are as follows:-

The Ring System – S.9 STA’72 provides that a licensed manufacturer may acquire taxable goods from another licensed manufacturer or may import taxable goods free from sales tax so long as he is authorised to do so by the DG. (The authorisation is valid for either 6 months or 1 year.)

The Refund System – S.31 STA’72 provides that where a licensed manufacturer has acquired taxable goods free of sales tax under s.9 then the seller of those goods can claim back any input sales tax paid on the initial acquisition of taxable goods making up his supply, so long as the claim is made within one year of the sale.

The Credit System – S.31A STA’72 and Reg.19A STRegs’72 provide that a licensed manufacturer may claim back any input sales tax paid by way of deduction against output ales tax payable for the taxable period in which the purchases were made, with any credit being carried forward. However, the sales tax paid back is only 4% or 8% of the value of the goods including the sales tax. (This means that only 84% or 88% of the original sales tax is repaid. The idea behind this is to encourage traders to use the Ring System.)

Returned Goods

S.31B STA’72 and Reg.19C STRegs’72 provide that sales tax paid on goods subsequently returned or in respect of ‘blanket’ discounts subsequently given may be reclaimed*, but only if the manufacturer has issued a proper credit note and provided the goods have not subsequently been sold or disposed of.

* The claim is by way of a deduction from the amount of tax paid with the return submitted for the taxable period in which the credit note was issued, with any credit being carried forward. (The guidance notes for filling in the tax return mention that the goods must have been returned within 3 months from the date of sale.)


SERVICE TAX

Service Tax is governed by the Service Tax Act 1975 (“STA’75”) and the Service Tax Regulations 1975 (“STRegs’75”). S.3. STA’75 provides that service tax shall be levied on taxable services provided by taxable persons in Malaysia.

Reg.3 STRegs’75 provides for a list of taxable persons and taxable services (contained in Sch.2 STRegs’75). These fall into nine groups:- Hotels with more than 25 rooms*

Restaurants in hotels with more than 25 rooms Restaurants in hotels with 25 rooms or less, with turnover more than RM300,000 Restaurants located outside hotels, with turnover more than RM300,000 Night-clubs, dance halls, cabarets, health centres, massage parlours, public houses and beer

houses Private clubs, with turnover more than RM300,000. Golf courses and driving ranges, with turnover more than RM300,000. Private hospitals, with turnover more than RM300,000 Others† - Insurance companies

- Telecommunication service providers- Forwarding agents- Car park operators (t/o > 150k)- Couriers (t/o > 150k)- Car repair centres (t/o > 150k)- Security guard service providers (t/o > 150k)- Employment agencies (t/o > 150k)- Public accountants‡

- Advocates and solicitors‡

- Professional engineers‡

- Architects‡

- Surveyors‡

- Consultancy service providers‡

- Management service providers‡

- Car hire firms (t/o > 300k)- Firms providing advertising services (t/o > 300k)- Credit/charge cards – where the rate is a flat RM50 on the principal card and RM25

on all supplementary cards.

* But the provision of rooms free of charge for tour operators or others promoting the hotel or tourism industry in Malaysia is exempt from service tax.

† The taxable services provided by any one taxable person include all the services provided by the other taxable persons.

‡ These service providers are able to provide services to other companies within the same group** free of tax so long as the same service is not also provided to third parties.

** A company within the same group is one in which more than a 50% equity stake is held or where at least a 20% equity stake is held and there is an ability to appoint a majority of the board of directors.

The taxable services are the usual services provided in the industry, but excluding out of pocket expenses, such as photocopying, travelling, telephone, printing & stationery, and postage.

Reg.3A STRegs’75 provides that the annual turnover thresholds are assessed on a rolling, twelve calendar month period prior to the month in question. S.7A STA’75 contains anti-avoidance provisions enabling the tax authorities to treat separate legal entities run by one person or two or more connected persons as one single entity.


S.1 STA’75 provides that service tax only applies to services provided in Malaysia and not to services provided in:

The Joint Development AreaLabuan, Langkawi and Tioman

Services provided in connection with goods or land situated outside Malaysia is similarly not subject to service tax.

S.4 STA’75 provides for the determination of value of the service liable to tax as follows:- for services provided to non-related parties – the price charged, or where no price is charged, the

arm’s length market value of the services provided,- for related party transactions – the arm’s length market value.

TAX ADMINISTRATION ACCA F6. T8.

ACCA F6. T8. TAX ADMINISTRATION

REAL PROPERTY GAINS TAX ACCA F6. T9.

Introduction

Capital Gains Tax in Malaysia is governed by the Real Property Gains Tax Act 1976 (“RPGTA’76”), which came into force on 7th November 1975. The Act is administered by the Director General of Inland Revenue.

S.3. RPGTA’76 provides for a real property gains tax to be levied on chargeable gains accruing to a chargeable person in a year of assessment on the disposal of a chargeable asset.

Schedule 5 of the Act, together with the Real Property Gains Tax (Exemption) (No. 2) Order 2009 result in the rate of real property gains tax currently being 5% for disposals within five years from the date of acquisition. Disposals made after five years from the date of acquisition are exempt from payment of the tax.

Chargeable Asset, Chargeable Person & Chargeable Gain

S.2. RPGTA’76 provides that a chargeable asset is real property, which is any land situated in Malaysia and any interest, option or other right in or over such land. Land is also defined to include:

the land surface, the earth below the surface and substances therein, buildings above or below the surface, trees, crops or other vegetation growing on land, land covered by water.

- but a chargeable asset cannot be something that forms part of the stock-in-trade of a business.

Schedule 2 RPGTA’76 provides that shares in a real property company (“RPC”) are also chargeable assets. A real property company is a controlled company ( 5 directors, 50 shareholders) that owns real property or shares in a real property company, the market value of which is not less than 75% of the value of its total tangible assets†.

† The company need not have RPC status at the date of acquisition or the date of disposal for its shares to be chargeable assets, so long as at some point during the period of ownership of the shares the company has RPC status.

S.6. RPGTA’76 provides that any person (including individuals, body of persons*, partnership, manager of a Hindu joint family, executors and trustees), whether or not resident in Malaysia, is assessable to real property gains tax.

* For companies, the manager, principal officer, directors and secretary are jointly and severally assessable to any real property gains tax payable by the company.

S.7. RPGTA’76 provides that a chargeable gain arises in respect of a chargeable asset if the disposal price exceeds the acquisition price.

s.10. RPGTA’76 provides that a year of assessment is the calendar year (for all chargeable persons).

Determining the chargeable gain or allowable loss

S.7.(1) RPGTA’76 provides that a chargeable gain or allowable loss is the difference between the acquisition price and the disposal price. Schedule 2 RPGTA’76 provides for the definition of the acquisition price and disposal price:-

Para.4. Sch.2. RPGTA’76 provides that the acquisition price is the consideration paid† for the asset plus incidental costs of acquisition, less:-

sums received by way of compensation for any damage to the asset,

ACCA F6. T9. REAL PROPERTY GAINS TAX

sums received under any insurance policy covering the asset, any deposits lodged by a prospective buyer that are forfeited as a result of the buyer pulling out.

† For assets acquired before 1 January 1970, the acquisition price is the market value of the asset as at 1 January 1970, and there is no deduction for the incidental costs, and only sums received from 1 January 1970 are deducted.

Notes. • If the acquisition price is negative (by reason of the deductions allowed) the negative amount becomes a chargeable gain at the time the sum is received.

• For RPC shares acquired when the company did not have RPC status, the acquisition price is the market value of the real property owned by the company as at the date of acquisition pro-rated according to the number of shares acquired as a fraction of the total number of shares in issue as at the date of acquisition.

• Where the assets of a deceased person are disposed of by executors or trustees, para.19(3) Sch.2. provides that they are deemed to have acquired the assets at an acquisition price equal to the market value of the assets as at the date of death of the deceased person less any sums subsequently received as compensation, insurance or deposits forfeited.

Para.5. Sch.2. RPGTA’76 provides that the disposal price is the consideration received for the asset less:- incidental costs of disposal, expenditure to enhance or preserve the value of the asset, expenditure incurred in establishing, preserving or defending title to, or to a right over, the asset‡.

‡ Where the asset was acquired before 1 January 1970, only expenditure incurred from 1 January 1970 is deducted.

Para.6. Sch.2. RPGTA’76 provides that incidental costs are those incurred wholly and exclusively for the purposes of the acquisition or disposal, being:-

Commission or fees for any surveyor, valuer, accountant, agent or legal adviser, Costs of transfer (including stamp duty), Advertising costs to find a seller or buyer.

Allowable losses

If the disposal price is less than the acquisition price then the loss is allowable by way of a tax credit at the appropriate rate applied to the loss. The tax credit can be set against any real property gains tax due for that year of assessment and any unabsorbed tax credit can be carried forward indefinitely. However, para.33 of Sch.2. provides that the following losses are not allowed:

Losses on the disposal of RPC shares. Losses where had there been a gain, that gain would be exempt under the Act. In practice, currently

generally this means that a loss on a disposal that is more than five years after acquisition is disallowed.

No gain, no loss transactions

Para.3. Sch2. RPGTA’76 provides that the disposal price is deemed equal to the acquisition price in the following circumstances:-

the devolution of the assets of a deceased person under a will Note 1., the transfer of assets between spouses or between a spouse and a company controlled * by either

spouse, or controlled* by either spouse jointly with connected persons†, for a consideration consisting of at least 75% in shares of the company Note 2.,

the transfer of assets to/from a nominee or trustee resident in Malaysia, the transfer of assets by way of security, gifts to the Government a State Government, or local authority, or a charity exempt from income tax,


disposals as a result of a compulsory acquisition, disposals in connection with Syariah-compliant financing arrangements approved by the Central

Bank or the Securities Commission,

* Control means ownership of more than 50% of the capital.† A connected person is a child, parent or sibling of either spouse, and the spouse

of such person.

Notes. 1. Para.19(3A) Sch.2. RPGTA’76 provides that the person acquiring the asset does so at an acquisition price equal to the market value at the date of transfer of ownership, less any sums subsequently received as compensation, insurance or deposits forfeited.

2. Para.19 Sch.2. RPGTA’76 provides that the person acquiring the asset inherits the acquisition price and date of the transferor.Para.34 Sch.2. RPGTA’76 provides that the acquisition price for the shares of the controlled company shall be the acquisition price of the asset(s) transferred plus any permitted expenses (expenditure by the transferor in enhancing the asset or in defending title to the asset) less any money payment received in the transfer.

Disposals between companies in the same group – Para.17. and para.19. Sch.2. RPGTA’76 provide that certain transfers of assets are no gain, no loss transactions where the transferee company inherits the acquisition price of the transferor. The conditions are as follows:-

Prior approval of the DG must be obtained*.The transferee company must be resident in Malaysia.The transfer is one of the following:-

- between companies in the same group to bring about greater efficiency in operations for a consideration consisting of at least 75% in shares, or

- part of a scheme of reorganisation, reconstruction or amalgamation, including the distribution of assets under liquidation, which is in compliance with government policy on capital participation in industry†.

* The DG may withdraw the approval up to three years later if:-- the transfer appears to have been made for a reason other than to improve

operational efficiency or in connection with a scheme of reorganisation, reconstruction or amalgamation, or

- the transferee company ceases to be in the same group of companies as the transferor company, or

- the transferee company ceases to be resident in Malaysia.

† In this case, the transferee company also inherits the acquisition date of the transferor (making the transaction transparent for real property gains tax purposes).

Transactions deemed at market value

Para.9. Sch.2. RPGTA’76 provides that in the following circumstances acquisitions and disposals are deemed to be at market value:-

where the transaction if not made on arm’s length terms or by way of gift*, where the consideration, or part thereof, cannot be valued, where the transaction is in connection with the loss of employment or in connection with past

services in employment, where the transaction is in full or part satisfaction of any debt, where the transaction concerns the transfer of a business for a lump sum consideration, where the Director General has taken anti-avoidance action under s.25(2).

* Para.12. Sch2. RPGTA’76 provides that gifts between husband and wife, parent and child, or grandparent and grandchild are transparent for real property gains


tax purposes and the donee simply inherits the acquisition price and the acquisition date of the donor.

Note Where the consideration consists of another asset, in an exchange, then the disposal price is the market value of the asset received. If the asset received has no market value the disposal price is the market value of the asset disposed of.

Acquisition and Disposal Date

Para.15. Sch.2. RPGTA’76 provides for the determination of the acquisition and disposal date, as follows:-

Where there is a written agreement, the disposal and acquisition date is the date of the agreement. Where there is no written agreement, the disposal date is the earlier of:-

- the date of transfer of ownership,- the date on which the whole amount of the consideration has been received by the disposer.

Acquisition and Disposal

An acquisition is defined in S.2. RPGTA’76 to include an acquisition by way of purchase, grant, exchange, gift, settlement or otherwise.

A disposal is defined in S.2. RPGTA’76 to mean: sell, convey, transfer, assign, settle or alienate whether by agreement or by force of law.

Rates of Real Property Gains Tax

Sch.5 RPGTA’76 provides for the rates of real property gains tax, which currently are as follows:-

For disposals within two years of acquisition 30%For disposals in the third year from acquisition 20%For disposals in the fourth year from acquisition 15%For disposals after four year from acquisition 5%

However, for individuals who are not citizens or permanent residents, the rate is 30% for disposals within five years from acquisition, and 5% thereafter.

Exemptions

S.8. & Sch.3. RPGTA’76 provide for an exemption from real property gains tax in respect of a private residence of a citizen of or permanent resident in Malaysia, so long as:

the residence is owned* by an individual and occupied, or certified fit for occupation, as a place of residence,

the election/application is the only one applied for in the individual’s lifetime, the election/application for exemption is in writing.

* The individual must be registered as the proprietor of, or the holder of a lease over, the land.

S.9 & Sch.4. RPGTA’76 provide for the following exemptions:- Individuals are exempt from real property gains tax up to the higher of 10% of the chargeable gain

and RM10,000 per chargeable asset, so long as the asset is not part of a larger chargeable asset. The amount of estate duty payable under a will is exempt, by way of deduction from the chargeable

gain, so long as the disposer is compelled to dispose of the asset in order to pay the estate duty.


Any gains accruing to the Government, a State Government or local authority are exempt.

The Real Property Gains Tax (Exemption) (No. 2) Order 2009 provides for the following exemptions:- Disposals made after five years from the date of acquisition are exempt from the payment of RPGT. A fraction of the chargeable gain is exempt, determined as follows:

Administration

Returns

S.13. RPGTA’76 provides that every chargeable person, or their nominee, who disposes of or acquires a chargeable asset shall file a return with the Director General within 60 days of the date of disposal, specifying the acquisition price, disposal price and gain or loss on disposal, and providing supporting documentation including a valuation report by a qualified valuer if the market value is to be applied. S.29. RPGTA’76 provides that a person who fails to make a return is guilty of an offence punishable by a fine of up to RM5,000 and/or a term of imprisonment of up to 12 months.

S.21B. RPGTA’76 provides that the acquirer must withhold the whole amount of any money payable up to 2% of the total consideration payable and must pay this amount to the DG (whether or not withheld) within 60 days of the date of disposal. Failure to pay this amount results in a fine of 10% of the amount outstanding being imposed.

Assessment

S.14. RPGTA’76 provides that the DG is empowered to make an assessment upon receipt of the return or at any other time if it appears to him that a chargeable person is chargeable with real property gains tax. The DG may accept the figures in the return or may adjust them as considered necessary.

S.27. RPGTA’76 provides that the DG may by written notice require any person to provide further information with regard to a return made or required to be made under the Act, within 14 days. In addition, the DG may by written notice require any person to provide bank statements and details of other assets owned, within 30 days or more (as specified). The DG may instread impose a penalty of treble the amount of tax payable.

Incorrect Returns

S.30. RPGTA’76 provides that any person making an incorrect return or providing incorrect information is guilty of an offence punishable by a fine of up to RM5,000 and a penalty of double the amount of tax payable.

Wilful Evasion

S.31. RPGTA;76 provides that any person who wilfully and with intent to evade or assist any other person to evade tax is guilty of an offence punishable by a fine of up to RM10,000 and/or a term of imprisonment of up to 3 years and a penalty of treble the amount of tax underpaid.


Payment

S.21. RPGTA’76 provides that on service of the notice of assessment from the DG the chargeable person has 30 days within which to pay the tax. Any amount of the tax remaining unpaid attracts a penalty of 10%.

Appeals

S.18. RPGTA’76 provides for a right of appeal, making use of the appeal provisions of the Income Tax Act 1967.

An example of a real property gains tax calculation is as follows:-

Price received upon disposal: 700,000Less: Incidental costs of disposal: (7,000)

Enhancement/preservation costs: (53,000)Defending title costs: (10,000)

Disposal price: 630,000

Price paid upon acquisition: 297,000Plus: Incidental costs of acquisition: 27,000Less: Compensation received: (15,000)

Insurance proceeds: (25,000)Deposit forfeited: (14,000)

Acquisition price: (270,000)

Gain/(loss): 360,000Sch.4. Exemption:- (36,000)

324,000Exemption Order 2009: (216,000) Note 1.

Gain subject to tax: 108,000

Tax at 15%: 16,200 Note 2.

Note 1. Suppose the disposal is within four years of acquisition.

Note 2. A quicker calculation is 5% of 324,000 … = 16,200.

2011 Jun F6 Tax (FA11)

Documents

Transcript of 2011 Jun F6 Tax (FA11)