IMPUTATION SYSTEM-S108 Credit Balance Account

Deduction of Tax from Dividends
By Tan Thai Soon

Section 108(1)
Where a dividend is paid or credited by a company to its shareholders, the company shall be entitled to deduct tax therefrom at the rate applicable to the company on the chargeable income for the year of assessment.

Comment:
a) The dividend is deemed to be derived from Malaysia:Section 14

b) Company will deduct a tax from the dividends and shareholders would received a net dividends.

c) Company will maintains S 108 credit balance account.
S 108 account increases when company paid corporate tax or has credits (s110) from dividend income. On the other hand, S108 account reduced when there is a tax refunded and/or a dividends has been paid in the basis period.

d) S108 credit balance account is carried forward into the following year

e) Company need to maintains it S108 account by submitting From R to Inland Revenue Department (IRD).

f) With effect from YA2008:i) no additional credit balance to be added to the existing s108 account; ii) company can elect to disregard s108 account balance by filing Form 50 with IRD; or iii) continue to maintain S108 balance (as at 31.12.07) until nil balance or end of the transitional period (as at 31.12.2013).

g) With effect from YA2014: i) all unutilized S108 credit balance will be forfeited; ii) company does not need to maintain S108 account; and iii) all company will move from the existing imputation system to single tier tax system (STS).

Gross Income From An Employment

Gross Income from an Employment
By Tan Thai Soon

The following shall be treated as gross income from an employment.

Section 25 (1)
Where gross income from an employment:-
(a) is not receivable in respect of any particular period; and
(b) first becomes receivable in the relevant period,
it shall when received be treated as gross income of the relevant person for the relevant period.

Comment
The assessability of employment income is on receipt basis, and "received" means legal entitlement of the income or is able to obtain the receipt on demand e.g. Salary. However, any bonus proposed in 2008 but not receive in the same year will not be assessed as gross income in that particular year.

Section 25(2)
Where gross income from an employment is receivable in respect of the whole of the relevant period it shall when received be treated as gross income of the relevant person for the relevant period.

Section 25(3)
Where gross income fails to be treated under subsection (1) and (2) as gross income for the relevant period, then if its receipt first becomes known to the DG on a day more than 5 years after the end of the relevant period, it shall be treated for the year of assessment which begin 5 years before the beginning og the year of assessment which includes that day.

Comment
This section serves as an anti avoidance provision to prevent loss of revenue, if the DG discovers the receipt of employment income is time barred.

Gross Income From A Business

Gross Income from Business

Section 24(1)
Where a debt owing in respect of
a) any stock in trade sold
b) any services rendered
c) the use or enjoyment of any property
the amount of the debt shall be treated as gross income.

Comment
This section use accrual concept is in comparable with the accounting principle.

Section 24(2)
The market value of any stock in trade which has been taken for private purposes without payment or any stock withdrawn from business for gifts or donation other than disposal.

Comment
A furniture trader give a compliment furniture sofa set to his relative for wedding gift. A sum equal to the market value of the furniture set will be added back to gross income for tax purpose.

Section 24(5)
Interest income of an investment dealing business or a money lending business.

Section 30(1)
Recovery of a bad debt which has previously been allowed as a deduction in ascertaining the adjusted income.

Section 30(4)
Waiver of debts by creditors which pertaining to any amount of expenditure previously allowed as a deduction in ascertaining the adjusted income.

Comment
Any purchases from trade creditor will reduce the gross income, therefore any debts written off by the creditor should be added back to increase the gross income for tax purpose.

Imposition of The Tax

Income Tax Act 1967-Part II
Imposition and General Characteristics of The Tax

Section 3-Scope of Charge
A tax to be known as income tax shall be charged for each year of assessment upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.

Comment
Income must be accrued (i) in Malaysia or (ii) accrued outside Malaysia and receive in Malaysia.

Section 3B-Non-chargeability to tax in respect of offshore business activity
Notwithstanding S3, tax shall not be charged under this Act on income in respect of an offshore business activity carried on by an offshore company.

Section 4-Classes income on which tax is chargeable
Tax is chargeable on income in respect of
a) Business;
b) Employment;
c) Dividends, interest or discounts;
d) Rents, royalties or premiums;
e) Pension, annuities or other periodical payments;
f) Other gains or profits.

Comment
Section 2 define "Business" includes professional, vacation and trade, but excludes employment.

Section 4A-Special classes of income
Income of a person not resident in Malaysia which is derived from Malaysia is chargeable to tax.

Comment
It refer to special payments made to non-residents, to be taxed at sources and within 30 days of such payments being made, under Withholding Tax.

Section 7-Residence Individual
Section 7(1) (a) provides that a person stays in Malaysia for at least 182 days (not necessarily consecutive) in a calendar year, he/she would be a resident.

Section 7(1) (b) provided that any temporary absence from Malaysia shall be taken to form part of such period: (i) connected with his services in Malaysia and owing to service matters or attending conferences or seminars or study aboard; (ii) owing to ill-health involving himself or a member of his immediate family; and (iii) in respect of social visits not exceeding 14 days in the aggregate.

Section 8-Residence companies and bodies of persons
Section 8(1)(a) A Hindu joint family, if its manager or karta is resident for that basis year.

Section 8(1)(b) A company or a body of persons carrying on a business; if any time during the basis year the management and control of its affairs are exercised in Malaysia.

Section 8(1)(c) Any other company or body of persons; if any time during that basis year the management and control of its affairs are exercised in Malaysia by its directors or other controlling authority.

Section 12-Derivation of business income from Malaysian
Section 12(1)(a) Gross income from the business as is not attributable to operations of the business carried on outside Malaysia shall be deeded derived from Malaysia.

Comment
The following activities would be deemed the business to be derived from Malaysia: (i) contract concluded in Malaysia; (ii) stocks maintained in Malaysia from which orders are fulfilled; (iii) ownership and risk passes in Malaysia;(iv) sale proceeds received in Malaysia; (v) services rendered in Malaysia.

Section 13-Employment Income
Section 13(1)(a) Salaries,fees,bonus and allowances.
Section 13(1)(b) Benefits in kind
Section 13(1)(c) Living accommodation
Section 13(1)(d) Refunds from unapproved funds
Section 13(1)(e) Compensation for loss of employment.

Section 14-General provisions as to dividend income
Section 14(1) where a company resident for the basis year of assessment pays, credits or distributes a dividend shall be derived from Malaysia.

2009 Malaysian Budget

2009 Malaysian Budget Commentary

1.Introduction
The Honourable, The Prime Minister and Minister of Finance, YAB Dato' Seri Abdullah Badawi, presented the 2009 Budget Proposals on 29 August 2008.

Details of how the proposed tax changes affect the individuals and businesses are summarised in the following sections.

It is intended to provide a general guide and hence should not be acted upon without seeking professional advice on any specific areas and matters.

2.The 2009 Budget Strategy
The 2009 Budget Strategies cover three specific areas:-
a) Ensuring the well being of Malaysians;
b) Developing quality human capital; and
c) Strengthening the nation's resilience.

3.Income Tax Changes Affecting Individuals
A)Increase of Tax Rebate
Present Position-
Resident individual with chargeable income not exceeding RM35,000 are given tax rebate of RM350.

Proposed Change-
The tax rebate be increased from RM350 to RM400

Effective: Year of Assessment 2009

B)Reduction in individual Income Tax Rates.
Present Position-
Resident individual income tax rates are progressive and ranges between 0% and 28%

Proposed Change-
It is proposed the tax rate be reduced ( i) from 13% to 12% for chargeable income exceeding RM35,000 to RM50,000; and (ii) from28% to 27% for chargeable income exceeding RM35,000 to RM50,000.

Effective: Year of Assessment 2009

C) Tax Exemption on Interest from Deposits
Present Position-
Interest income received from money deposit with approved institutions is taxed at 5% at source. Subject to the following exemption ( i) savings account in Lembaga Tabung Haji and Bank Simpanan; (ii) fixed deposit account up to RM100,000; and (iii) fixed deposit account exceeding 12 months.

Proposed Change-
Tax on interest on interest income received from approved institutions be fully exempted.

Effective: 30 august 2008

D) Tax Exemption on allowances/ perquisites/gifts/benefits provided to employees
Proposed Change-
It is proposed that tax exemption be given to employees on allowances, perquisites, gifts and benefits-in-kind as follows:

a) Petrol card, petrol allowance or travel allowance between the home and work place of up to RM2,400 per annum;

b) Petrol card, petrol allowance or travel allowance and toll card for official duties of up to RM6,000 per annum;

c) Allowance or fees for parking;

d) Meal allowance;

e) Allowance or subsidies for chilcare in respect of children of up to RM2,400 per annum;

f) Telephone, mobile phone. pager and personal data assistant (PDA), and the bills thereof, registered in the name of the employee or employer;

g) Employers' own goods provided free of charge or at discounted value of up to RM1,000 per annum;

h) Employers' own services provided free or at a discount provided such benefits are not transferable;

i) Medical benefits exempted from tax are extended to include maternity expenses and traditional medicines such as ayurvedic and acupuncture;

j) Interest subsidies for loans up to RM300,000 in respect of housing, motor vehicle and education loans. The exemption will be given to existing and new loans.

Effective:Year of Assessment 2008 (for all proposal except (a) above); and YA 2008 to YA2010 ( for proposal (a) ).

Comment:
a) The above exemptions are not applicable to employees having control over the company (eg. directors of controlled companies), sole proprietors or partners of partnerships.

b) The above allowances, perquisites, gifts and benefits provided by employers are fully deducted.

c) The above provide areas of personal tax planning, for both local employees and foreign employees with local tax resident, to redesign their remuneration packages by shifting portion their monthly salary to allowance and benefits-in-kind.

E) Tax exemption on perquisite.
Present Position-
Perquisite (whether in money of otherwise) provided to employee pursuant to his employment in respect of:-
a) past achievement award;
b) service excellence award;
c) long service award provided that the employee has exercised an employment for more than 10 years with the same employer.

The exemption is limited to RM1,000 per employee per annum.

Proposed change-
i) The exemption on excellent service awards will be extended to all awards relating to innovation and productivity; and
ii) The exemption be increased from RM1,000 to RM2,000.

Effective: Year of Assessment 2008

F) Tax Treatment on Bonus and Directors' Fees
Present Position-
Income tax on bonus and directors' fees is based on the year such incomes are receivable. However, generally bonus and directors' fees are received in the following year. The tax payer will declare the bonus and directors' fees in the year such incomes are received.

Proposed change-
It is proposed that bonus and directors' fees be taxed in the year such incomes are received.

Effective: Year of Assessment 2009

Comment:
i) The proposal allowed companies to declare and accrued the directors' fees and bonuses in 2008 and paid in the following year in 2009;and

ii) Employees need only to declared the 2008 directors' fees and bonuses in Form EA 2009 and Form B or B 2009 , based on receipt basis in 2009;

iii) This would eliminate the administrative work of the DG of inland revenue from issuing Form JA 2008.

Tax Penalties

Tax Offences and Penalties

1. Tax Offences

An offence is committed under the Income Tax Act 1967 under the following section.
a) Section 77(1)-Failure to furnish a return by individual
b) Section 77(3)-Failure to give notice of chargeable income by individual arrives in Malaysia.
c) Late submission of Return Form after 2 years when the case is being audited or investigated.
d) Fraud, omissions and understatements.
e) Failure to comply with Notice.
f) Section 107C(2),(3) and (4)(a)-Failure by company to estimate of tax payable and payment by instalments.

2. Tax Penalties
Tax penalties and fine will be imposed under the following sections of the Income Tax Act for various tax offences committed

a)Section 112(1)
Liable to a fine between RM200 to RM2,000 or not more than 6 months imprisonment or both (for failure to furnish a tax return under S77(1) & S77A, or failure to give notice of chargebility under S77(3) ).

b)Section 112(3)
Where no prosecution were make, the Director General may require a taxpayer to pay a penalty of up to three time the amount of tax (for the offences under S77(1), S77A & S77(3) ).

c) Section 113(1)
Liable to a fine between RM1,000 to RM10,000 together with a special penalty of up to 200% of the amount of tax which has been understated(for incorrect return by omitting or understating, or incorrect information on the chargebility).

d) Section 113(2)
Where no prosecution were make, the Director General may require a taxpayer to pay a penalty equal to the amount of tax which has been understated (for incorrect return by omitting or understating, or incorrect information on the chargebility).

e) Section 114(1)
Liable to a fine between RM1,000 to RM20,000 or imprisonment of up to 3 years or both; together with a special penalty of up to 300% of the amount undercharged ( for wilful evasion, such as omission from a return; false statement in a return; false reply whether orally or in writing; and false books of account or false records).

Tax Audit

What is a tax audit
A tax audit is an examination of a taxpayer's business records and financial and financial affairs to ascertain that the amount of tax due should be reported and paid are in accordance with tax laws and regulations.

Types of tax audit
There are two types of tax audit, namely desk audit and field audit.

The objectives of for tax audit
a) To encourage voluntary compliance with the tax laws
b) To educate and create awareness of taxpayers rights and responsibilities.

Years of Assessment covered
Generally, a period of one to three years. However, it may be extended beyond the period depending on the issues identified during an audit.

Selection of cases
a) Selection based on risk analysis;
b) Information received from third party;
c) Selection based on specific industries, e.g.construction industry;
d) Selection based on specific issues for a certain group of taxpayers;
e) selection based on location;
f) Late submission of tax return;and
g) fluctuation in profit and loss, e.g. gross profit

Penalty and Offence
a) Understatement or omission of income
- 100% for failure to submit returns-S112(3)
- 300% for incorrect returns-S113(2)
b) DGIR inexercising his discretionary powers
- 45% to be imposed for the first offence