Chapter 1

Overview of
Malaysian Tax
 Topics Addressed

Importance of Taxation
Federal Government’s tax revenue
Profile of the Inland Revenue Board
Taxes under the preview of the Inland Revenue Board
Basis of Malaysian income tax
Taxation system in Malaysia
 Taxation
• A fee charged (levied) by a government on a product/
income/activity

• Government
– Main source of revenue
• Government expenditure
• Financing for development
Taxes In Malaysia

2 Types :

•Direct taxes (on person/corporate)

• income tax
• petroleum income tax
•stamp duties and
•real property gains tax.

•Indirect taxes (price of good/service)

• import duties
• excise duties
• sales tax and service tax.
Federal Tax
Revenue

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 Source: Ministry of finance

Government revenue consists of three components – direct taxes,

indirect taxes and non-tax revenues. Direct taxes consist of income
taxes from companies, cooperatives individuals, petroleum and other
taxes, as well as estate duty, stamp duty, real property gain tax and
others. Indirect taxes consist of export duties, import duties, sales tax,
services tax, taxes on commodities such as rubber, tin, palm oil and
others. Non-tax revenue consists of dividends from GLCs, road tax,
licenses and permits and revenue from federal territories. 6
 Profile of the
Inland Revenue
Board of Malaysia
(IRB)
 Profile

Prior to March 1996, known as the Department of Inland

Revenue Malaysia (under the Ministry of Finance).
Became a Statutory Board on the 1st of March, 1996.
Generally speaking the Inland Revenue Board (IRB) is
responsible for:
formulation of new tax policies for both the private and
public sectors,
tax collection; and
compliance enforcement.
 Specific Functions

Act as an agent of the Malaysian Government and to provide

services in administering, assessing, collecting and enforcing payment
of taxes under the IRB.
Advice the Malaysian Government on matters relating to taxation
and to liase with the appropriate Ministries and statutory bodies on
such matters;
Participate in or outside Malaysia in respect of matters relating to
taxation;
Perform such other functions as are conferred on the Board by any
other written law;
Act as a collection agent for and on behalf of any body for the
recovery of loans due for repayment to that body under any written
law.
 Taxes under the purview of IRB

Relevant legislation Types of taxes

Income Tax Act 1967 Income tax

Petroleum Income Tax Act 1967 Petroleum tax

Real Property Gains Tax Act 1976 Real property gains tax

Stamp Duty Act 1949 Stamp duty

Estate Duty Act 1991 Estate duty

 Basis of
Malaysian Income
Tax
 Scope of Taxation

Sec 3 of ITA 1967 :

A tax 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 ( foreign source
income).

With effect from YA 2004, foreign source income received by any

person ( other than a resident company carrying on the business
of banking, insurance, sea or air transport) will be exempted from
income tax.
 Income versus Capital

Capital gains are not chargeable to income tax.

ITA 1967 does not define “income” nor “capital”.
Case law can provide guidance.
Involves examination of badges of trade.

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 Characteristics of Income

Repetitive from a source of income and received in

the ordinary course of business.
Periodical return “coming in” with some sort of
regularity or expected regularity from defined sources.
Nature of gains or profits has to fall into any of the
sub-paragraphs under section 4 and 4A of ITA 1967.

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 Sec 4 of ITA 1967
Classes of Income:
Profits or gains of a trade, business, profession or
vocation;
Profits or gains from personal services –
employment.;
Dividends, interests and discounts;
Rents, royalties or premiums;
Pension, charges or annuity or other periodical
payments; and
Gains or profits not falling under any of the foregoing
paragraphs;

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 Income of Non-Resident Person Subject to
Income Tax (Sec 4A of ITA 1967)

Any consideration for services rendered by him or his employee

in connection with the use of property or rights belonging to, or
the installation or operation of any plant, machinery or other
apparatus purchased from the non-resident;

Any consideration for technical advise, assistance, or service

rendered in connection with technical management or
administration of any scientific, industrial or commercial
undertaking, venture, project or scheme;

Rent or other payments made under any agreement or

arrangement for the use of any movable property.

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Examples:

 Revenue
 Business income, employment income, rent
and dividends

 Capital
 Gains from realization of investments, personal
assets and from gambling activities

 Payments to non-residents
 Payment for use of rights, technical advice or for
rental of movable properties

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 Person

Includes:
•Company

•A body of persons
•Unincorporated body of persons (not being a company),
including a Hindu joint family but excluding a partnership.
•Include trust, club, co-operative societies and etc.
• Corporation sole -- Individual.
•Individual
 Territorial Basis
 Income is assessed on a territorial basis.

 Therefore, only income accruing in or derived from
Malaysia is chargeable to tax.

 Foreign income is not taxable.
 This rule is applicable to both resident and non-
resident persons, including companies

 An exception applies to resident companies involved in

banking, insurance, and sea and air transportation
which are assessed on a worldwide basis ie income,
wherever derived, is chargeable to tax in Malaysia.
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 Accrued

Carries the meaning “earned” or “right to receive”.

Does not mean “received”.

Income from a particular source can be earned and

received in the same period.

Note that the earned and the right to receive is different

from having received
 Example

A payment for sales of RM5,000 (‘the sum’) made in

15 Dec 2011 to a customer was due on 31 December
2011 but the trader received it only on 1 January
2012.

Tax implications
The payment accrued in Dec 2011
The sum was received in Jan 2012
The sum will be taxed in the year of assessment
2011 since it was business income that ‘accrued’ in
Dec 2011. It is immaterial that the sum was
received the following year.
 Derivation rules

• Rules on the derivation of the various

income differ according to the source of
those income and are specified under the
law.
Derived
Sec 4 of ITA 1967 - Classes of Taxable Income

Derived has been defined in the Act according to the sources of

income as follows:

Section Sources of income Derivation section

S4(a) Business 12
S4(b) Employment 13(2) and 13(3)
S4(c) Dividends, interest and 15
discounts
S4(d) Rents, royalties and premiums 15

S4(e) Pensions, annuities and other 17(1) to 17(3)

periodical payments
S4(f) Special classes of income 15A
Gains or profits not falling
under any of the foregoing
paragraphs
 Derived

Malaysian Derived Employment Income

“Gross income in respect of gains or profits from an

employment for any period during which the
employment is exercised in Malaysia; shall be deemed
to be derived from Malaysia”.
 Exercise
Dr. Sarah, a computer programmer signed an employment contract
in India with PCK Ltd (a Indian government owned company) on the
31st of December 2009. With effect from 1 January 2010, she was
assigned to Malaysia by PCK Ltd to assist Jonker Sdn Bhd (a client
of PCK) in developing its computerized container handling system.
Seventy percent of her remuneration for 2010 was received in
India. The remainder was paid in Malaysia.

Issue: Sarah wants to know whether the portion received in India

will be taxed in Malaysia.

Discussion: The portion received in India is derived from Malaysia

because it relates to a period during which the employment was
exercised in Malaysia. Therefore, the income will be taxed in Malaysia
although it was received in India.
 Malaysian Derived Business Income

Income from a business source that is attributable to

operations of the business being carried out within
Malaysia is deemed to be derived from Malaysia.
 Malaysian Derived Business Income
I-Plus Sdn Bhd is a Malaysian resident company, involved in the
provision of business consultancy services. It has a branch in Hong
Kong. I-Plus has signed a contract with a commercial bank in Hong
Kong, to provide consultancy service for the bank’s strategic
management of branches in Hong Kong. The service was provided
by I-Plus’s employees stationed in Hong Kong. The duration of the
project is expected to be for a period of at least 20 months. Work on
the project commenced in January 2010. I-Plus’s financial year ends
on December 31.

Advise the Financial Controller of I-Plus Sdn Bhd on whether the

income from the Hong Kong project is derived from Malaysia.

Discussion: Income derived by I-Plust from the Hong Kong contract for the year
of assessment 2004 is not deemed to be derived from Malaysia as it is clearly
attributable to a project carried on outside Malaysia
Paragraph 28 of Schedule 6 to ITA 1967

Foreign source income received by any person (other

than a resident company carrying on the business of
banking, insurance, sea or air transport) will be
exempted from income tax.
 Scope of Charge – Individuals
Up to year 2003, a resident individual was taxed upon
Malaysia source income and foreign source income remitted
back.

With effect from year 2004, individuals (resident and non-

resident) are assessable only on income accrued in and
derived from Malaysia.

Foreign source income is exempted from income tax by

virtue of paragraph 28, Schedule 6 of the Income tax Act
1967.

Capital gains on the other hand are not subject to income

tax as the Income Tax Act 1967 only imposes tax on
transactions that are 'income' in nature.
 Question
Mike , a Germany national, is a Malaysia non-resident for year
2009. His income for the year consists of commission from
Malaysia as well dividends from an investment in Germany. The
dividend income was remitted back to Malaysia in the year of
assessment concerned.

Issue: Determine whether the dividend income derived from

Germany should be subject to Malaysian income tax.

Discussion:
The dividend income derived from Germany is exempted from Malaysian
income tax by virtue of Schedule 6, paragraph 28 of the Income Tax Act
1967.
The dividend income would be exempted from Malaysian income tax even
if Tanakura was a Malaysian resident for year 2009.
Capital Receipts

Capital gains are not chargeable to income tax.

Example :

•Realization from long term investments.

•Realization from personal assets.

•Windfall, gambling or profits from speculative activities.

•Gift
 World Income Scope

Resident companies carrying on the business of banking,

insurance, shipping and air transport are assessed under the
world income scope.

Income wherever derived would be taxed in Malaysia on an

accrued basis.

Whether the income is remitted into Malaysia is of no relevance.

If the foreign income has also suffered foreign tax, bilateral
relief or unilateral relief would be accorded accordingly.

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 Scope of Charge of Income Tax
(from YA 2004)

Capital Income

Other Income Offshore business

No Tax activity income by
offshore company

Received in M’sia from Accrued in or

outside Malaysia derived from
Malaysia

Resident bank, insurance, Other Persons Not

sea and air transport :Resident/nonresident Chargeable
Taxed
irrespective of
(Sec. 3B)
Exempted from resident status
Taxed Income Tax of person
 Income Tax Rate
for Resident Individuals
 Income Tax Rate

Individual
Resident: scale rate based on level of income 0% to 26%
Non-resident: Flat rate 28%

Company with paid up capital 2.5 million= 24% for YA2016

Basically, Tests:
• Determine the receipt is income in nature
•The income is accrued within the relevant period for income
tax purposes
•Whether the income stream from Malaysia
Tax rate for resident individual (year of assessment 2016 onwards)

Chargeable Income Calculations (RM) Rate % Tax(RM)

0-2500 On the First 2,500 0 0
2,501-5,000 Next 2,500 0 0
5,001-10,000 On the First 5,000 0
Next 5,000 1 50
10,001-20,000 On the First 10,000 50
Next 10,000 1 100
20,001-35,000 On the First 20,000 150
Next 15,000 5 750
35,001-50,000 On the First 35,000 900
Next 15,000 10 1,500
50,001-70,000 On the First 50,000 2,400
Next 20,000 16 3,200
70,001-100,000 On the First 70,000 5,600
Next 30,000 21 6,300
Exceeding 100,000 On the First 100,000 11,900
Next RM 24 12,000

If chargeable income is $80,000 for the year 2016, compute the amount of tax
payable:

Resident: 5,600 + (21% x $10,000)) Non-resident: 28% x 80,000

$7.700 $22,400
Computation of
Income tax
Payable

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 Computation of Income tax Payable

Steps : Compute

1: The statutory income (SI) from each source.

2: Aggregate income (AI).
3: Total income (TI).
4: Chargeable income.
5: Tax chargeable.
6: Tax payable.

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 Computation of Gross Income

Statutory Less: Allowable expenses

Income from Less: Double deduction of expenses

Business Less: Special deductions (S34(6) of

ITA 1967)

(Approach 1)
Adjusted Income

Note: Computation of SI from Add: Balancing charges [SP > TWDV]

business has to be done Less: Balancing allowances [SP < TWDV]
separately for each business
source as balancing charges and Less: Capital allowances (IA and AA)
capital allowances are source
specific.
Statutory Income
 Profits before

Computation of Taxation

Statutory Add: Disallowed expenses

Less: Expenses which qualify for double
Income from deduction
Less: Non-business income or Capital receipts
Business
(Approach 2) Adjusted Income
Computation of Gross Income
Statutory
Income from Less: Allowable expenses

Non-Business
Statutory Income
Sources
Computation of
Aggregate Aggregate Statutory
Income Income from Business
Sources

• Unabsorbed business
loss can be set-off Less : Previous year’s business losses
against any business
source. Add : Statutory income from other sources
• Unabsorbed business
losses can be carried
forward indefinitely.
Aggregate Income
Computation of
Total Income
Aggregate Income

• Only adjusted loss

from business can be Less : Current year business losses
set-off.
Less : Approved donations

• Unutilized portion can

be carried forward to
next YA to be set-off Total Income
against aggregated SI
from business.
 Approved Donations

Cash donation to approved institution, Government, State

Government and local authority.
Donations to approved institutions restricted to 10% of aggregate
income (in the case of companies), & 7% of AI (individual).

Donation of artifact, manuscripts or painting (value as determined

by Department of Museums and Antiquities) to Government.
Donations of painting (value to be determined by National or State
Art Gallery) to National or State Art Gallery.
 Approved Donations
Cash donation to approved libraries.
Restricted to RM20,000.
For the provision of library facilities to public or school
libraries, university or colleges.

Donations of cash or goods (value to be determined by local

authority) for the provision of facilities in public places for the
benefit of disabled persons.
Available only to individuals.

Donations of cash or in kind of medical equipment (value to be

certified by Ministry of Finance) for the healthcare facility
approved by the Ministry.
Restricted to RM20,000 cash.
 Total Income

Less: Personal Reliefs

[For Resident Individuals]

Chargeable Income
Computation of
Tax Rates
Tax Payable
Tax Chargeable

Less: Tax Credits & Rebates

[for Resident Individuals]

Tax Payable
 Net profit before
tax
Add Non-Allowable expenses
Less Double deductions
Adjusted income
Add Balancing charges
Less Capital allowances and balancing allowances & Unabsorbed
capital allowances b/f (Max: to adjusted income; balance c/f)
Statutory income
** Add all: Aggregate Statutory income from business source
Less Previous year’s business loss b/f
Add Statutory income from other sources Aggregate income

Less Current year business loss

Approved donations (Sec. 44(6), 44(6A), 44(8)...
Total income

Less Personal relief Chargeable

income

X Tax Rates (%) Tax Chargeable

Less Tax Credit & Rebate Tax Payable

Taxation System
in Malaysia

NEXT WEEK!!!
 Basis periods
• Income is taxed on an entity in relation to a time
frame.

• In income tax law, these time frames are

constituted by accounting or financial periods,
basis periods and year of assessment

• The current year assessment system (CYA)

operates with effect from the year of assessment
2004.

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 BASIS PERIOD (YA 2004 AND
SUBSEQUENT YAs)
• Basis year for a YA= Basis period for that YA

BASIS PERIOD

CLOSING ACCOUNTS CLOSING ACCOUNTS

31 DECEMBER NON-31 DECEMBER

Basis period for YA 2011 If closing accounts 31 May;

= Calendar year 2011 FY 1.6.2010 – 31.5.2011 shall
(1.1.2011-31.12.2011) be the basis period for YA 2011
This simply means that the income earned in the
period 1 Jan to 31 Dec 2011 would be taxed for
the period 1 Jan to 31 Dec 2011 for the year of
assessment 2011.

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 Basis period for individuals
• Example:
• Arvind (an individual) commenced employment
on 1 Jan 2011 and worked till 31 Dec 2011.
• The calendar year, basis period and the year of
assessment in relation to the employment income
would be as follows:
– The calendar year is 2011
– The basis year is 2011
– The year of assessment is 2011

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 2. Company, trust, co-operative society

• In the case of a company, trust or co-operative

society, the basis year for a year of
assessment in relation to a source shall
constitute the basis period for that year of
assessment.

• It would encompass all sources of income i.e.

business, dividend, rent etc.

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 Accounts to 31 Dec
• Example: Cyber Sdn. Bhd. (a limited
company) closes its accounts to 31 Dec
2011. It has business income and dividend
income

• The calendar year 2011 will form the basis

period for the year of assessment 2011.
• It will apply to all the sources of income i.e.
business income and dividend income.
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 Accounts other than 31 Dec

• If the company, trust or co-operative society closes the

accounts to a date other than 31 Dec, then the financial
period of 12 months ending on the accounting date
would be the basis period for the relevant year of
assessment.

Example: Jaya Sdn. Bhd’s accounting date is 30th June.

In the calendar year 2011, it closed its accounts to 30th
June 2011.

The financial period is 1 July 10 – 30 June 11

The basis period is 1 July 10 – 31 June 11
The year of assessment is 2011
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 3. Taxpayers other than companies

• The law on basis period and year of assessment

was changed w.e.f. YA 2004

• It affects all taxpayers other than company, trust

body and co-operative society.

• In other words, it affects the following tax entities:

– sole proprietors, individual partners, employees
– deceased persons, clubs and trade associations

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• In respect of those entities mentioned in the
previous slide, the calendar year basis will apply to
all sources of income, namely business income,
employment income and investment based
income like dividends, interest etc.

Example: Ah Long (an individual) commenced

his money lending business on 1 Jan 2010 and
proposes to close his accounts to 30 April each
year.

What is the implication for tax purposes?

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• As Ah Long is an individual engaged in a sole
proprietorship business of lending money.

• For income tax purposes, the calendar year will

be basis year for the relevant year of
assessment.

• Ah Long’s accounts for the year ended 30 April

2011 will be ignored.

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The relevant period for the relevant year of assessment
will be:

1 Jan 2010 – 30 Apr 2010

YA 2010
1 May 2010 – 31 Dec 2010

1 Jan 2011 – 30 Apr 2011

YA 2011
1 May 2011 – 31 Dec 2011
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• If Ah Long had other sources of income like rent
and dividends, these income from the relevant
sources will be assessed on a calendar year
basis.

• In such a situation what would you advice Ah

Long?
• For accounting, management and income tax
purposes, it would be advisable for Ah Long to
prepare the accounts to the year ended 31 Dec.

• Furthermore, it would be more tax efficient.

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 The self assessment system
• The self-assessment system (SAS) - taxpayers are required by law
to determine their taxable income, compute their tax liability and
submit their tax returns based on existing tax laws and policy
statements issued by the tax authorities.

• A notice of assessment would not be issued under SAS. The tax

return furnished by the taxpayer is deemed to be a notice of
assessment.
•
• The Inland Revenue authorities would check and verify tax returns
through tax audits and the implementation of penalty system to
enforce compliance with tax law.

• The self-assessment system (SAS) was implemented in two stages:

companies in 2001 followed by businesses, partnerships and
salaried individuals in 2004.
•

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Self-Assessment Scheme for Individuals
Operational Specifications

An individual (without business income) would have to submit his return by the
30 April of a given year for income derived in the previous year. E.g. the tax
return for year of assessment 2010 must be submitted by 30 April 2011.

The due date for an individual with business income is 30th June for a given
year for income derived in the previous year. E.g. the tax return for year of
assessment 2010 must be submitted by 30th June 2010.

The return will state the individual’s chargeable income and tax payable as
determined by him or her.

Additionally, upon submitting the return, the individual must account for the
balance of income tax payable after deducting the total tax deducted from his or
her remuneration under the Schedular Tax Deduction Scheme (STD) and the
total instalment payments under the instalment scheme for persons with business
income operated by section 107B to the Income Tax Act (only applies to an
individual with business income).
 Returns and payments of tax
• All persons must furnish a return in the prescribed
form at the specified date

• Estimates of taxes must also be furnished to the

DG and installment payments made accordingly.
Defaults and non-payment should attract penalty

• Taxes can also be paid by installment in the case

of employees through salary deductions

• The difference in the estimated tax and the actual

tax should be settled after a specified period.
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 Records and assessments

• The DGIR requires taxpayers to keep proper

records to ascertain the income tax liability –
usually for seven years or more

• The DGIR may raise an assessment in

certain cases – where estimates are not
made, returns are not filed, or fraud and
evasion is detected

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 Appeal against an assessment
• Taxpayer can appeal against an assessment
and the issues arising can be decided by an
appellate body.

• The appellate body consists of (at the various

stages):
– the Special Commissioners of Income Tax
– The High court
– The Court of Appeal
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 Records and assessments

• The DGIR requires taxpayers to keep proper

records to ascertain the income tax liability –
usually for seven years or more

• The DGIR may raise an assessment in certain

cases – where estimates are not made, returns
are not filed, or fraud and evasion is detected
 The End

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