PURPOSE LEARN THIS SUBJECT

1- BE ABLE TO COMPUTE:

a) PERSONAL TAX : 40 – 60 MARKS

b) PARTNERSHIP TAX

2- CAPITAL ALLOWANCE

3- INDUSTRIAL BUILDING ALLOWANCE

Chapter 1: Taxation and Scope of Charge

Learning outcome:By the end of this topic, you should be able to:1. Explain the scope of charge for taxation;2. Analyse the types and sources of income

with regard to taxation; (INCOME / CAPITAL)

3. Explain who a chargeable person is; (siapa yang perlu bayar tax)

4. Analyse the year of assessment for individual taxpayers;

(kenal pasti YOA bagi pembayar tax)

Terms1- Mutually exclusive = they cannot occur at the same time. An example is tossing a coin once, which can result in either heads or tails, but not both. (Tidak boleh berlaku serentak)

2- Exhaustive = Treating all parts or aspects without omission (menyeluruh)

“use dictionary and improve your vocabulary”

Introduction

• Tax in Malaysia is governed by Income Tax 1967 (ITA 1967)• S3 in ITA 1967 is about “scope of charge”.1. What is a tax?• Oxford Dictionary defines:

“contribution levied on persons, property or business for the support of government”

Bayaran yang dikenakan terhadap individu, harta atau perniagaan bagi membantu kerajaan.

1. What is a tax?

• Two definition from Australian cases:1- a compulsory exaction of money by a public authority for public purposes enforceable by law; (in Mathews v The Chicory Marketing Board)Tuntutan wajib berbentuk wang oleh pihak berkuasa bagi tujuan untuk rakyat dikuat kuasakan oleh undang-undang)

2- the process of raising money for the purposes of government by means of contributions from individual persons. (in R v Barger)Proses mengumpul wang untuk kerajaan atas sumbangan individu

The High Court of Australia ; identified the following usual characteristics of a tax:(ciri-ciri cukai)

• It is a compulsory payment; (bayaran wajib)• the money is raised for government purposes; (duit yg dikutip utk kerajaan)• the exactions do not constitute payment for

services rendered; (bukan pembayaran perkhidmatan)

• the payment are not penalties; (bayaran bukan denda)

• the exactions (tuntutan) are not arbitrary (penimbang tara); and

• the exactions (tuntutan) should not be incontestable (tidak boleh dicabar).

OBJECTIVES OF TAX POLICIES(matlamat polisi percukaian)

a) Raising revenue to finance government expenditure.(meningkatkan hasil bagi menampung perbelanjaan kerajaan)

b) Ensuring that taxes are collected effectively and at minimum cost both to the government and tax payers. (memastikan cukai dikutip secara cekap dan pada kadar kos yang minimum pada kerajaan dan pembayar cukai)

c) Regulating the private sector of economy to maintain the desired level of employment and increase economic development / growth. (menguatkuasa undang-undang pada sektor swasta, memastikan jumlah pekerjaan dan meningkatkan pembangunan ekonomi)

OBJECTIVES OF TAX POLICIES

d) Regulating the activities of specific areas of the private sector so as to encourage activities which are beneficial to the country and to encourage those which are desirable in the national interests. (menguatkuasa undang-undang pada sektor swasta, menggalakkan aktiviti2 yang memberi faedah pada negara)

e) Regulating the distribution of income and wealth between different types and classes of citizens. (Menyelaraskan agihan pendapatan di kalangan penduduk)

f) Regulating specific activities of citizens which are thought to be undesirable, e.g, drinking, smoking, gambling. (menguatkuasa aktiviti tertentu yang dikira sebagai tidak dikehendaki contoh minimum keras, rokok, perjudian)

“MT”

Taxes are split into 2 broad classifications:a) DIRECT TAXES: direct charge the tax to the

taxpayer. (Cukai yang dikenakan terus pada pembayar

cukai)Eg: Income tax, real property gains tax (RPGT), estate duty.

b) INDIRECT TAXES: tax collected by third parties. (Cukai yang dikutip oleh pihak ketiga)

- additional price of product/service is collected by an intermediary. (harga tambahan ke atas barangan/ perkhidmatan yang dikutip oleh orang tengah)- Eg: sales tax, service tax, excise duty, import and export duties and value added tax/goods and services tax.

Direct taxes fall into three categories:a) PROGRESSIVE – as income rises, as

amount of tax increase. M’sian personal income tax is a progressive tax. (berhubungan positive: pendapatan bertambah jumlah cukai yang dibayar juga bertambah)

b) PROPORTIONAL (berkadaran) – take same the same proportion of income at all levels. The M’sian corporate income tax, 25% or foreign personal income tax. (Cukai pendapatan syarikat BERKADARAN 25% tanpa mengikut sama ada pendapatan syarikat naik atau turun)

Direct taxes fall into three categories:c) REGRESSIVE (pengunduran) - decreasing

proportion if income as income rises. Foreign personal income tax. (cukai pendapatan pekerja asing)

- impact on lower income earners.- regressive in nature.- eg 26% x RM10,000 = RM2,600 [low income]

26% x RM100,000 = RM26,000 [high income]

PROPORTIONAL DAN REGRESSIVE mempunyai maksud yang lebih kurang sama tapi proportional melibatkan peningkatan dan pengunduran

“MT”

Indirect taxes fall into two categories:a) AD-VALOREM – [Fixed Percentage – peratus tetap] - where the tax is based on value. - a “fixed percentage” of the tax value of

transaction is absorbed as taxation.

- Eg: sales tax – fixed 10% is imposed on certain product.

b) Specific rate (Kadar tetap) - where a specific monetary amount is levied on

each units.

- Eg: import duties – RM100 imposed on certain goods.

Three sources of revenue laws:a) Statue Law – Income Tax 1967;b) Case Law – court decisionc) The Practice of Inland Revenue – Public

Ruling, Assessment, Enforcement practices.

Scope of charge – S3a) Income in nature – “accrued” and “derived”

in Malaysia (Pendapatan “DIPEROLEHI” di Malaysia)b) Income in nature – received in M’sia from

outside Malaysia (Foreign Source Income)

diterima di Malaysia dari pendapatan luar negara.

Paragraph 28, Schedule 6BUT, (b) starting from YA 2004: Foreign Source Income exempted from tax EXCEPT, you work with RESIDENT COMPANY in bank, insurance, shipping or air transport.Bermula tahun 2004 pendapatan luar negara yang diterima di Malaysia dikecualikan dari membayar cukai KECUALI mereka yang bekerja dengan syarikat resident Malaysia dalam sektor bank, insuran, perkapalan dan pengangkutan udara di luar negara.

Examples:

1. You worked with CIMB at Mauritius Office, salary bring back to Malaysia

Taxable

2. You worked with Sunway Construction in Abu Dhabi salary bring back to Malaysia

3. You worked with MAS in France, salary bringback to Malaysia

1.1 Sources of income• Act does not define the income mean.• But, categories income under S4 and S4A as follows: SECTION 4 - RESIDENT 4 (a): gains or profits from a business, for whatever period of time carried on; 4 (b): gains from an employment 4 (c): dividends, interests, discounts (DID) 4 (d): rents, royalties, premiums (RRP) 4 (e): pensions, annuities (unit trust) or other periodical payments. 4 (f) gains or profits not falling under any of the foregoing paragraphs.

1.1 Sources of income• Act does not define the income mean. (always contest by taxpayer – company)• But, categories income under S4 and S4A as follows:

SECTION 4 - RESIDENT

SECTIONS

INCOMES

4 (a) gains or profits from a business, for whatever period of time carried on; (KEUNTUNGAN PERNIAGAAN)

4 (b) gains from an employment (KEUNTUNGAN PENGAJIAN)

4 (c) dividends, interests, discounts (DID)

4 (d) rents, royalties, premiums (RRP)

4 (e) pensions, annuities (unit trust) or other periodical payments.

4 (f) gains or profits not falling under any of the foregoing paragraphs.

SECTION – 4(a) 4 (a): gains or profits from a business, for whatever period of time carried on;

- GAINS or PROFITS (UNTUNG)- Not sales of turnover (BUKAN JUALAN)- That why company tried to minimise

company “PROFIT” tax on PROFIT - How: creating a lot of expenses, expense

ALL- Sdn Bhd company: directors buying

everything using company fund.- Berhad: gives staff bonus, company trip,

ESOS

SECTION – 4(b) - (KEUNTUNGAN PENGAJIAN)

4 (b): gains from an employment

• S13 (1)(a)• S13 (1)(b)• S13 (1)(c)• S13 (1)(d)• S13 (1)(e)

SECTION 4A – SPECIAL CLASSES OF INCOME• FOR NON RESIDENT

i) Person or employee has housing benefit provided by employer, income earned from working of installation or operation any plant, machinery or other apparatus (equipment) purchased. (non resident yang dapat faedah rumah yang disediakan oleh majikan, income dari pemasangan atau operasi kilang, mesin atau peralatan)

ii) Amount paid for technical advise, assistance or service rendered with technical management or administration of any scientific, industrial, commercial or venture project.(non resident yang mendapat pendapatan dari beri nasihat teknikal, pengurusan teknikal atau pengurusan saintifik industri, komersial atau projek baru)

\

SECTION 4A – SPECIAL CLASSES OF INCOME• FOR NON RESIDENT

iii) Rent or other payments, not being payments of film’s rentals, made under any agreement or arrangement for the use of any moveable property,(non resident menerima sewa atau bentuk bayaran, (tetapi bukan sewaan film), sewa dan bayaran tu adalah harta yang boleh alih. (sewakan kereta)

2.0 INCOME OR CAPITAL (PENDAPATAN DAN MODAL)

• Differentiate between income and capital(bezakan antara pendapatan atau modal).

• Income tax on “income” [pendapatan](cukai dikenakan ke atas pendapatan)

• NOT on capital gains [keuntungan modal] (bukan keuntungan modal)

• Since act don’t define income – so referred case law.

Differentiate by characteristics.(Akta tak nyatakan maksud pendapatan so ia sentiasa di cabar di mahkamah)

2.0 INCOME OR CAPITAL (PENDAPATAN DAN MODAL)

• Income (pendapatan):a) repetitive (berulangan) b) flow from source of income (pengaliran)

c) received in ordinary course of business (diterima dari

urus niaga perniagaan / operasi)

• Capital gains:a) buying assets – then sell it (beli harta dan jual)

b) 1 time event – jarang-jarang berlaku

Examples:1.1: Music composer, buying jewelery then sell, earn profit.Answer = NOT TAXABLE

1.2: Lawyer by profession, play stock market, then gains RM150,000.Answer = NOT TAXABLE

Example 1.3

•Greenfield Sdn Bhd (GSB) cleared a portion of its oil palm for replanting purposes.•However, before replanting, Government issued notice of acquisition to GSB to acquire that portion of land for road expansion purposes.•GSB received a compensation of RM750,000.• The road expansion took 12 months to complete.•During the period, the government utilised another portion of the plantation to keep the machinery and equipment used in the road expansion project, GSB received RM100,000 for 12 months.

Answer

• RM750,000 is not subject to taxable because represent as disposal. [1 TIME ONLY)•RM100,000 is taxable because it is a payment for the use of the land for specified period.•It represent income repetitive payment for 12 months.

Income and capital receipts

Income receipts ; chargeable to income tax

Capital receipts: NOT chargeable to income

tax

a) Provision of services (menyediakan

perkhidmatan)b)Sale of goods/trading stock(jualan barangan / stok)c) Trading or adventure in

the nature of trade (dagangan)d) Sale of short-term

investment (pelaburan jangka masa pendek)

a) Gift (hadiah)b) Profit from disposal of long

term investment (keuntungan dari

pelupusan pelaburan jangka panjang)

b)Speculation, windfall gains (aktiviti spekulasi)c) Gambling (perjudian)d) Sale of capital assets (penjualan aset modal)

2.3 Offshore business

• S3B – Income derived by offshore company from offshore business activity “IS NOT CHARGEABLE TO INCOME TAX”.• Tax governing offshore business is Labuan Offshore Business Activity Tax Act (LOBATA 1990).• Effective 2009, Offshore company can elect to be taxable with 3% of their profit.

3 - PERSON• S2 – defines “PERSON” to be include -individual - company - body of persons - a corporation sole (sole proprietor) • Body of persons – unincorporated bodies (not company) included Hindu Joint Family (pls google

this) EXCLUDING PARTNERSHIP. - Examples: Trust, Club, Trade Association, Cooperative Societies.• In partnership: Tax charges to individual partner.

Example 1.4

•Donald Trumpet wrote a will to leave all his wealth to his favorite cat, Emmey, upon his death.•The income from the wealth accruing to the cat would be subject to income tax.•In this case, the tax authorities are empowered under the Act to appoint agent for the collection of income tax on income derived from the wealth.

It is crucial to establish the concept of “person” because:

(i)Such person will be the “chargeable person” assessable to tax on his income derived from such taxable activities;[pihak yg dikenakan cukai drp pendapatan yang diperolehi drp aktiviti yang dikenakan cukai]

(ii) The “tax rate” applicable to each category of chargeable person varies, some are taxed at flat rate while others are taxed at scaled rates or reduces rates.[Kadar cukai pelbagai bergantung pada kategori, kadar rata atau kadar skala]

Income Tax Rate for the YA 2011

Example 1.5

a) Company

Rate

Paid up capital > RM2.5 million shares

Paid up capital ≤ RM2.5 million shares at the beginning YA

25%

Chargeable income1- ≤ RM500 K 20%2- > RM500 K 25%

b) IndividualRESIDENT

NON - RESIDENT

0-26% Scaled rate

26% Flate rate

c) Trust 25% Flate rate

d) Club, Trade Association 0-26% Scaled rate

e) Co-operative Society 0-26% Scaled rate

4.0 Accruing in or derived from

• Malaysia income tax system is founded on the “modified territorial concept”.• Income accrued in or derived from Malaysia will be taxable regardless where you receive the money. (Semua pendapatan yang “diperolehi di Malaysia dikenakan cukai” tanpa mengira dimana anda menerima pendapatan tersebut)

• TWO (2) important factors: a) the accrued/derived test b) the geographical boundaries of Malaysia

5.0 Malaysia

• S2 of the Act defines “Malaysia” to mean: • Malaysia would include: a) Peninsular Malaysia b) East Malaysia (Sabah & Sarawak) c) Territorial waters of Malaysia d) Sea-bed (sea floor) and subsoil (2 layers) of the Territorial waters . e) Any other areas – natural resources (fishing and petroleum extraction)

(Why this definition is important?)

7.0 Year of assessment

• Effective from 1 January 2000 moves towards the implementation of CURRENT YEAR BASIS.• The assessment of income tax to be concurrent with the derivation (Example: income year 2001, assess also YA 2001)• In taxation when refers to Calendar Year = 1 Jan until 31 Dec• YA 2013 = 1 Jan 2013 until 31 Dec 2013• “Basis year” for YA 2012 = 1 Jan 2013 until 31 Dec 2013

8.0 Basis period for INDIVIDUALS

• Self assessment was fully implemented in YA 2004.• Basis period for individual is calendar year basis.• Payment of tax and submission of tax return not later than 30 April (Income from employment only – Form BE).

Example 1.8 - Individuals

• SL Low operates a restaurant in Tanjung Karang since 2008• She derives business income, dividend income and rental income.• Section 21 of the Act requires the basis period for all sources of income to be on a calendar year basis:

YA 20144(a) Trading income 1.1.2014 – 31.12.20144(b) Dividend income 1.1.2014 – 31.12.20144(c) Rental income 1.1.2014 – 31.12.2014

Example 1.9 - company, trust body and co-operative society - NOT CALENDAR YEAR• Soh Poh Sdn Bhd manufactures Pooh Toys and closes its accounts to 31 December every year.• The company also derives interest income and dividend income. • The basis period for YA 2014 will be YA 2014

4(a) Manufacturing business 1.1.2014 – 31.12.20144(c) Dividend income 1.1.2014– 31.12.20144(c) Interest income 1.1.2014 – 31.12.2014

Example 1.9 - company, trust body and co-operative society - NOT CALENDAR YEAR• Jaya manufacturing Sdn Bhd closes its accounts to 31 January every year.• The company derives dividend income and rental income besides its manufacturing business.• The basis period for YA 2014 for the various sources would be:

YA 20144(a) Manufacturing business 1.2.2013 – 31.1.20144(c) Dividend income 1.2.2013 – 31.1.20144(d) Rental income 1.2.2013 – 31.1.2014

Scope of charge for YA 2010 - 2013

Offshore business activity carried on by offshore company (s 3B) – Not

chargeable to income tax

Others (S 3)

Malaysia accrued/derivedIncome (s 4, 4A)

Foreign sourceIncome received

in Malaysia from outside Malaysia

or

INCOME

Resident bank,Shipping, air transport,

Insurance company

Others- Exempted from income

tax

YA

Chargeable income

+

Chargeable person

Income tax liability

Resident?Yes

Scaled rates(0 – 26%)

Noa) Flat Rate at 26% (individual)b) Flat Rate at 25% (Company)

Tax planning on scope of charge

a) Malaysian derived incomei) Incomeii) Accrued/deemed derived from Malaysiaiii) Received is not relevant

Scope of charge

Income tax

YA

Others-Individual, unit trust-Trade AssociationCalendar year basisi.e: 31 DecYA 2011: 1 Jan 2011 – 31 Dec 2011

Company, trust body and co-operative societyi) Calendar year 31 Dec 2011 orii) Non-calendar year (non 31.12

year-end)

or

b) Foreign source incomei) Incomeii) Accrued/derived from outside Malaysiaiii) Received in M’sia

Exemption

Yes Eliminate Tax

Eliminate Tax

Move to Chapter 2